Canadian bull markets have usually lasted longer than bear markets. The TSX experienced its longest bull market in recent history between March 2009 and March 2020 — a record 131 months. Conversely, bear markets seldom last longer than a few years. The 10 most recent Canadian bear markets have lasted for 11 months, on average, while the 10 most recent bull markets lasted for 67 months. It’s easier to win a bet on a future bull market forming than on a lengthy period of declining stock prices.
Stock market returns during bull markets can change lives. When accompanied by strong economic growth, high employment rates, and low inflation (a set of favourable macroeconomic conditions), bull markets can last for years — if the Bank of Canada doesn’t raise interest rates beyond healthy thresholds. Given that small companies may have the most to gain during great economic times, small-cap stocks could turbocharge investor portfolios during the next bull market.
The TSX is up nearly 13% since it bottomed out in mid-October last year. It could be on its way to a new bull market as it catches up to the S&P 500, which is already in one. Two small-cap investments could help Canadian stock investors ride the new wave.
WELL Health Technologies stock
WELL Health Technologies (TSX:WELL) is a $1.1 billion Canadian small-cap stock that’s digitizing the local healthcare market. The company’s acquisitions-led growth spree helped it raise its revenue growth guidance for 2023 by 11%. However, most striking about WELL stock is its recent commitment to an artificial intelligence (AI) investment program that may incubate medical technologies that revolutionize healthcare.
AI is the hottest investment theme on the market today following OpenAI’s release of a widely adopted generative AI platform ChatGPT in November 2022. Subsequently, U.S. AI stocks have powered the S&P 500 to a 19.5% surge so far this year.
WELL Health targets investing in 10 AI projects in its AI investment program. The deals should offer it significant equity exposure to potentially hot technology assets. The success of any portfolio projects could lift WELL stock higher. Further, merging AI with the company’s existing operations could enhance corporate productivity, potentially improve operating margins, and make WELL Health stock a hot AI stock to buy over the next five years.
WELL stock is up 66.9% year to date. Management guides for a 34% year-over-year revenue growth for 2023 following recent accretive acquisitions.
Shares currently trade at a forward price-to-earnings (P/E) multiple of 59.3. Perhaps that’s on the high side. However, Bay Street analysts project WELL Health can increase its earnings per share by an average 25% per year over the next five years. AI investments could change that picture if portfolio companies produce medical AI technology breakthroughs.
- We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if Enbridge made the list!
iShares U.S. Small Cap Index ETF (CAD Hedged)
If you currently do not have a high-conviction idea of which small-cap stock could produce the highest returns during the next bull market in North America, an index exchange-traded fund (ETF) could be your best option, and I’m looking at an ETF that offers cheap exposure to about 2,000 small-cap stocks in one single investment and eliminates foreign currency risks.
iShares U.S. Small Cap Index ETF (CAD Hedged) (TSX:XSU), offered by Royal Bank of Canada’s RBC Asset Management, offers cheap exposure to 1,998 U.S. small-cap stocks at a cheap cost to investors.
The ETF generated its highest one-year return of 78.6% during the bull market of 2021 and produced a three-year return of 28% between June 2009 and June 2011. It produces its best returns during recoveries from bear markets. Following a 21.7% drop during the U.S. bear market of 2022, the ETF is up 7.3% so far in 2023. It can do better if the market recovery of 2023 still has some legs (despite widespread calls for a recession that may not happen).
Rising tides lift all boats, and the ETF could generate respectable returns from its diversified portfolio during the next bull market.
The index ETF has a low management expense ratio of 0.36%, and cushions investors from fluctuations in exchange rates between the Canadian dollar and the U.S. dollar through hedging instruments.
