Investing in profitable small-cap stocks can help long-term investors beat the broader markets by a wide margin. Typically, small-cap companies grow at a faster pace compared to their larger counterparts. So, if these companies can successfully grow earnings in line with or faster than sales, they will likely deliver market-beating returns over time.
Here are two of the best small-cap TSX stocks you can consider buying in January 2024.
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goeasy stock
Part of the financial lending industry, goeasy (TSX:GSY) has returned over 1,000% to shareholders in dividend-adjusted gains over the past decade. Down 27% from all-time highs, goeasy stock is valued at $2.63 billion by market cap and offers you a dividend yield of 2.4%.
In the last two years, companies in the financial sector have trailed the broader markets due to rising interest rates, resulting in a tepid lending environment and higher delinquencies.
Despite these macro headwinds, goeasy increased loan originations by 13% to $722 million in the third quarter (Q3) of 2023. It ended the quarter with a loan portfolio of $3.43 billion, an increase of 33% year over year, while sales were up 23% at $322 million. goeasy’s adjusted earnings also rose 29% to $3.81 per share in the quarter.
goeasy’s stellar lending growth was driven by a record volume of applications for credit, which surged 30%. Moreover, it experienced stable credit and payment performance with a net charge-off rate of 8.8% in Q3, down from 9.3% in the year-ago quarter.
A net charge-off is basically the difference between gross charge-offs and recoveries of delinquent debt and a lower multiple is favourable.
Priced at nine times forward earnings, GSY is among the cheapest growth stocks in Canada, given it is forecast to increase earnings by 20% annually in 2023 and 2024.
Its earnings expansion should also fuel dividend hikes. In the last 10 years, goeasy has raised dividends by more than 15% annually.
Well Health stock
Similar to goeasy, Well Health (TSX:WELL) has also delivered stellar returns to shareholders. The health-tech stock went public in April 2016 and has gained roughly 3,800% in less than eight years. Down 58% from record highs, Well Health stock is valued at $918 million by market cap.
The company ended Q3 with record patient visits and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) while reporting over $200 million in quarterly sales for the first time. It expects to increase sales to $900 million in 2024, up from just $570 million in 2022.
In the last three quarters, Well Health increased organic sales by 16% year over year. Its improving bottom line allowed Well Health to improve the balance sheet in Q3 and report a net-debt-to-adjusted-EBITDA multiple of 2.6 times, down from 2.9 times in the same period last year.
Equipped with a strong growth profile, Well Health stock trades at less than 1.2 times forward sales. Analysts remain bullish and expect the small-cap TSX stock to more than double in the next 12 months.
