Beginning Investors: 3 TSX Stocks I’d Buy With $500 Right Now

Small cap TSX stocks like EQB Inc (TSX:EQB) have big potential.

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Are you looking for stocks to buy with $500? If so, you might want to look into shares of small companies. Large cap stocks often deliver good returns, but not such good returns that they can turn $500 into a substantial amount of money. With small cap stocks, there is some potential for even a small $500 portfolio to grow into a substantial savings account. That certainly isn’t the typical experience with small caps. Many lose money investing in them. But the ‘best case scenario’ return is high with such names. In this article, I will explore three small cap TSX stocks that I’d buy with $500.

First National

First National Financial (TSX:FN) is a Canadian non-bank lender that boasts a juicy 6.8% dividend yield. Despite paying out such a large amount of income, FN has also delivered considerable growth over the years, with its earnings having compounded at 11.5% per year over the last five years. In the same timeframe, the company’s dividend has increased by 5.3% per year.

If you invest in FN today and the dividend does not change, you’ll get an adequate return just from dividends alone. Plus, the company’s history suggests that some dividend growth may be in the picture. On the whole, FN stock has a lot of potential.

Cascades

Cascades Inc (TSX:CAS) is a Canadian pulp and paper company best known for making toilet paper. Its stock is very cheap, trading at 0.6 times book value at 0.2 times sales. The P/E ratio is currently higher at 14.5, due to some recent losing quarters. Although Cascades was unprofitable in two of the previous years, it did have positive free cash flow. The stock pays a dividend and has a 5% yield.

Cascades stock was very cheap at certain times in the past. At one point, it was net-net, meaning that it traded for less than its net working capital! Unfortunately, the company’s balance sheet has deteriorated somewhat since those days. The stock does trade for less than book value, even to this day.

Cascades does not seem to be a company in decline. Its revenues have steadily risen over the years, as have its cash flows. The recent profitability issues appear to have been due to accounting technicalities rather than poor business performance. Overall, this stock has potential.

EQB

EQB Inc (TSX:EQB) is a small Canadian bank. It operates exclusively online, and it does not have any branches. Over the years, it has grown much more quickly than its large bank cousins. In its most recent quarter, EQB delivered:

  • $317 million in revenue, up 20% year over year (y/y).
  • 450,000 customers, up 36% y/y.
  • $123.5 billion in assets under management (AUM), up 18% y/y.
  • $73.73 in book value per share, up 14% y/y.
  • $2.67 in diluted earnings per share (EPS), up 4.3% y/y.

While the EPS growth was not fantastic, all of the other metrics increased by double digits. It’s a similar story over the last three- and five-year periods, too. Finally, EQB is highly profitable, with a 39% net income margin. Despite this, it trades at just seven times earnings! This is one small stock with big potential.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends EQB. The Motley Fool has a disclosure policy.

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