With the TSX up 16% in 2024, it can be hard finding exciting stock ideas for 2025. Valuations have risen and there just are not the same bargains to be found like in 2023 and early 2024.
That is why small cap stocks (stocks with a market capitalization between $100 million and $1 billion) are an attractive place to look for growth. There are reasons small cap stocks remain attractive.
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Small cap stocks with earnings and valuation growth potential
Firstly, given their smaller size, they have a lot larger base to grow from. Growth can multiply many times before a company reaches market saturation. Secondly, small cap stocks tend to suffer from undervaluation for many reasons. However, often it is not related to business fundamentals.
The combination of growing income/cash flow per share and a rising valuation can make for incredible compounding returns for shareholders. If you are wondering what stocks could deliver in 2025 and beyond, here are two stocks to check out.
A diversified growth company temporarily drawn down
If you want an undercover steady growth stock, Calian Group (TSX: CGY) is one to check out today. It only has a market cap of $591 million.
It provides a diverse mix of services that include healthcare, cybersecurity, training, and advanced technologies (think nuclear services and space/satellite technologies).
The company has delivered solid growth in the past few years. Revenues have increased by a 17% compounded annual growth rate (CAGR). Earnings before interest, tax, depreciation, and amortization (EBITDA) have increased by a 25% CAGR.
Calian is a major contractor to the Canadian military. Unfortunately, the Canadian government announced a major budget reduction last quarter. The market didn’t like that and the stock pulled back considerably. Fortunately, Calian has made major steps to diversify its business by customer and geography.
Recent acquisitions are resulting in some considerable contract wins and backlog growth. This should fuel earnings growth in 2025. However, the market doesn’t recognize it yet.
Calian pays a nice 2.3% yield, so you get paid to wait for the turnaround to play out. With a price-to-earnings ratio below 10, the stock is cheap today.
A tech stock in a turnaround
Sangoma Technologies (TSX: STC) is another small cap that could deliver a strong rise in 2025. It only has a market cap of $285 million.
Like Calian, Sangoma is in a bit of a turnaround after some tough times. It provides a large portfolio of communication software for small-to-medium businesses. Communication software has been in a tough market for a few years. That, along with some poor acquisition and operational execution, caused the stock to seriously decline.
Today, Sangoma has a smart new management team. They are focused on finding organizational efficiencies, integrating its vast software offerings, and re-focusing sales efforts on the right markets.
Now, it is very well-positioned to start taking share in its core small-to-medium business market. The company generates a lot of cash. It has been able to quickly deleverage and improve its balance sheet.
At seven times free cash flow, the stock is still cheap. If management can return this company to a growth posture, there could be considerable upside ahead.
