Canadian small-cap stocks (stocks with market caps between $50 million and $500 million) are intriguing investments right now. While the best quality small-cap stocks have risen significantly in 2024, their valuations have not.
The best small-cap stocks have demonstrated strong earnings and free cash flow growth. Likewise, they have made strong progress on improving their balance sheet and expanding market presence.
Yet, the stock market still overlooks many of these companies. You can still buy them at attractive valuations even with great prospects for growth. If you don’t mind a bit of volatility (because small-cap stocks are volatile), small-caps can provide outsized returns. Here are two to consider for November.
Source: Getty Images
An aerospace provider rising from a low base
Firan Technology Group (TSX: FTG) has a market cap of $182 million. This small-cap stock is up 80% in 2024, but it could still have a nice run ahead.
The company manufactures very specialized cockpit parts and circuit boards for the aerospace industry. It is not a flashy tech company. However, the company has been executing very well.
COVID-19 killed the aerospace industry. However, demand for both commercial and defence aircraft is insatiable. Major OEMs (original equipment manufacturers) have nearly a decade of demand built up.
That bodes very well for Firan. Its backlog has rapidly expanded in 2024. As it brings on more efficiency measures and manufacturing capacity, it will continue to scale both revenues and earnings.
Today, Firan trades with an enterprise value-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of seven. That’s near the top of its historic valuation range.
However, with demonstrated profitability and attractive cash flow generation, it demands the premium. Likewise, this small-cap stock still trades at a considerable discount to other larger aerospace providers trading at 10 times or more.
A small-cap tech stock on a big turnaround
Sangoma Technologies (TSX: STC) has a market cap of $210 million. It provides unified communication technology solutions to small and medium businesses across North America.
Just a few years ago, its market cap was several times larger. While that is hardly an endorsement, the company is pulling off an interesting turnaround.
Previous management over-levered the balance sheet on acquisitions. It did a poor job integrating those businesses and results were in a tailspin. Today, Sangoma has a new, experienced executive team. They have cleaned up the organization, integrated all their technologies, and refocused its sales partners.
Over the past 12 months, the company generated $44 million of free cash flow (20% of its market cap). It has used the cash to rapidly lower its debt levels. Today, this small-cap stock’s balance sheet is in good shape. It has the flexibility to be opportunistic in acquisitions or even share buybacks.
The communications market is depressed so growth has been hard to find. However, the company is reinvigorating its product and sales strategy. This shift could lead to market gains over the long term.
Even after rising 111% in 2024, the stock only trades with an EV/EBITDA ratio of six and a price-to-free cash flow ratio of 5.9. STC has a free cash flow yield of 17%. If management can continue to execute, there could still be substantial upside for this small-cap stock in the future.
