After a strong rise in the TSX in 2024, most high-quality growth stocks are fairly valued or even a bit pricey. Part of the reason for this is just that those companies have been executing very well.
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High-quality small-cap stocks still have more upside
Stocks like Constellation Software, Descartes Systems, and Shopify are up by +40% this year! Some of these stocks were somewhat undervalued in 2023. However, they have been performing well, with strong growth and rising profitability. The market has definitely rewarded them.
Many small-cap stocks have risen significantly in 2024. However, their valuations remain attractive in comparison to some of the larger-cap growth stocks.
If you are looking for some smart (and cheap) small-cap stocks to buy, here are two to buy with $1,000 right now.
A small-cap aerospace stock
Firan Technologies Group (TSX: FTG) only has a market cap of $182 million. That is after an 80% rise in the stock in 2024. While Firan is not exceptionally cheap today, it is still relatively attractive.
Firan provides specialized cockpit parts and circuit boards for the aerospace industry. While it is not a super exciting business, it has some strong long-term tailwinds. There is massive global demand for new planes. The major OEMs (original equipment manufacturers) are having a tough time keeping up. They have nearly a decade of backlog.
All this means is that there is a substantial opportunity for Firan in the future. The company has made some smart acquisitions to expand its product and geographic exposure. With a solid balance sheet, it is likely to continue being opportunistic. Management has a goal to average 15% annual growth across its business.
Firan stock is not as cheap as it was a year ago. However, it trades at a substantial discount to larger aerospace parts providers. If it continues to execute, Firan could have attractive upside from earnings/cash flow per share growth and a valuation re-rating.
An undervalued Canadian conglomerate
Calian Group (TSX: CGY) has a market cap of $575 million. In fiscal 2024, it grew revenues by 13% and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 30%! Yet, its stock is down 15% in 2024.
The company missed its revenue guidance for 2024. However, that is largely because the Canadian government (one of its largest customers) unexpectedly and severely cut its military budget for the year.
The good news is that Calian is using its strong balance sheet to acquire businesses that diversify its business by segment, customer, and geography. The acquisitions are also helping push its margin profile higher.
One of the most exciting opportunities for Calian is selling the combination of its diverse business segments. It is now able to package multiple types of services into a project. Not only will this help to increase the size of future projects, but margins are also likely to rise.
Calian stock does not get the appreciation it deserves. Despite a record of high teens revenue and cash flow growth, it only trades with an enterprise value-to-EBITDA ratio of six and a price-to-free cash flow ratio of 8.6.
Management needs to execute their mid-teens growth plans. If they can, there is likely to be a significant upside for the stock. You get to collect a 2.2% dividend yield while you wait for that growth to materialize.
