Canadian small cap stocks (stocks with a market capitalization of less than $1 billion) have underperformed for several years. However, that trend reversed in 2024. Last year, many small cap stocks rose by 70% or more.
Yet, 2024 was largely the catch-up trade. After the market tumbled in late 2022, small cap stocks were essentially left for dead. Nobody wanted a stock that had a market cap below $1 billion.
Small cap stocks are not as cheap as they were, but they are still attractive
As a result, you could pick up profitable, growing businesses at very attractive valuations. This was simply because they were small and unknown. Several small Canadian companies were swiped up by private equity players simply because they were just so darn cheap.
Today, the valuation gap has narrowed. Investments in small caps will largely be based on your expectations for earnings/cash flow per share growth. However, there is still a valuation gap, particularly when compared to larger stocks.
Small cap stocks still look attractive today. You might need to be a little choosey, but there are still some great opportunities. Here are a few to look at in 2025.
This stock is set for a turnaround
Sangoma Technologies (TSX:STC) has been a turnaround story for the past few years. It is now at an inflection point.
Sangoma provides communication software for small and medium (SMB) sized businesses. It has applications that span a broad array of customer needs. Customers get an enterprise experience at an SMB price.
After new management rightsized its organizational structure and focused its sales strategy, the company has started to generate a tonne of excess cash. It has been using that to quickly pay down what was once an oversized debt burden.
Now, Sangoma is positioned to focus on growth and profitability again. The company is expecting sales momentum to increase in the second half of 2025. Despite rising 150% in 2024, this small cap stock is still relatively cheap with a price-to-free cash flow ratio of only 6.5.
A small cap tech stock on the rise
VitalHub (TSX:VHI) is a bit of a different scenario than Sangoma. This tech stock is pretty pricey after a 177% rise in 2024. Early in 2024, its stock was very cheap. However, the market was pleasantly surprised when it started generating higher than expected earnings and free cash flow.
VitalHub provides software for the healthcare industry. Across the world, health systems are stressed, over utilized, and inefficient. VitalHub’s software helps solve a lot of efficiency problems in the system. It also helps improve overall patient outcomes.
Many health systems are stuck with antiquated software (or paper in some instances). As a result, the industry is ripe for the type of disruption VitalHub provides.
Today, VitalHub is loaded with cash after some recent equity financings. It has been deploying this into a large pipeline of acquisitions. If it can continue to accretively deploy capital, it could be another year of strong earnings and free cash flow growth.
The Foolish takeaway
These are just a few stock ideas you can find in the Canadian small cap universe. Look for companies that are either cheap when compared to other industry peers or have a catalyst to cause profitability to rapidly rise (or preferably both).
If you are shrewd, you might be able to pick these stocks up before they become household names in Canada or across the world. You can rapidly see your capital rise when you hit the right small cap stock opportunities.
