Small-cap stocks can be very volatile, but they can also be highly rewarding investments. There are several reasons for this.
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Why small-cap stocks can outperform
Firstly, small-cap stocks tend to have a low share float. This means there are not a lot of shares that regularly trade hands. Consequently, they can be somewhat illiquid, especially if you have a large position. This can create a lot of volatility both for the downside and upside. All it takes is for a larger investor or institution to start aggressively buying, and a small-cap stock can soar.
Secondly, small-cap stocks are often younger companies, earlier in their growth trajectory. Due to this, earnings can, at times, be more volatile. A big miss can lead to a huge selloff. However, a beat can lead to a double-digit gain. It is smart to look for companies with highly invested management teams and a track record of good execution.
Lastly, small-cap stocks can provide a long runway of growth ahead. Just given the law of large numbers, it is much easier for a stock with a market cap of $100 million to quickly multiply by 10X than for a stock with a $100 billion market cap. A company that is in the early innings of its growth trajectory can provide a much longer runway for compounded returns.
If you are convinced by the bull case for small-cap stocks, here are three Canadian small-cap stocks to look at today.
A small-cap tech stock with plenty of growth
VitalHub (TSX: VHI) is a top small-cap stock to investigate. It has a market cap of $612 million. VitalHub provides software services to ancillary healthcare settings across Canada, the U.K., the Middle East, and Australia.
The company has been seeing a mix of growth from good acquisitions and organic growth. It has made over 20 acquisitions since it was publicly listed. It has a development arm in Sri Lanka that enables it to build and improve the software solutions it sells cost-effectively.
The healthcare industry operates with incredibly outdated software solutions. Consequently, there is still a substantial runway for VitalHub to grow for years ahead.
Over the past five years, revenues have grown by a 46% compounded annual growth rate (CAGR). Earnings before interest, tax, depreciation, and amortization (EBITDA) have grown by an 83% CAGR in that time.
A flight technology company
Firan Technology (TSX: FTG) has a market cap of only $225 million. Its stock is up 312% in the past five years.
Firan provides specialized circuit boards and cockpit parts for the airline industry. Demand for new airlines around the world has fuelled record backlogs and years of production for the major aircraft OEMs. This is expected to provide a long-term growth tailwind for Firan.
It has used strategic acquisitions to expand its market presence, manufacturing capacity, and product expertise. Today, it has a growing backlog that should continue to fuel its approximately 15% average annual growth target.
A cheap multi-service provider in Canada
If you are looking for a value-priced small-cap stock, Calian Group (TSX: CGY) is one to look at. It has a market cap of $560 million. Unlike the stocks above, it has underperformed expectations for a few years. However, that could present opportunities.
Calian is a provider of training, cybersecurity, satellite/extraterrestrial, and healthcare services to military and government entities in Canada, Europe, and the United States. Global defence is a top-of-mind issue across these nations. Military spending is expected to increase, and that should help bolster Calian’s already robust backlog.
The company trades at its lowest valuation in the past 10 years (despite expecting solid growth in 2025). It also has a nice 2.35% dividend yield.
