Small-company stocks that we rate ‘Speculative’ and ‘Higher Risk’ can offer attractive advantages. They offer higher potential rewards to compensate for their greater risk.
In 2020, you should focus on high-quality stocks. After all, quality helps stabilize your portfolio against market volatility. And volatility may rise in the months ahead if global trade tensions worsen. But if you can accept more risk, consider buying stocks we rate ‘Higher Risk’ and ‘Speculative’: Hardwoods Distribution, PFB Corp., Evertz Technologies, Intertape Polymer and Firan Technology Group. They offer you four benefits common to small-company stocks that have traded for years.
First, small-company stocks often deliver more. Between 1980 and 2015, US small-cap stocks produced an average yearly compound return of 11.2 per cent. This beat the corresponding eight-per-cent return of US large caps.
But that’s only true of seasoned small stocks. By contrast, IPOs (initial public offerings) usually cost investors money. Investment firm Kidder Peabody, for instance, found that two-thirds of newly-issued small stocks trailed the Dow Jones Industrials.
Lower visibility creates opportunities
A second advantage with small-company stocks is that fewer analysts follow them. This reduces their visibility. It also makes the market for small stocks less efficient which, in turn, creates opportunities. Many are cheaper than well-known big-name stocks.
Third, management often owns lots of the shares: it’s crucial to them that their companies do well.
Fourth, a successful product usually does more for a smaller company’s earnings and share price. It has less impact on a corporate giant’s overall results.
It’s important to diversify across at least five small-company stocks. But invest at most 10 to 20 per cent of your stock money in them. If you lack the cash to diversify, consider buying small-stock mutual funds.
■ Evertz Technologies Limited (TSX—ET) of Toronto designs, manufactures and markets video and audio infrastructure solutions for the television, telecommunications and new-media industries. Evertz enters the new year with significant momentum of its internet protocol, information technology and cloud solutions. The company probably earned $1.00 a share in 2019. The stock trades at a reasonable 18.0 times that figure. It also pays a dividend that yields 4.0 per cent. Buy for growth and income.
■ Firan Technology Group Corporation (TSX—FTG) of Toronto is an aerospace and defence electronics product and subsystem supplier to customers around the globe. The company has achieved strong bottom-line growth in 2019. Earnings per share for the nine months ended Aug. 30, 2019, were $0.24, up from $0.07 a year earlier. The company’s backlog at the large air transport manufacturers remains at record levels. Firan should earn $0.40 a share in fiscal 2020, and it trades at just 9.3 times that estimate. It’s a speculative buy for growth.
■ Hardwoods Distribution Inc. (TSX—HDI) is North America’s largest wholesale distributor of architectural grade building products to the residential and commercial construction sectors. Earnings per share are expected to have dropped in 2019 due to higher operating and finance expenses. But profit should rebound in 2020 and beyond, thanks to a positive outlook for the US construction market. Hardwoods shares trade at just 9.3 times 2020’s forecast earnings of $1.67 a share. Buy.
■ Intertape Polymer Group Inc. (TSX—ITP) of Montreal makes tapes, films and packaging for industrial and retail use. The company dominates the market for water-activated tape, which is expected to grow rapidly. This should help it grow faster than its peers. Intertape, which reports in US dollars, trades at just 10.7 times 2020’s forecast earnings of C$1.48 a share. The stock yields 4.9 per cent. Buy.
■ PFB Corporation (TSX—PFB) of Calgary manufactures insulation building products using expanded polystyrene. The company continues to experience sustained demand for its product lines in both Canada and the US. Earnings should rise from an estimated $1.07 a share in 2019 to $1.24 in 2020. The stock trades at just 9.8 times the 2020 estimate. Buy.
This is an edited version of an article that was originally published for subscribers in the December 27, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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