Canadian small caps break through downtrend

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

–  by Keith Richards


If you don’t want to buy individual names, consider iShares S&P/TSX Small-Cap Index fund.

In my last column, I noted that major U.S. markets had likely hopped on a new mega-year bull, having recently snapped a technical ceiling that began in 1999.

I also noted the potential for an interim bear market correction sometime in 2014, although I pointed out that such a correction should be viewed as part of a “normal” bull market.

Despite any interim corrections, the bigger picture is technically bullish for what will likely be a multi-year bull.

As we continue to enjoy the remaining upside from this market before an interim correction, I’m putting some of the capital in the ValueTrend Managed equity platform into Canadian small caps.

Of course, you can always buy individual small caps. But you can also ride the sector itself by buying an exchange-traded fund such as iShares S&P/TSX Small-Cap Index (XCS-TSX, $15.01).

Admittedly, since early 2011, Canadian small caps have been a dog’s breakfast.

But the sector broke its downtrend around August. For our part, we recently bought a position in the iShares fund for the ValueTrend Managed Equity platform.

Putting the iShares ETF under the microscope, we’ve identified many constructive stocks. Not only do their charts show them breaking out of the pack, they also show superb valuations.

Because small caps can be volatile, individual investors might want to stick with the iShares ETF.

But if you have enough capital to diversify properly through several good small caps, pick names from the ETF that show compelling fundamentals, as well as technical breakouts.

One such name is Chemtrade Logistics Income Fund (CHE.UN-TSX, $18.37), a Toronto-based manufacturer of sulphur products and performance chemicals.

Although Chemtrade, which we’ve owned for some time, is small cap, its seven per cent dividend makes it a natural long-term play for our portfolio, as does its steadfast stock pattern.

Chemtrade’s recent quarterly update indicated confidence in its yield, as well as its corporate growth, spurring analysts to raise their recommendations.

Although the company is now pondering a US$1 billion acquisition — namely, New Jersey-based General Chemical — it’s not going to spill the beans unless the deal actually goes through.

Still, Chemtrade has a history of growing through acquisitions. So, we think this deal will not only benefit the company’s shareholders, but the company itself.

Mark Davis, Chemtrade’s CEO, said as much at the company’s quarterly meeting, noting that any merger or buyout would have to benefit the stockholders.

He also said any such move would have to keep Chemtrade’s balance sheet strong, as well as show earnings sustainability.

Given such criteria, we’re confident Chemtrade’s cash flow will continue to be both steady and predictable — and, perhaps most important — will continue to grow.

Yet another interesting small-cap candidate is Pure Technologies Ltd. (PUR-TSX, $6.70), although we don’t now yet own it.

Headquartered in Calgary, Pure develops products for the inspection, monitoring and management of critical infrastructure, such as pipelines and bridges.

Pure Technologies was recently upgraded by a few brokerages. And after releasing some good earnings, it also garnered positive press in the Globe and Mail.

Because the company has risen on the good publicity, we’d look to buy it on a pullback. But Pure Technologies’ story is good, worthy of being considered as part of a small-cap portfolio.

Another small-cap we like? Parkland Fuel Corp. (PKI-TSX, $18.14), which buys and owns fuel distribution firms. It also owns a few gas stations.

We’ve owned Parkland for a while. But with the recent pullback in its shares, its stock now makes more sense as a buy than before. Moreover, with a dividend approaching six per cent, Parkland boasts a healthy payout.

Thanks to its recent purchase of SPF Energy in North Dakota, Parkland not only has a beachhead in a high growth market, but a business that meshes well with Parkland’s other operating divisions.

And although many analysts have raised their recommendations for Parkland, they still did so after we ourselves had done so. Moreover, they’re basically plowing the same ground, having raised their price targets to $20-$21 a share — in-sync with our technical target price of $20.

In addition to small caps, we’ve also recently bought some Canadian mid-cap plays.

One such name is CAE Inc. (CAE-TSX, $12.65), the Quebec-based make of flight simulators for both civil aviation and the defense industry.

Although the company’s third quarter was roughly in-line with expectations, its guidance spurred several analysts to upgrade their recommendations.

To its credit, CAE has a big order backlog — one that will fuel its profitability in the months to come.

The technical breakout at which we bought the stock — just over $11 — suggests a minimum price target of $13, which is in-line with the analysts’ new targets.

Not only are we encouraged by CAE’s operational progress, but we believe it’s well positioned for growth, as the aviation business steadily gains altitude.
Another one of our favorite mid caps is Enerplus Corp. (ERF-TSX, $19.64), a Calgary-based oil and gas outfit.

It’s a relatively new acquisition for Value Trend. More important, it just reported a winning quarter. Indeed, for many analysts, the company now rates an “outperform.”

Enerplus recently sold some non-core assets, buying some new assets that the company expects to be more profitable — all of which have buoyed its shares.

Yet, after we sat in on the company’s stockholders’ meeting, we came away even more impressed.

Technically, the stock is now targeting $22-$24 a share, which is about 15-20 per cent higher than its current price. And, oh, Enerplus’s dividend tops 5.5 per cent.

In your search for undervalued, but technically strong portfolio holdings, consider adding some of Canada’s small caps or mid caps. In addition, for both growth and opportunity beyond the more common small-cap names, diversify your portfolio, or buy an ETF with a broad footprint.


Keith Richards is portfolio manager of Value Trend/Wealth Management in Barrie, Ont. You can e-mail him at
Keith will be appearing on BNN’s MarketCall on Wed., Dec. 18 at six p.m., Eastern standard time. If you have a question for Keith, call him toll-free during the show at 1-855-326-6266, or e-mail your question ahead of time to Specify that your question is for Keith.

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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