Investing in small or micro-cap stocks is fraught with risk, but the potential for owning a multi-bagger is also greater.
Early-stage companies often fly under the radar compared with their large-cap cousins because they lack brokerage coverage. Some may not generate much in the way of revenue or any profit yet, but their stocks could still pop on potential catalysts. Over time, some firms may even become takeover targets by a strategic buyer, such as a competitor, or a financial buyer, such as a private equity firm.
To help navigate the small-cap minefield in Canada, we asked three portfolio managers for their top picks that trade below $5 a share.
David Barr, president of PenderFund Capital Management Ltd., Vancouver
BSM Technologies Inc.
52-week range: 78 cents to $1.80 a share
Toronto-based BSM, whose equipment and software help owners of truck, rail and other fleets track their vehicles, has grown through acquisition and could be a takeover target, says Mr. Barr. "We like BSM because it is one of the 20 largest telematics companies in the world."
BSM, which has 155,000 North American subscribers, gets a recurring revenue stream from its technology, which provides data that can help clients save money. The firm is still consolidating its acquisitions, including Webtech Wireless Inc., which doubled its size in 2015.
Activist investor Crescendo Partners LP, which has a 10-per-cent stake in BSM, last year appointed three members to its board, including PenderFund chairman Kelly Edmison. Crescendo "works with a company for a few years to optimize the operations, and when the time is right, will look to sell the company," Mr. Barr said.
Vigil Health Solutions Inc.
52-week range: 18 cents to $1.28 a share
This health-care technology company, which provides emergency call and other monitoring services to the seniors' housing market in North America, will benefit as baby boomers grow older, says Mr. Barr. "We see a huge trend with an aging population toward more assisted living."
Services provided by Victoria, B.C.-based Vigil include a monitoring system for residents with dementia. Vigil has a "sophisticated board of directors with a proven track record, so I think this company is going to do extremely well over the long term," he said. Logical suitors one day could include medical equipment suppliers that sell another product into seniors' homes, he said.
A risk to its stock could be an event like the 2009 financial crisis because that triggered a slowdown in seniors' homes being built as companies faced problems getting financing, he said.
Steven Palmer, president of AlphaNorth Asset Management Inc., Toronto
Helius Medical Technologies Inc.
52-week range: $1.11 to $2.59 a share
The U.S.-based medical technology company makes a device to help people recover from brain injuries when used along with physical therapy, says Mr. Palmer. "It's a device that stimulates the tongue with electrical impulses. The tongue has a lot of nerve connections directly to the brain. The concept behind it is that the brain has the ability to renew itself."
The device, called PoNS, is undergoing a clinical trial with results expected in September, he said. "If that is positive, it will be a huge catalyst [for the stock]. Helius can then apply to the U.S. Food and Drug Administration to get approval for PoNS as a safe device, he said. Smaller trials and anecdotal evidence suggests that it works, he said.
Negative results would hurt Helius's shares, but the device could still undergo trials for other applications, such as helping people with multiple sclerosis, he said.
Jackpot Digital Inc.
52-week range: 2 to 6 cents a share
Shares of Vancouver-based Jackpot Digital should benefit from new orders for its next-generation electronic poker-game tables destined for cruise ships and casinos, says Mr. Palmer. "Jackpot Blitz is the new table that leapfrogs everybody in terms of technology," and is like sitting around an 84-inch iPad touchscreen, he said.
These newly launched game tables, which are leased to operators, reduce operating costs because no dealer is required. They also allow for faster play and the flexibility for several games – from poker to blackjack – to occur simultaneously.
Jackpot Digital expects monthly recurring revenue averaging a minimum of $5,000 (U.S.) per table. Potential catalysts for the stock include news of additional financing to make more electronic-game tables, and new orders from casinos for the Blitz table from Carnival Cruise Lines, he said.
Robert McWhirter, president of Selective Asset Management Inc., Toronto
Cymat Technologies Ltd.
52-week range: 13 to 40 cents a share
The stock of the Mississauga-based materials technology company may get a boost from new markets for its aluminium foam, says Mr. McWhirter. Uses for the foam depend on the size of holes in metal. Eighty per cent of sales stem from architectural cladding. The rest is from the military sector, where the material is used as blast protection under vehicles.
Cymat is vying for another military contract to include the foam in amphibious troop carriers, but that decision is unlikely until 2018, he said. The company is also doing tests with an automotive company to put foam in wheel wells of vehicles for crash protection. If tests are successful, it could mean a significant contract next year, he added.
A recent convertible-debt conversion and warrant exercise added 37-million outstanding shares but has left Cymat with a cleaner and stronger balance sheet.
FLYHT Aerospace Solutions Ltd.
52-week range: $1.70 to $3 a share
Shares of FLYHT, which makes satellite communications equipment that allows aircraft to live-stream their black-box flight data, could get a lift from sales to more Chinese airlines, says Mr. McWhirter. China requires new domestic planes to have satellite communication systems by year-end. Calgary-based FLHYT has an installed base of about 400 activated systems worldwide, but that number could double if it lands a deal with a tier-one Chinese carrier, which typically owns 400 to 700 planes, he said. That's key because FLYHT gets a monthly revenue of $1,100 per activated system.
Airbus has about 1,000 non-activated systems installed on its planes. Aviation rules requiring new aircraft by 2021 to report their location once a minute when in distress could increase sales. FLYHT, whose contract backlog exceeds $25-million, just did a 10-for-one stock consolidation that may attract new investors.