Small Cap Stocks That Should Benefit from Rising Interest Rates

The small cap stocks on our list will likely see large increases in EBIT margins this year

SmallCapPower | July 14, 2017: The Bank of Canada increased interest rates by a quarter point Wednesday for the first time in seven years. Higher interest rates benefit companies in the financial services sector, with most of the effects being realized by lenders. Higher rates typically means lenders will generate incremental revenues without incurring incremental costs, thus increasing their profitability. Strangely, lenders who have lower margins will reap greater benefits from those who have already high margins. In light of this, we have identified five Canadian small cap stocks that will likely see the greatest increases in profitability due to rising interest rates.

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goeasy Ltd. (TSX: GSY) – $29.31
Consumer Lending

goeasy Ltd. is a Canada-based, full-service provider of goods and alternative financial services engaged in providing loans and other financial services to consumers, and leasing household products to consumers. It operates in two segments: easyfinancial and easyhome. Its easyhome segment consists of four product categories: furniture, electronics, computers and appliances, which are offered under weekly or monthly leasing agreements. easyhome operates through both corporately owned stores located across Canada and through a network of franchised locations. Additionally, it operates an e-commerce platform that allows customers to enter into merchandise leasing transactions through online channels. The easyfinancial segment is its financial services arm, operating in the non-prime consumer lending marketplace. easyfinancial is focused on providing consumer installment loans.

  • Market Cap: $392,515,358
  • EBIT Margin: 19.0%
  • EBIT (LTM): $68,472,000

Callidus Capital Corp. (TSX: CBL) – $14.30
Corporate Financial Services

Callidus Capital Corporation (Callidus) is a Canada-based company, which is engaged in providing financing solutions for companies that are unable to obtain financing from lending institutions. The Company operates a finance business that provides senior secured asset-based loans and lending services to mid-market companies operating in Canada and the United States. The Company offers a range of facilities, including revolving lines of credit; term loans, including standalone term loans; distressed lending, including debtor in possession (DIP) loans, acquisition funding out of bankruptcy and stalking horse bid funding, and growth oriented financing in support of acquisitions, management buyouts (MBO’s), inventory builds, seasonal facilities and purchase order financing.

  • Market Cap: $713,536,067
  • EBIT Margin: 23.0%
  • EBIT (LTM): $35,328,000

Chesswood Group Ltd. (TSX: CHW) – $11.89
Corporate Financial Services

Chesswood Group Limited is engaged in financial services businesses. The Company operates through two segments: Equipment Financing-U.S. and Equipment Financing-Canada. The Equipment Financing-U.S. segment is involved in small-ticket equipment leasing and lending to small businesses. The Equipment Financing-Canada segment provides commercial equipment financing to small businesses in Canada. Through its interests in subsidiaries, the Company is engaged in providing micro and small-ticket equipment financing to small businesses; providing working capital loans to small businesses in over 30 states of the United States; providing commercial equipment financing to small and medium businesses in Canada; providing consumer financing solutions to the heating ventilating and air conditioning and home improvement markets; holding a portfolio of legal finance receivables in the United States, and selling, servicing and leasing Acura automobiles in the Province of Ontario.

  • Market Cap: $197,021,664
  • EBIT Margin: 32%
  • EBIT (LTM):  28,924,000

First National Financial Corp. (TSX: FN) – $26.93
Corporate Financial Services

First National Financial Corporation is a Canada-based parent company of First National Financial LP (FNFLP), which is an originator, underwriter and servicer of prime residential (single-family and multi-unit) and commercial mortgages. The Company operates through two segments: Residential (which includes single-family residential mortgages) and Commercial (which includes multi-unit residential and commercial mortgages). The Company provides mortgage-financing solutions to the mortgage market in Canada. The Company also invests in short-term mortgages, usually for six- to 18-month terms. The Company provides underwriting and fulfilment processing services to a mortgage originator using the mortgage broker distribution channel.

  • Market Cap: $1,614,623,026
  • EBIT Margin:  25.6%
  • EBIT (LTM): 272,595,000

Accord Financial Corp. (TSX: ACD) – $8.75
Corporate Financial Services

Accord Financial Corp. is a provider of asset-based financial services to businesses, such as asset-based lending (ABL), including factoring, lease financing, working capital financing, credit protection and receivables management, and supply chain financing for importers. The Company’s business involves ABL by Accord Financial Inc. and Accord Financial, Inc., which entails financing or purchasing receivables on a recourse basis, as well as financing other tangible assets, such as inventory and equipment; lease financing and equipment and working capital lending by Accord Equipment Finance, and credit protection and receivables management services by Accord Financial Ltd., which involves providing credit guarantees and collection services, generally without financing.

  • Market Cap: $71,763,565
  • EBIT Margin: 33%
  • EBIT (LTM): $9,432,740

Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.

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