5i Research has identified three small cap Canadian tech growth stocks that look appealing
Ryan Modesto | February 26, 2019 | 5i Research: While small-cap stocks tend to be considered investments with high volatility and, in turn, higher risk, there are handfuls of Canadian small cap stocks that also have great growth, profitability and strong balance sheets, often with no debt. Being able to filter out the ‘junk’ and speculative names in the Canadian small cap space can go a long way in mitigating many of the risks with smaller stocks. Below we wanted to highlight three Canadian small cap tech growth stocks that fit this kind of mould and are companies we often get questions on at 5i Research.
Sylogist is an Enterprise Resource Planning (ERP) solutions company in North America. It focuses on software solutions in the education, government and not-for-profit sectors. While small at a $282 million market cap, the Company has seen its share price grow by 45% in the past year and revenues have grown by just over 26% annually over the last five years. While SYZ is traded on the Venture Exchange, the Company derives over 70% of revenues from the U.S. More than 70% of these revenues have also been recurring in nature. While the growth at SYZ is impressive in its own right, the ability to drive shareholder value in other forms is perhaps what makes Sylogist the most interesting. SYZ has grown its dividend by just over 14% annually for the last five years and maintains a payout ratio of 63%. The Company also holds no debt as of the first quarter of 2019. Sylogist keeps tight control over the share count, not diluting shareholders, with outstanding shares in the recent quarter of 22 million compared to roughly 24 million outstanding back at year-end 2014. Finally, insiders are well aligned with shareholders as insiders own roughly 8.8% of its shares.
Kraken Robotics Inc. (TSXV:PNG)
At 5i Research, we typically prefer stocks that trade over a market cap of $100 million. The reason for this is that the $100 million market cap tends to act as a bit of a natural filter for quality. Quite simply, it is hard to grow a company to that size and in order to do so, something needs to be going right. Often times, once when a company crosses that $100 million threshold, larger investors can start participating, which can add to the interest and momentum in that name. With that said, Kraken is one of those names that is on the smaller side with a market cap of $88 million but appears to be making the right moves.
The Company trades at 4 times next year’s expected sales and analysts expect revenue growth of 84% in 2019. Ocean Infinity, a customer of PNGs batteries, also owns 11% of the Company while insiders own roughly an additional 20%. PNG, however, does more than batteries as they also sell what are essentially underwater drones for mapping things like the ocean floor and for security and defense purposes. PNG holds very little debt but it continues to have negative operating cash flows, which makes it more reliant on capital markets for financing operations, which can be a risk for shareholders. Overall, there is plenty to like in this Venture name but the risks do remain high, making it not for everyone.
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Lightspeed (LSPD)
Don’t bother looking for this ticker quite yet as it is not public at this stage. However, LSPD is a company that investors should keep an eye on. From a ‘market infrastructure’ point of view alone, we think Lightspeed is interesting. By market infrastructure, we mean the makeup of the Canadian stock landscape. In Canada, there has not only been very few IPOs, let alone successful IPOs, there has been even fewer tech IPOs. The last material one we can remember being Shopify Inc. (TSX:SHOP). This means that Canadian investors will likely be hungry for a new, high-growth tech name in Canada, within an industry that has very few technology names to begin with and a market that has seen very few quality IPOs overall.
So, from a pure investor demand point of view, we think it is worth getting familiar with LSPD. The business itself, however, is interesting. Lightspeed generated $72 million in revenues over the last 12 months according to the preliminary long-form prospectus and is in 100 countries. About 90% of revenues are recurring in nature and revenue has grown at 36% annually since 2016. The Company provides point-of-sale (POS) technology that allows small and medium-sized businesses process transactions and also offers analytics and inventory management services to help people manage their business better. At the company level, LSPD checks a lot of boxes. They are in an attractive sector, and attractive space (payments), they have recurring revenues and are growing fast. Finally, within Canada, they are a unique exposure for a portfolio.
Of course, there are risks here. First off, there is a lot of information forthcoming for the IPO still. Most importantly, the pricing of the IPO has yet to be determined. Given the above comments on investor demand, the Company will likely be able to price the offering high but if priced at levels that are too frothy, the IPO might not do well. Management will need to find a balance of getting the financing they ‘need’ while leaving a little on the table for investors once they go public. Other risks are around managing a public company vs. private. Management now needs to report quarterly and make and beat guidance. If they have trouble doing this at the outset, this can create a loss of faith in the company and, in turn, the share value. So overall, there are risks, but LSPD is certainly a company that should be on an investor’s radar.
While the Canadian stock market can be small, especially outside of energy and financials, there are many great and growing companies and stocks in Canada. At 5i Research, we strive to find these quality Canadian growth and dividend stocks for our members. They are out there, investors just might need to look a bit harder to find them.
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