By Hassan Malik
While
going largely unnoticed, a recent study conducted by five independent stock-market
experts concluded that small-cap stocks can beat the overall market by as much
as five percentage points a year. The study by AQR Capital Management, LLC, entitled
“Size Matters, If You
Control Your Junk,” monitored 50 years of U.S. data and 30
years of oversees data, and reported that: “if you want to beat the market, buy
small-cap stocks of high quality, as measured by balance-sheet strength,
profitability, stability and growth.” Fortunately for Canadian investors, there
are more than a few high-quality small cap stocks available in their country. Presuming
this is true, we have identified two stocks in particular that may outperform
in 2015.
Canadian Western Bank (TSX: CWB): Similar
to many other western Canada based companies, Canadian Western Bank’s
performance has been hurt by the drop in oil prices. This has been reflected in
the company’s share price, which is roughly $28 today, down from nearly $43 in August
2014. Yet, despite a decline in share price, the bank has recently revealed
some promising financials. Foremost, the bank reported first-quarter net income
of $54.2 million, up 3% compared with the same period last year. As well, in a
recent statement, Chief Executive Chris Fowler announced that the bank sold its
property and casualty insurance division for $197 million. The cash derived
from this sale will probably be used in acquisitions, likely in the equipment
finance or wealth management areas, and outside of the bank’s core markets of
Edmonton and Calgary. Going forward into 2015, Mr. Fowler expects loan growth
of 10%-12%, along with earnings rising up to 8%. “We measure ourselves on
performance-based metrics, like revenue growth, loan growth, provisions for
credit loss, return on equity, earnings per share, and cost efficiency—metrics
which reflect the true performance of CWB Group and have not had a
statistically significant correlation to the price of oil,” Mr. Fowler said.
Accordingly, it is true that a higher oil price will foster the bank’s growth.
Yet, despite declining oil prices, the bank’s future prospects look quite
promising, and analysts are already predicting its share price to recover.
Leon’s Furniture Ltd. (TSX: LNF): The
Toronto based furniture and alliance retailer recently reported an 11.8% increase
in fourth-quarter net income as sales at both corporate and franchise stores
improved. As well, the company reported net income of $29.9 million, or $0.38
per diluted share, in the three months ended Dec. 31. That was up from $26.3
million, or $0.34 per share, in the prior-year quarter. Meanwhile, for the year
ended December 31, 2014, total system wide sales were $2.35 billion, including
almost $374 million in franchise sales, versus $2.04 billion, including $344.8
million of franchise sales, in 2013. The rise in sales can be partly attributed
to the 2013 acquisition of rival “The Brick.” Going forward into 2015,
President and CEO Terry Leon said that Leon’s is in the early stages of a
15-month project to install a new computer system. This installation should
improve operational efficiencies between The Brick and Leon’s divisions of the
company.
Disclaimer: This article was posted with
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therein do not necessarily reflect those of SmallCapPower. SmallCapPower
does not endorse any investment advice provided by these third-party
contributors.
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