A weekly look at some small-cap stocks making news – or about to.
As of market close on Thursday, April 3, Canada’s S&P/TSX SmallCap Index was down by about 2 per cent over the past 12 months. The Russell 2000 in the U.S. was down by about 8 per cent over the same period.
So much for those bets that small caps would outperform their larger market peers, at least in the U.S..
The Russell 2000 became the first major U.S. benchmark to enter a bear market on Thursday after falling more than 20 per cent from its all-time high of around 2,466 in late November. The index fell 6.6 per cent on Thursday alone, the biggest daily percentage decline since March, 2020. (A bear market is a drop of 20 per cent, while a correction is a drop of 10 per cent). By comparison, the S&P 500 is down 12 per cent from its Feb. 19 high of 6,147.
It’s a major reversal from last year when small caps were considered the hot trade post U.S. President Donald Trump’s re-election. Investors believed small caps would benefit from his administration’s promises of lower taxes and deregulation.
The Russell 2000 closed out that election week with an 8.6-per-cent advance, almost four percentage points higher than the 4.7-per-cent weekly gain of the S&P 500, CNBC noted in an article on Thursday. It also cited a prediction back then from Tom Lee, managing partner and head of research at Fundstrat, that small caps could outperform by more than 100 per cent over the next couple of years.
Trump’s wide-sweeping tariff announcements appear to have blunted the enthusiasm for U.S. small caps amid concerns that the U.S. could enter into a recession.
Canada’s S&P/TSX Small Cap Index has also suffered, but not as badly, so far. It was down 3.8 per cent on Thursday alone and is down about 7 per cent from its record high of 852.21 reached in April, 2022.
Canada’s small cap index is much different from the U.S., notes Anil Tahiliani, a senior portfolio manager at Matco Financial Inc. in Calgary, whose Matco Opportunities Fund is focused on small and mid-cap growth companies.
First, he points out that the Russell 2000 Index is more diversified and has about 1,953 holdings versus 247 for the S&P/TSX Small Cap Index. The sector weights are also very different. He cites Bloomberg data showing that the top three sectors for the Russell 2000 Index as of March 31 are industrials (19 per cent), financials (19 per cent), and health care stocks (17 per cent), which make up 55 per cent of the index.
“These sectors are more focused on the general health of the economy,” he says.
Meanwhile, the S&P/TSX Small Cap Index is more focused on resources with materials such as gold, silver and base metals, accounting for 33 per cent of the holdings and energy at 22 per cent – that’s 55 per cent commodities.
“In an inflationary world, or when there’s a lot of uncertainty, investors are hedging with gold and gold stocks; as a result, this index really outperforms,” Mr. Tahiliani says of the S&P/TSX Small Cap Index.
He notes that the Russell 2000 index is down 14.3 per cent so far this year, as of Thursday’s close, while the S&P/TSX Small Cap Index is down 2.5 per cent.
“The main driver of outperformance is the materials sector which is up 19 per cent as of March 31st,” he adds. “And given its weight in the index has driven the returns.”
Other small caps making news this week:
D2L Inc. (DTOL-T) shares dropped 15 per cent on Thursday after the education technology company reported fourth-quarter revenue that beat expectations but a weaker-than-expected outlook.
The company reported fourth-quarter revenue of $53.3-million, an increase of 12 per cent over the same period in the prior year. The result was above expectations of $52.8-million. Income for the period was $19.9-million compared with $563,000 for the same quarter last year.
The company also provided guidance for its fiscal year ending January 31, 2026, saying it expects subscription and support revenue in the range of $194-million to $196-million, implying growth of 7 to 9 per cent over fiscal 2025 (and 9 to 10 per cent on a constant currency basis). Total revenue is expected in the range of $219-million to $221-million, implying growth of 7 to 8 per cent year over year (8 to 9 per cent on a constant currency basis).
Canaccord Genuity analyst Doug Taylor said in an April 2 note that the fourth-quarter results beat revenue and EBITDA expectations but that some of the revenue guidance was lower than expected due in part to uncertainty around the U.S. Department of Education’s future and funding and “the knock-on effect on higher education budgets.” He has a “buy” and $22 target on the stock.
National Bank Financial analyst John Shao, who has an “outperform” (similar to buy) and $22 on the stock, said the stock sell-off was likely due to its lower-than-expected guidance stemming from “FX [currency] headwinds and macro uncertainties,” but said those were beyond the company’s control.
“When it comes to matters that it can control, we consider D2L a perfect example of capital discipline, with scaling profitability paired with measured investments,” the analyst wrote in an April 3 note. “Looking ahead, this track record of strong execution will certainly help the company navigate those macro uncertainties to achieve its medium-term targets. If anything, we continue to like D2L for its strong profitability, which now offers plenty of optionality. The pullback represents an attractive entry point at the current valuation.”
The company also announced this week that its president, Stephen Laster, is leaving on May 9 to take on a new opportunity as CEO of a private company. D2L said the company is not a competitor. The company stated that his responsibilities would go to D2L’s founder and CEO, John Baker, and the rest of the senior leadership team.
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Converge Technology Solutions Corp. (CTS-T) announced after markets closed on Tuesday that it has agreed to amend its previous agreement to be taken over by H.I.G. Capital. It said H.I.G will acquire all shares of Converge for $6 per share in cash, up from $5.50.
It said the revised bid is a result of an unsolicited, conditional and non-binding proposal that Converge received for cash consideration of $6 per share from a new third party on March 7. That was followed by an official submission of a binding all-cash offer on March 31. On April 1, before Converge entered into the amended agreement with H.I.G, the third party upped its bid to $6.10 per share, a best and final offer, Canaccord Genuity analyst Robert Young said in a note.
“Despite the higher bid, the Converge board advised to proceed with H.I.G’s amended offer at $6 for the following reasons: 1) certainty of close, 2) shorter timeline to close, and 3) stakeholder stability and reduced disruption risk if CTS decided to accept a competing bid,” Mr. Young wrote, adding that H.I.G. has a five-business day match period for any offers.
“Given April 8 is the proxy deadline for the upcoming April 10 shareholder meeting, we see low probability of any new bids and expect the H.I.G. amended agreement to close,” he wrote. He raised his target to $6 from $5.50 to reflect the offer with a “hold” rating.
Other changes include: TD Cowen’s David Kwan to $6 from $5.50 with a “buy” rating, Scotia’s Divya Goyal to $6 from $5.50 with a “sector perform” rating, CIBC’s Stephanie Price to $6 from $5.50 with a “neutral” rating and Desjardins Securities’ Jerome Dubreuil to $6 from $5.50 with a “tender” recommendation.
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Canaccord Genuity Group Inc. (CF-T) announced on Tuesday that it’s selling its U.S. wholesale market-making division to Cantor Fitzgerald, the independent Canadian investment bank announced Tuesday, nearly two years after it warned of a potentially “significant penalty” related to that business. The Globe’s Jameson Berkow has the full story here
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MDA Space Ltd. (MDA-T) has signed a deal to buy Israeli company SatixFy Communications Ltd. (SATX-A), a maker of chips for satellite communication systems.
Under the deal, announced before markets opened on Tuesday, MDA Space will pay US$2.10 per share in cash and plans to retire SatixFy’s existing debt of about US$76-million immediately upon closing, for a total cash consideration of about US$269-million.
SatixFy brings with it more than 60 patents issued and pending, as well as a staff of about 165 largely specialized technical employees around the world. MDA Space chief executive officer Mike Greenley says the deal is the next step in reinforcing the company’s technical differentiation as the global market transitions from analog to digital satellite technology.
BMO Capital Markets analyst Thanos Moschopoulos maintained his “outperform” rating on the stock after the announcement. “While the transaction is initially dilutive from an EV/EBITDA valuation perspective, we believe it makes significant strategic sense, and in our view, should be accretive in later years,” he wrote in a note.
Canaccord Genuity analyst Doug Taylor wrote in a note that, despite a premium valuation, “we believe the deal presents a strong strategic fit, vertically integrating MDA with its satellite semiconductor supply chain and reinforcing the differentiated digital satellite offering.”
Mr. Taylor, who has a “buy” and $37 target on the stock, also wrote that the transaction “creates long-term value by solidifying MDA’s position as a key supplier of satellite technology.”
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Westport Fuel Systems Inc. (WPRT-T) reported fourth-quarter revenue of US$75.1-million down from US$87.2-miillion a year earlier. The result was ahead of expectations of US$70.4-million, according to S&P Capital IQ.
Its net loss was US$10.1-million or 59 cents US per share versus a loss of US$13.9-million or 81 cents a year earlier. The expectation was for a loss of 28 cents.
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Pizza Pizza Royalty Corp. (TSX: PZA) reported a drop in fourth-quarter earnings compared to the same time a year earlier.
After markets closed on Monday, the restaurant chain said sales came in at $160.4-million, down from $163.9-million a year earlier. The result was below expectations of $161.2-million, according to S&P Captal IQ.
Same-store sales decreased 3.8 per cent. Adjusted earnings came in at $9.8-million or 24 cents per share compared to $10.1-million or 25 cents a year earlier.
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BRP Inc. (DOO-T) announced a deal to sell its outstanding shares of Telwater Pty, Ltd. to Yamaha Motor Australia Pty Ltd., a subsidiary of Yamaha Motor Co., Ltd. “The acquirer has been established in the region since 1983 and a key player in Australia’s boat industry,” the company stated in a release on April 1.
It said the transaction follows the decision to sell its Marine businesses “to channel its efforts and investments towards its core Powersports activities, thereby enhancing its position for long-term success.”
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Well Health Technologies Corp. WELL-T shares fell 15 per cent this week after the company disclosed it was delaying the release of annual financial statements because of an investigation into the billing practices of a U.S. subsidiary. Read the Globe story here.
Separately, the company announced it was moving ahead with plans to buy a controlling interest in Toronto-based Healwell AI.
“We view Well as a top performer in healthcare technology in Canada,” Ventum Capital Markets analyst Rob Goff said in a March 31 note. He has a “buy” and $18 target on the stock. “We forecast continued outperformance driven by organic growth, FCF [free cash flow] generation, and accretive acquisitions.”
April 8: AGF Management Ltd. (AGF-B-T), Tilray Brands Inc. (TLRY-T)
April 9: The North West Company Inc. (NWC-T), Theratechnologies Inc. (TH-T)
April 10: Reitmans (Canada) Ltd. (RET-X), Sucro Limited (SUGR-X), Richelieu Hardware Ltd. (RCH-T)
April 11: Corus Entertainment Inc. (CJR-B-T)
April 11: MTY Food Group Inc. (MTY-T)
April 23: Cargojet Inc. (CJT-T), Precision Drilling Corp. (PD-T), Aecon Group Inc. (ARE-T), Mullen Group Ltd. (MTL-T)
April 29: Morguard North American REIT (MRG-UN-T)
April 30: Morguard Real Estate Investment Trust (MRT-UN-T), Spin Master Corp. (TOY-T)
May 1: Capital Power Corp. (CPX-T), Pason Systems Inc. (PSI-T)
May 5: Ero Copper Corp. (ERO-T)
May 6: Western Forest Products Inc. (WEF-T), Minto Apartment Real Estate Investment Trust (MI-UN-T), Boardwalk Real Estate Investment Trust (BEI-UN-T), Extendicare Inc. (EXE-T)
May 7: Killam Apartment REIT (KMP-UN-T), Green Thumb Industries Inc. (GTII-CN)
May 8: Alaris Equity Partners Income Trust (AD-UN-T), TerrAscend Corp. (TSND-T)
–with a file from The Canadian Press
