Last year, we identified five early stage companies with mispriced stocks that were trading at low Enterprise Value to Revenue multiples. Now, we take a look at their individual performances. Overall, the group increased almost 23% with International Road Dynamics leading the way, up over 75%, as it was acquired during the year at a hefty premium. Although with positive returns for the year, both Firan Technology Group and EXFO Inc. are down over 30% from their 52-week high, illustrating the need to closely watch your investments in small-cap stocks to maximize returns. H2O Innovation was the only company to lose ground in the past year, down almost 18%.
International Road Dynamics (now part of Wi-LAN Inc.) – Acquired at $4.25 per share
International Road Dynamics (IRD) is a highway management technology company that specializes in supplying products and systems to the global Intelligent transportation systems industry. Based in Saskatoon, Sask., the company has sales and service offices throughout the United States.
Due to a takeover bid, IRD jumped 75.6%, making it the best performer in the group over the past year. In April 2017, IRD announced that it would be acquired by Wi-LAN Inc (TO:QTRH) (TSX: WIN) at a price of $4.25 per share.
Our take: One of the best ways to maximize gains in the stock market is to identify stocks that are mispriced. Investing in underpriced companies can give attractive returns for long-term investors. Mispricing usually occurs due to the market overlooking the company’s info. Small-cap companies are especially prone to irregular information because there are fewer investors, analysts and media sources following these stories. These opportunities can be identified through relative valuation and intrinsic valuation. Relative valuation employs a number of comparative metrics that allow investors to evaluate a stock in relation to other stocks. Intrinsic valuation methods allow investors to calculate the value of an underlying business independent of other companies and market pricing.
EV/Revenue is one of the comparable used to evaluate a company’s relative valuation to peers. EV/Revenue gives investors a quantifiable metric of how much it costs to purchase the company's sales, hence, a lower ratio indicates undervalued stocks. In this article, we are looking at the one-year performance of the undervalued Canadian small-cap companies, which were identified a year ago.
Firan Technology Group Corp – $3.39
Aerospace & Defence
Firan Technology Group Corporation (TO:FTG) is a supplier of aerospace and defence electronic products and subsystems. The company operates through two segments: FTG Circuits and FTG Aerospace. FTG Circuits manufactures technology printed circuit boards. FTG Aerospace designs and manufactures illuminated cockpit panels, keyboards, bezels, subassemblies and assemblies for original equipment manufacturers of avionics products, as well as for airframe manufacturers.
Another opportunity that could have been, FTG hit an all-time high of $4.74 on January 20, 2017 after announcing a three-year contract with a large aerospace equipment manufacturer, representing a potential upside of ~70% for anyone who bought stock in September 2016.
Market Cap: $76 million
Revenue: $87 million
Price at Last Report Date: $2.80
Overall Return (since September 8, 2016): 21.1%
Forage Orbit Garant Inc (TSX: OGD) – $1.86
Mining Support Services & Equipment
Forage Orbit Garant Drilling Inc. is a Canadian company that provides surface and underground drilling services to the mining and exploration industry in Canada and internationally. The company provides geotechnical drilling services to mining or mineral exploration companies, engineering and environmental consultant firms, and government agencies.
OGD rose significantly towards the end of 2016 as it snapped a streak of quarterly losses during Q2/2017, but was unable to sustain that momentum overtime.
Market Cap: $67 million
Revenue: $125 million
Price at Last Report Date: $1.49
Overall Return (since September 8, 2016): 24.8%
EXFO Inc. – $4.98
Industrial Machinery & Equipment
EXFO Inc. (TO:EXF) is a Canadian company that provides communications service providers (CSPs) and data center, cloud and web-scale operators with field test, service assurance and analytics solutions to ensure the deployment, maintenance and management of physical, virtual, fixed and mobile networks.
Earlier this year, EFXO closed at an all-time high of $ 7.99 in April 2017, on the back of improved performances over consecutive quarters, but fell off after a dip in quarterly earnings.
Market Cap: $262 million
Revenue: $305 million
Price at Last Report Date: $4.52
Overall Return (since September 8, 2016): 10.2%
H2O Innovation Inc – $1.35
Environmental Services & Equipment
H2O Innovation Inc (V:HEO) provides integrated technological water treatment solutions based on membrane filtration technology to municipal, energy and mining end users.
The company is also delivers drinking water and processes water production, and wastewater treatment systems. The stock peaked in November 2016 at $2.34 as it was unable to sustain strong revenue growth over consecutive quarter. A year later, on Sept. 29, 2017, the company announced record high annual revenues of $83 million, but was still unable to turn a profit over the period.
Market Cap: $54 million
Revenue: $51 million
Price at Last Report Date: $1.64
Overall Return (since September 8, 2016): -17.7
The original article can be seen here.
Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in any of the companies mentioned above.