Four small cap stocks with long-term growth potential

BMO’s Tyler Hewlett focuses on companies that can grow their business but are less exposed to general economic weakness

Ruth Saldanha 7 December, 2018 | 6:00PM
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Ruth Saldanha: Markets have been extremely volatile over the past few weeks and many experts believe that the bull run in equities may well be coming to an end. Some have even said we might be looking at another recession. With this backdrop where should investors look for value especially in the riskier small cap stock space. with me to discuss this we have Tyler Hewlett, small cap Portfolio Manager for BMO Asset Management. Tyler, thank you so much for joining us today.

Tyler Hewlett : Thank you.

Saldanha : To begin with what is your outlook for equities and right now in this volatile environment on what should investors focus.

Hewlett:So, the market has been nervous over the past few weeks about a few things, first of all is rising interest rates and less accommodative monetary policy. Corporate profits have been a big concern. So corporate profits have been a bit weaker due to rising wages. Due to rising input costs and also of course interest rates. The market has been concerned about global trade and trade wars and I think the outlook for next year really depends on how much more certainty we get with respect to these issues. Looking forward we actually expect that the volatility is likely to continue for the next several months.

Saldanha : In this environment you do have some stock picks that you like the first of which is a packaging company called Winpak tell us what you like about that stock.

Hewlett:So as you said Winpak is a packaging company serving the food and beverage industry. So think things like Keurig they supply Keurig with a lot of their containers for their coffee. So what we like about Winpak is their innovation has really allowed them to gain market share with large food and beverage companies like Keurig. The end markets for their products are very stable again it is consumer packaging. We like that the company should be able to grow in 2019 as they increase their capacity and then this is a company with a very stable balance sheet. It’s a high cash flow business company has about $300 million in cash on the balance sheet that they can use for either acquisitions to buyback their stock or to do other things that can create shareholder value.

Saldanha : Your second stock pick is in the human resources space, right. Now unemployment is at lows in Canada do you think that this company benefits from that.

Hewlett:So the great thing about a company like People Corp. which is a group benefits and human resources service company. Servicing, the small and mid-cap corporate market. What we really like about People Corp's business is that it's very stable. So over 90% of their revenues are recurring. So this is a type of industry where you get paid regardless of the economic environment. There are, there is increasing demand for their services, employee retention is very important for companies right now. Again this is a company with very strong growth, it's a fragmented industry, they can grow through both organic and acquisitive means. Very steady and we think this is a company that we should be able to see 20% growth from for the next several years.

Saldanha : Your third pick is in the funeral space and the only certainties are death and taxes. This company seems to be pretty set on that tell us more about this stock.

Hewlett:Park Lawn Corporation is a cemetery and funeral services business, operating in Canada and the U.S. It's mostly cemetery related as you said there are not many businesses more resilient than the death business. So this is a company again the end markets are very fragmented it's an industry with a lot of barriers to entry. So that puts a company like Park Lawn in a great position to do accretive acquisitions and we think the company again should be able to buy businesses improve their profitability and grow it at call it 15% rates for many years into the future.

Saldanha : Your final pick is in the renewable energy based Boralex tell us more about this particular stock.

Hewlett:So Boralex is a renewable energy producer of mostly hydro and wind. Mostly in Ontario and France. The demand for renewable energy has been growing very strongly and we expect that's a trend that is not going to go away. We actually think it's going to accelerate. So when we look at Boralex over 90% of their installed capacity is contracted with large utilities. So they have very strong visibility on their revenues we believe that the company should be able to double their earnings power over the next say three or four years from adding on capacity and the company does have some debt to finance their projects. When we talk about for instance the uncertainty with respect to interest rates about 90% of their debt is fixed rate or hedged against rising interest rates. So here's a company that we think can grow very stable revenue base and is less exposed to some of the economic uncertainties that we see in the market.

Saldanha : Thank you so much for joining us with your perspectives, Tyler.

Hewlett:Thank you.

Saldanha : From Morningstar I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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