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Summary
- Canadian smallcap and microcap stocks are the outperformers of 2020, rebounding strongly after the March drip.
- After a long period of underperformance, these Canadian stocks are once again rising, making it a favourable option for investors.
- Materials sector drove the recovery of the TSXV index.
- Abitibi Royalties, Rupert Resources and Artemis Gold are among the rising stars of the ongoing rally on TSXV.
The S&P/TSX Venture Composite Index’s (TSXV) remarkable recovery in the second quarter of 2020 fiscal year has been widely celebrated by investors and analysts, more so because many constituents of the index are risky micro-cap stocks. As the novel coronavirus pandemic spread in Canada in March, both TSXV and the key S&P/TSX Composite Index (TSX) crashed, erasing a substantial amount of investor wealth in mere weeks. However, since then, both the indexes have recovered, with the TSXV companies faring even better than the heavyweights on TSX.
While TSX gained back over 44 percent in a 25-week period (from March 19), TSXV rose by an astonishing 117 percent in the same period. This steep recovery in the TSXV is being powered by the materials and mining sector, which accounts for 63.6 per cent of the overall index. Materials constitute only 15.4 per cent of the TSX composite. The S&P/TSX Venture Materials Sector Index has gained 64.45 per cent year-to-date (YTD).
YTD performance of S&P/TSX Venture Composite Index (Source: S&P Global)
Canadian Micro-Cap Stocks: The Outperformers of 2020
In Canada, micro-capitalisation or micro-caps are public companies with a valuation of up to C$ 300 million. They are basically the smallest companies on the stock exchange. That’s nothing to be dismissive of, since the right bet on a right micro-cap can lead to mega returns. Many successful companies – including the likes of Amazon, Apple, Netflix and Walmart – started out as micro-caps or small-caps.
However, because of their limited historical market data, liquidity, assets and unproven products, sales or operations, micro-caps are considered volatile and categorised as high-risk investments.
Before investing in these stocks, it is essential to run a background research of the company, understand its business model and management’s long-term operational and sales plans. This groundwork helps investors avoid fraudulent stocks and any other potential pitfalls.
TSXV’s Mega Micro Rally
After a long period of underperformance, Canadian small-cap and micro-cap stocks are once again rising, making it a favourable option for investors. Apart from the TSXV, the Canadian Securities Exchange (CSE) composite index has also bounced back after hitting a low in mid-March.
The CSE is an electronic exchange for entrepreneurs, emerging and micro-cap firms in Canada. The bourse has nearly 580 companies listed on it. The minimum inclusion eligibility for companies on CSE is a market cap of up to C$ 5 million.
The index posted a 76 percent growth in the 15-week period (between March to June) and a 44 percent increase over a three month-period.
Growth Chart of Indices (from March 15 to June 3)
Here’s a look at three rising stocks from the metals and mining industry on the TSXV:
Abitibi Royalties Inc. (TSXV:RZZ)
Shares of mineral exploration firm Abitibi Royalties (RZZ) have withstood the COVID-19 onslaught, posting a 27 per cent growth this year. The company has a current market cap of C$ 287 million. Its current earnings per share stands at C$ 0.33 and the stock has a dividend yield of 0.65 per cent.
The company has performed better than its parent firm Golden Valley Mines, recording a whopping 2800+ per cent stock price growth in the last eight years while keeping a strong financial history.
Abitibi Royalties owns several assets in Canadian Malartic Mine. The company recently acquired the Hammond Reef South Project in Northwestern Ontario. It has consistently performed well on the index and was ranked third in the list of 50 rising stars on the TSXV.
Rupert Resources Ltd. (TSXV:RUP)
The spectacular growth of Canadian mineral mining company Rupert Resources Ltd (RUP) is a classic example of a micro-cap stock yielding good returns over time. The company has posted a remarkable 311.8 per cent growth YTD, following exceptional drill results from its ongoing exploration Pahtavaara Project in the Central Lapland Greenstone Belt of northern Finland.
Artemis Gold (TSXV:ARTG)
This mining stock has posted a nearly 384 per cent growth this year. Artemis has a current market cap of C$ 770 million.
The miner’s scrips went on an upswing after it acquired the Blackwater Gold Project in central British Columbia from New Gold Inc for $190 million in cash on June 9. Three days later, it announced plans to raise C$ 155 million, including C$ 85 million bought deal offerings, and a non-brokered offering to raise C$ 70 million. ARTG stocks have gained 35 per cent in a month and its current price-to-earnings (P/E) ratio of 70.60. The company ranked fourth in the list of 50 rising stars on the TSXV.
COVID-19: A Growth Catalyst
Several small-cap and micro-cap companies in the materials sector have proven to be resilient in face of the unprecedented pandemic. Sometimes, smaller organisations tend to better adapt with changing circumstances as compared to large-cap companies. Experts say these firms performed well during this crisis because of their agility and the ability to react quickly to a changed business environment.
After from benefitting from their resource and product-driven approach, these companies were quick to implement baseline changes such as pay cuts and embrace full-scale digital transformation as COVID-19 spread across North America. The Canadian economic rebound from the pandemic-driven slump has also contributed the good performance of small-cap and micro-cap stocks.
