Kalkine Media picks TSX undervalued small-cap stocks to watch in Q3

Highlights

• Transcontinental said that its top line grew by 20.3 per cent year-over-year to close at C$ 747.8 million in Q3 2022.
• Sleep Country Canada noted an improved gross profit margin of 35.9 per cent in Q2 2022, compared to 34.5 per cent in Q2 2021.
• Algoma Steel Group noted a growing net income of C$ 301.4 million in Q3 FY2023 relative to C$ 203.6 million reported in Q1 FY2022.

Canadian investors with money constraints can explore small-cap stocks like Transcontinental (TSX: TCL.A), Sleep Country (TSX: ZZZ), Dundee Precious Metals (TSX: DPM), ECN Capital (TSX: ECN), and Algoma Steel (TSX: ASTL).

Small-cap stocks are generally known for providing greater growth exposure as some have the potential to grow into bigger businesses. Due to the ongoing volatility in the market, many small-cap stocks appear to be undervalued at their present price level.

The small-cap companies mentioned above dole out dividends, which could be crucial for value seekers. So, let us have a detailed view of the following five undervalued small-cap stocks, shortlisted by Kalkine Media®, which also pay a dividend:

1.     Transcontinental Inc (TSX: TCL.A)

Transcontinental is a C$ 1.49 billion market capitalization firm offering printing and packaging services across the country, with headquarters in Montreal. Transcontinental said that its top line grew by 20.3 per cent year-over-year (YoY) to close at C$ 747.8 million in the third quarter of 2022, despite challenges related to inflation, supply chain, and the labor market. Not only this, but the industrial company also noted a double-digit surge of 21.4 per cent to C$ 34.1 million in the latest quarter against C$ 28.1 million in the third quarter last year.

Besides, Transcontinental is expected to distribute a quarterly dividend of C$ 0.225 on October 24. In its latest cash flow statement, Transcontinental reported C$ 49.3 million in cash flows from operating activities in the third quarter this year, comparatively low from C$ 54.6 million posted in Q3 2021.

2.     Sleep Country Canada Holdings Inc (TSX: ZZZ)

Sleep Country Canada is a C$ 956.04 million market-size mattress retailer. Sleep Country also pays a quarterly dividend (currently, C$ 0.215). The Consumer company said that its same-store sales grew by 15.1 per cent in the second quarter of 2022. Sleep Country saw its revenues reach C$ 227.57 million in the latest quarter, indicating a variation of 18.4 per cent from C$ 192.17 million in the same period a year ago.

Sleep Country Canada noted an improved gross profit margin of 35.9 per cent in the second quarter this year, compared to 34.5 per cent in Q2 2021. Its net income spiked by 33.2 per cent to C$ 22.66 million in this second quarter. The mattress company also reported basic earnings per share (EPS) of C$ 0.61 in the second quarter of fiscal 2022, indicating a 32.6 per cent growth from C$ 0.46 per share in the same period of 2021. Sleep Country opened one store during Q2 2022.

3.     Dundee Precious Metals Inc (TSX: DPM)

Investors aiming to widen their portfolio exposure to commodities like precious metals can explore cheap stocks like Dundee Precious Metals. This small-cap metal miner also pays a quarterly dividend of US$ 0.04 (upcoming payment due on October 17).

Dundee Precious Metals reported production of 72,904 ounces of gold (AU) and 8.8 million pounds of copper (Cu) in Q2 2022. The mining company revealed that this quarterly production aligned with its 2022 outlook. Dundee generated US$ 71.8 million of cash from operating activities in the latest quarter, relative to US$ 75.7 million posted in the previous year's second quarter. The gold and copper miner said that its free cash flow (FCF) amounted to US$ 41.2 million in the second quarter this year, higher than US$ 67.1 million in the same period of 2021.

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4.     ECN Capital Corp (TSX: ECN)

ECN Capital is a C$ 1.24 billion market capitalization firm offering financial products and advisory services. The Toronto-based financial firm will deliver C$ 0.01 as a quarterly dividend on October 3. ECN Capital said its originations were US$ 613 million in the second quarter of fiscal 2022, comparatively above US$ 398 million posted in Q1 2022.

ECN Capital reported US$ 8.1 million in net earnings attributable to equity holders in the latest quarter, greater than the US$ 4.3 million recorded in the previous quarter. ECN Capital CEO Steven Hudson highlighted that ECN's adjusted operating earnings amounted to US$ 0.09 per share in Q2 2022, meeting the upper limit of the guidance range of US$ 0.08 per share to US$ 0.09 per share. Hudson added that the company is well positioned to deliver results in the prevailing environment.

5.     Algoma Steel Group Inc (TSX: ASTL)

Algoma Steel is a C$ 1.25 billion market capitalization company engaged in manufacturing steel in North America, with its headquarters in Ontario. Algoma Steel posted cash worth C$ 1.13 billion in its balance sheet for Q1 FY2023 ended on June 30 this year, relatively higher than C$ 915.3 million posted on March 31 this year. Algoma Steel saw its revenue climb to C$ 934.1 million in the latest quarter, higher than C$ 789.1 million in the first quarter a year ago. As a result, the steel maker also noted a growing net income of C$ 301.4 million in the first three months of fiscal 2023 relative to C$ 203.6 million reported in the same period of FY2022.

Algoma Steel Group also saw its cash from operating activities swell to C$ 276.6 million in the latest quarter than C$ 121.1 million in the first quarter of fiscal 2022. Apart from financial results, the Board of Directors (BoD) of Algoma Steel also announced a quarterly dividend of US$ 0.05, payable on September 30.

Bottom line

Income-seeking investors looking for under C$ 30 stocks can consider the TSX stocks mentioned above to derive significant value in the future, as these small-cap companies pay handsome dividends. Apart from this, these stocks could diversify your portfolio to different sectors and industries. However, investors should know that small-cap equities possess greater risk than their larger counterparts. Therefore, one needs to evaluate such stocks' business health and fundamental strength cautiously.

Please note, the above content constitutes a very preliminary observation based on the industry, and is of limited scope without any in-depth fundamental valuation or technical analysis. Any interest in stocks or sectors should be thoroughly evaluated taking into consideration the associated risks.