13 promising small-cap stocks

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We are looking for a Canadian small-cap name set to outperform based on a quantitative analysis model with a proven track record

A Canadian small-cap name set to outperform based on a quantitative analysis model with a proven track record.

The London Stock Exchange Group’s Starmine Relative Valuation Model is a quantitative model that measures how attractively valued a stock is using six valuation ratios: enterprise value to sales and EBITDA; price to earnings , cash flow and book value; and dividend yield.

Over the past 12 months, the model has a decile spread of 28 per cent for Canadian stocks. This means that the top 10 per cent as a group has outperformed the bottom 10 per cent by 28 per cent. However, when we look at small-cap stocks, this spread increases to 45 per cent. Put another way, if an investor simply bought the top 10 per cent and shorted the bottom 10 per cent, he or she would have earned a 45-per-cent one-year return .

For reference we include three of the underlying ratios used by the model: next 12-month EV/sales, P/E and dividend yield.More than half of the companies scoring 100 are from the oil and gas sector. Valuation ratios are a double-edged sword, though. If a company’s share price is low relative to forecast earnings, for example, that may be a sign that the stock is underappreciated by the market and should rally in the near future.

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