Small-cap stocks have long been a reliable way to beat the stock market averages.
Due to their smaller size, these stocks are able to grow faster on average compared to their larger peers. After all, it’s easier to double in size as a $100 million company than it is as a $100 billion company.
Small-cap stocks come fraught with risks, however. Often lacking established products or customers, investing in these companies is usually betting on what they will become, not what they’ve built.
Which small-cap stocks are building something special? Here are three promising options.
Uranium Participation (TSX:U)
This is perhaps the most unique company on this list. Uranium Participation doesn’t intend to build any unique product or service. Instead, it simply accumulates uranium.
What’s the point of accumulating uranium? It gives investors a direct way to profit from rising uranium prices. Overhead expenses are minimal, so the vast majority of your dollars are essentially investing in uranium.
The next question you likely have is, what’s so promising about uranium?
The main use of uranium today is nuclear power. Following the Fukushima disaster, many nuclear power companies stopped signing long-term contracts, opting to wait and see what the regulatory environment will be.
Over the next few years, many legacy long-term contracts are expected to roll off. Purchasing solely through the spot market can be perilous for a utility, so most will re-engage with new contracts. That pent-up demand has the potential to push uranium prices significantly higher.
This stock likely isn’t a candidate for a huge position in your portfolio, but it offers unique diversification benefits with non-correlated returns. Plus, the pent-up demand thesis is fairly compelling.
Chorus Aviation (TSX:CHR)
When I wrote about Chorus Aviation back in 2015, I thought shares were a bargain.
“Trading at only 7.7 times next year’s earnings, Chorus trades at a wide discount to the market average,” I said. “With a 7.58% dividend, it also has a yield that is two to three times that of the TSX index.”
Over the next four years, Chorus stock would go on to double the return of the S&P/TSX Composite Index.
Today, the business is largely the same, and on many metrics the stock remains cheap.
Chorus is essentially an undercover airline. Instead of operating under its own banner, it acts as a capacity supplier for companies like Air Canada.
This strategy comes with risks, such as customer concentration, but has allowed the company to grow profits while paying out a dividend of 6% or more.
Today, shares trade at 11 times earnings. There’s risk here, but the price looks to compensate for that.
TMX Group (TSX:X)
While you may not know it, you’ve likely helped TMX Group make money in the past. That’s because it owns the Toronto Stock Exchange, making money every time a stock is listed and traded.
Today, the company has diversified its revenue streams into new areas like big data, energy hedging, derivatives, fixed income, and analytics.
Most impressive is this company’s ability to generate large sums of free cash flow, enough to service a steadily growing dividend. TMX group has been paying out a reliable dividend since 2003, never reducing the payout even once.
After a recent run-up, the dividend yield is just 2.7%, so it may be best to wait for a pullback. Even so, the stock has still been a profitable buy even after steep run-ups in the past.
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Fool contributor Ryan Vanzo has no position in any stocks mentioned. Chorus Aviation is a recommendation of Stock Advisor Canada and Dividend Investor Canada.
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