Versabank, Firan Group, Exco and Calian Group

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Hi,

What do you think of Versabank, Firan Group, Exco and Calian Group as a small cap stocks with the target of maximizing total return
in a few years?

How would rank these stocks? Do you recommend any of them?

Thanks,
IF

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Asked on April 30, 2023 12:29 pm
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Private answer

Hey there,

Off the top of my head, I am most familiar with VB, XTC and CGY. I can tell you right away that there isn't much to be excited about re: XTC at the moment. Given the cyclical nature of the autoparts industry, combined with the fact it is a small cap - it has struggled and will likely continue to underperform in the short-to-medium term. Even if we do enter an auto bull market, XTC has struggled operationally at times and has also failed to close on any type of material acquisition (which they used to do). Of note, I own XTC and plan on parting ways with it. Out of those 3, I'd rank XTC at the bottom.

As for CGY - it used to be a Bull List stock but has been trading sideways for the better part of the past couple of years. Surprisingly, it has held up quite well considering the negative sentiment toward tech companies and small caps. It has managed to maintain a healthy growth rate and is expected to grow revenue in the low teens over the next couple of years. Profitability has been all over the map, but is expected to achieve more consistent earnings growth in the coming years. Overall, I like this company and I'd likely rank it #1. Today, I'd say it is closer to fairly valued than anything, so one could expect it to perform inline with growth rates.

Versabank is one I used to own, but then sold when I had made a hefty profit. That said, I've always been impressed with the management team and their ability to deliver. The company took a pretty big hit and it seems to have coincided with the US regional banking issues. When the SVB news came out - VB cratered. Given that First Republic just defaulted this morning (and JPM subsequently bought it out), I would say that there is still the risk of further downside due to the macro environment. Also worth noting is that VSBK is now listed on the NASDAQ recently and it has made (and in the process of making more) acquisitions south of the border, so it is now more subject to US macro environment. Its CET1 ratio has also been declining and is currently at 11.19% - a little tight to that 11% minimum. That is the bad news. The good news, the bank is still performing quite well and growing at an impressive pace. I'd expect its CET1 ratio to improve as acquisitions are integrated and assuming it successfully navigates the current environment, could be well positioned for a nice rebound. That said, there is still some risk to consider here given what is happening in the US. That is why I'd rank it #2 - without that risk, it would likely jump to #1 based on current valuation and expectations for growth.

Of those 3 - I'd have no problems owning CGY and VB (recognizing potential macro risks) at these levels. Not as familiar with Firan - would have to do some digging.

Mat

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Posted by Mathieu Litalien
Answered on May 1, 2023 6:37 am