Canada Passive Index Funds Yield Small Caps to Follow

By Will Ashworth

One problem in finding Canadian small-cap stocks owned by active managers is that mutual funds in Canada have taken a back seat to exchange-traded funds, especially those tracking passive indexes. 

Long ago, I worked in the mutual fund industry in Toronto at a time when ETFs weren’t widely discussed and covered; mutual funds ruled the roost. It was easy to find actively managed small-cap funds to cherry-pick stocks for a do-it-yourself portfolio. Not so much anymore. 

Nonetheless, for the latest of 10 installments to get me to 30 businesses to analyze over the next few months, I’ve selected the NEI Canadian Small Cap Equity Fund, which has $53 million in net assets. 

Approximately 72% of the fund’s 83 holdings are small-cap stocks, 11% are microcaps, and 17% are invested in mid-cap stocks.  The average market capitalization of the holdings is $1.8 billion. The top three sectors by weight are basic materials (29.11%), energy (13.48%), and industrials (11.80%).  

Happy Investing.

Bird Construction (BDT)

Bird Construction (TSX:BDT, OTCMKTS:BIRDF), as its name suggests, is a leading Canadian construction company that operates nationwide, including here in Halifax, where I live. It has been in business for more than 100 years and has a market cap of $1.63 billion. 

Dividend investors will like Bird's income offering. In early October, it announced a 50% increase in its monthly dividend to $0.07 a share. The annual rate of $0.84 currently yields 2.7%.

One thing the company has become very good at is working collaboratively with developers on large projects. They provide project management, site supervision, and construction services, and the developers and property owners do what they do best: fill their buildings with tenants. 

Bird was added to the S&P/TSX Composite Index and made the 2024 TSX30 list. 

That list is an annual ranking of the 30 top-performing companies on TSX based on dividend-adjusted share price performance over a three-year period. 

“Bird’s 7th place ranking on the TSX30 reflects a 245% increase in dividend-adjusted share price performance and a 209% increase in market capitalization over the three-year period,” the company said. 

VersaBank (VBNK)

Interestingly, VersaBank (TSX:VBNK, NASDAQ:VBNK) is the second digital bank in my list of 30 TSX and TSX Venture stocks. The London, Ontario-based company has a market cap of $608 million. Its stock is up 44% in 2024 and 211% over the past five years. 

Unlike EQB Inc. (TSX:EQB), the other digital bank on my list, VersaBank is a North American bank focused on the business-to-business market. In addition to the bank, it also owns DRT Cyber Inc., an IT security firm with corporate and government clients across North America.

On Aug. 30, VersaBank completed its small but strategic acquisition of Minnesota-based Stearns Bank Holdingford N.A., paying $19.3 million for the $62 million asset-sized bank. It immediately renamed it VersaBank USA N.A.  

“This is a transformational event in VersaBank's growth strategy, enabling us to bring our unique and highly attractive RPP solution, which has been very successful in Canada, to the largest point-of-sale financing market in the world,” said David Taylor, president and CEO, VersaBank.

Formerly known as the Pacific & Western Bank of Canada, VersaBank is a tiny bank that I’ve followed for several years. It’s only getting started. 

Docebo (DCBO)

Docebo (TSX:DCBO) was founded in 2005 and went public on the TSX in 2019. Its learning management system (LMS) helps customers like Netflix (NASDAQ:NFLX) and Lululemon (NASDAQ:LULU) integrate training use cases into their existing enterprise software stack. Docebo has a market cap of $2.11 billion. 

I’ll admit that I often have trouble understanding technology companies and the words they throw around to describe their products. I don’t know if it’s any different for Docebo. 

However, the company’s 42% compound annual growth rate (CAGR) for subscription revenue over the past eight years is hard to ignore. The CAGR suggests that it’s successfully sold its software to companies needing ongoing employee, customer, and partner training.

Over the next three years, it intends to become a “Rule of 40” company, which is defined as a company’s annual growth rate, when added together with its adjusted EBITDA margin, exceeds 40.

It’s an interesting business that’s profitable on a non-GAAP basis. I look forward to discussing it further in the coming weeks.

Until next time. 

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.