Financial Services Lead the Way in the Canadian SMID-Cap 30

By Will Ashworth

Over 10 previous articles, I selected my Canadian SMID-Cap 30. These companies are listed on the Toronto Stock Exchange or TSX Venture Exchange. 

Except for two, they all have market caps between $100 million and $10 billion. While some names carry higher risks, they are all investable stocks within a diversified portfolio. (All figures in Canadian dollars, unless otherwise noted.)

Now, it’s time to identify each company’s pros and cons and why I think they’re worth owning. 

Over the next five articles, I’ll discuss six stocks in each, sticking to specific sectors: 1) Financial Services and Communication Services, 2) Consumer Defensive and Health Care, 3) Industrials and Materials, 4) Consumer Cyclical and Energy, and, 5) Technology, Real Estate, and Utilities.

Once all five articles are published, I’ll continue covering the 30 companies as important information emerges, such as exceptional earnings, transformational acquisitions, and other relevant news. 

Happy Investing.

Definity Financial (DFY) - Financial Services

Definity Financial (DFY) is the largest of the five financial services stocks in the Canadian SMID-Cap 30, with a market cap of well over $6 billion.

Definity is one of Canada’s leading property and casualty insurance companies — the sixth largest, with $4.4 billion in GWP (gross written premiums) in the trailing 12 months ending Sept. 30, 2024. 

P&C companies are in the news because of the devastating wildfires in Los Angeles. Catastrophic claims are something all P&C underwriters worry about. Since you can’t predict or guarantee they won’t happen, the best insurance companies prepare for the worst. 

Its top brand is Economical Insurance. However, it also generates significant revenue from Sonnet Home & Auto Insurance, Definity’s digital insurance platform. (Full disclosure: both my mother-in-law and my wife’s aunt and uncle are insured by Sonnet. They’re delighted with the company.)

Definity wants to become one of Canada's top five largest P&C insurers. I don’t see why it can’t happen. Its largest insurance segment is Personal Auto. Between 2019 and 2023, GWP grew by 6.6%, compounded annually. In the first nine months of 2024, growth is 15.1%, more than double its recent results.  

If you follow the insurance industry, the combined ratio is vital. That’s the sum of a company’s incurred losses and expenses divided by its earned premiums. The insurance company makes money on their underwriting when it’s under 100. 

Definity wants to grow its GWP by up to 10% annually while keeping its combined ratio in the mid-90s. If it hits the target, the entire business should be profitable, except when investment losses occur due to changes in the fair value of these investments.

The downside of owning insurance stocks is that despite all the science and data analytics available to limit them, you never know when catastrophic losses will hit your business. 

Bottom Line: While Definity’s revenue and profit growth over the past five years is impressive, what stands out is its senior leadership team. They all have extensive P&C insurance experience, and approximately 70% have worked at Definity for over five years.

Management is due to report Q4 earnings on Feb. 13, with the consensus estimate at 87 cents per share.  They’ve surprised on the upside in 10 of the last 12 quarters, coming in a whopping 195% higher than estimates in the September quarter. 

You can get away with mediocre management in some industries and still do well on your investments. Not so in the insurance industry. It’s ruthless. Just ask Warren Buffett.    

EQB Inc. (EQB) - Financial Services

EQB Inc. (EQB) owns Equitable Bank, Canada’s seventh-largest bank by assets with $127 billion in assets under management and administration. 

While it provides personal and commercial banking services and wealth management through Equitable Bank, Bennington Financial, Concentra Trust, and ACM Advisors, the work its EQ Bank digital bank does has gained Canadians' attention. 

EQ Bank finished fiscal 2024 (October year-end) with 513,000 customers and $9.1 billion in deposits, up from 27 million and $1.1 billion in 2016. That’s compound annual growth of 44.5% and 30.2% over the past eight years. 

Innovation continues to help EQB grow profits at an exceptional pace, and that’s shown in the stock’s performance. Over the past 10 years, through Q4 2024, its annualized total shareholder return was 14.4% with dividends paid compounding at over 20% annually.

In October, Strategy magazine named EQ Bank the “Brand of the Year” in Canada, partly because its commercials featured Eugene and Dan Levy, the father-and-son team behind Schitt’s Creek. 

I don't know the average age of its customer base, but I’m sure it’s much younger than the Big Five Canadian banks. As Canada continues to age, that’s a very good thing. 

The downside to EQB’s business is that it’s managed to fly under the radar in recent years, but given its marketing prowess, the big banks aren’t going to sit idly by and let it continue to take market share. The competition is likely to get stiffer in the years ahead. 

Bottom Line: Disruptor stocks have proven to provide loyal investors big profits. EQB is one such disruptor. 

Brookfield Business Corp. (BBUC) - Financial Services 

The biggest positive for Brookfield Business Corp. (BBUC) is that Brookfield Corp. (BN) owns 64.8%. 

The latter is one of the world’s largest and most successful alternative asset managers, with Brookfield Business its publicly traded private equity platform. 

“Our business is a compounding engine built on the back of Brookfield’s private equity playbook, developed and honed over 25 years to deliver top tier returns. Since launching BBU eight years ago, we have invested approximately $9 billion alongside Brookfield’s private equity business to acquire high-quality, mission-critical and market leading operations,” stated CEO Anuj Ranjan in its Q3 2024 letter to unitholders. 

It knows how to make money. 

For example, in February 2022, Brookfield along with its institutional partners, acquired 60% of  First Abu Dhabi Bank’s Magnati payments business for approximately US$690 million. 

Then, in September 2024, it acquired Network International, the leading digital payments processor in the Middle East, for $3 billion. Combining it with Magnati gives it the scale necessary to grow the value of these assets over time.    

However, private equity's cyclical nature means its revenues and profitability won’t move higher in an orderly manner. This makes it a challenging investment for those who seek consistent growth in the top and bottom lines. Impatient investors aren’t a good fit. 

Bottom Line: Few alternative asset managers do as well as Brookfield at buying, growing, and selling businesses for exceptional profits. They recycle capital better than most. 

VersaBank (VBNK) - Financial Services

VersaBank (VBNK) is a London-based Canadian chartered bank that went digital long before it was cool in 1994. Then known as Pacific & Western Bank, it got its Schedule 1 license in 2002, changing its name to VersaBank in 2016. 

David Taylor has managed the bank’s evolution throughout the past 30 years. 

While it still flies under the radar, with a market cap of just $628 million, the bank is making inroads into the U.S. market, but not in the same way as its Big Five peers. That’s what makes it attractive. 

The bank has operated a Point-of-Sale (POS) financing business for over a decade through its Receivable Purchase Program (RPP). The business purchases loan and lease receivables from finance companies in various sectors, including commercial equipment, consumer healthcare, vehicles, and home improvement.

In August 2024, it acquired Stearns Bank Holdingford N.A., a tiny Minnesota-based small business lender, for $19.0 million. The acquisition enabled it to launch VersaBank USA and its POS/RPP program south of the border, an underserved multi-trillion-dollar marketplace. 

The beauty of its program is that it has had zero loan losses after more than 10 years in the business. As a result, it grew its total assets from $1.8 billion in 2019 to $4.84 billion at the end of Q4 2024 (October year-end). 

There’s a lot to like about VersaBank and very little to dislike. 

Bottom Line: VersaBank stock has appreciated 153% over the past five years. It might be the Canadian SMID-Cap 30 stock that I’m most excited about. 

However, it’s important to remember that doing business in the U.S. is an entirely different kettle of fish. Plenty of Canadian companies have gone south looking for a massive payday, only to return home with their tails between their legs. 

Toronto-Dominion Bank’s (TD) $1.3 billion October 2024 fine from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network comes to mind.   

Tiny Ltd. (TINY) - Financial Services

Tiny Ltd. (TINY) is one of the riskier stocks in the SMID-Cap 30. It has never lived up to its potential, although its shares briefly traded above $30 in 2021. 

Tiny's history dates back to 2006 when founder Andrew Wilkinson created a web design company in his Victoria apartment. After that, Pixel Union sold themes and apps to Shopify (TSX:SHOP) merchants. 

By 2013, Wilkinson had cobbled together five businesses generating $7 million in annual profits. So, in 2016, using their free cash flow, Wilkinson and his Tiny co-founder, Chris Sparling, fans of Warren Buffett and Charlie Munger, began buying other tech-related businesses. 

In 2014, the duo sold most of the Pixel Union business to a family office. Five years later, they reacquired it (renamed WeCommerce) for $15 million with billionaire investors Bill Ackman and Howard Marks participating. 

In 2020, they raised US$150 million from other investors to buy more companies, creating a “Berkshire 2.0,” if you will. They took WeCommerce public in December 2020. In April 2023, Tiny went public, combining its business with WeCommerce. Wilkinson and Sparling owned 79% of the merged entity. 

“I have always considered Andrew and Chris to be the Warren and Charlie of the technology investment world,” said Bill Ackman at the time. Ackman’s family holding company owned 15.4% of WeCommerce at the time of the merger. 

Tiny stock has lost two-thirds of its value since the merger. 

The two co-founders, who were co-CEOs, stepped aside in June 2024. They were replaced by Jordan Taub, who was CEO at WeCommerce. Taub spent nearly four years at Constellation Software (TSX:CSU), one of Canada’s most successful tech investors.

Bottom Line: The two founders remain its largest shareholders, holding nearly 74% of the stock. That’s the good news. The bad news is that it’s losing a lot of money--$15.2 million in operating losses on $146.6 million in revenue through the first nine months of 2024—so investors must remain patient as Taub restructures the business to make it profitable. It’s not a sure thing. 

Rogers Communications (RCI) - Communication Services

Rogers Communications (RCI.B) is one of two companies in the Canadian SMID-Cap 30 with a market cap higher than $10 billion. 

As I said in the selection process, I chose Rogers, which has a $23 billion market cap as I write this, because I didn’t feel there was a smaller communications services stock worth investing in. If that changes, I’ll swap out RCI.B stock. But for now, it stays. 

Since I selected Rogers in mid-November, its stock has lost 16% of its value. It’s now down 34% over the past year and the same amount over five years. Admittedly, Rogers and its two wireless rivals, BCE (TSX:BCE) and Telus (TSX:T), are also in trouble, having lost 51% and 22%, respectively, over the same period. 

As a sports fan, Rogers's purchase of BCE’s 37.5% interest in Maple Leafs Sports & Entertainment, which would give it a 75% controlling stake in the sports conglomerate, is the asset of the cable empire that interests me most.  

That’s because I’ve watched over the years as owners of professional sports teams have gotten obscenely wealthy from their sports properties. Dallas Cowboys owner Jerry Jones bought the NFL team and the stadium it played in at the time for $140 million--$90 million cash and $50 million in loans--and today it’s worth $11 billion, a compound annual growth rate of 13.3% over 35 years. 

While the NHL isn’t the NFL, Toronto is one of North America's three or four largest cities. Its estimated population of 10.2 million (2021) is in the Greater Golden Horseshoe, which spans from Niagara Falls to the Durham Region. 

Should Rogers take the Blue Jays and move that into MLSE, it could then spin off the Major League baseball team into a publicly traded entity alongside the NHL’s Toronto Maple Leafs, NBA’s Toronto Raptors, and whatever other sports-related assets it feels would be attractive to investors.

Doing this lowers its financial cost while maintaining control of the entire pie. Based on the $4.7 billion purchase price for BCE’s stake, MLSE is valued at around $12.5 billion. If Rogers took some of its sports assets public, they could be worth more than this number. 

The downside is that Rogers has a significant amount of debt. A major recession, which is a real possibility with Trump's tariffs, would reduce cash flow and its ability to pay down the debt—$45.9 billion as of Sept. 30, according to S&P Global Market Intelligence—limiting the stock’s upside. 

Bottom Line: Diversification is about more than just the size of a company; it also involves the sectors it invests in. Rogers is another sector bet with an intriguing future.  

Up next: the Consumer Defensive and Health Care sectors. 

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.

Will Ashworth is currently ranked 300 out of 30,536 financial bloggers analyzed by TipRanks, with a 16.6% return on his buy and sell ratings. He is one of the founding contributors to this newsletter.

Will has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.