Canadian small-cap stocks have performed exceptionally this year as evident from the 12% rise in the S&P/TSX Small Cap Index in 2024. This marks a major change in fortunes given that Canadian large-cap stocks, measured by the performance of the TSX 60 Index, have outperformed small-cap stocks in 11 of the past 13 years. Portfolio managers are increasingly becoming bullish that this strong performance in Canadian small-cap stocks will continue in the foreseeable future. For example, Jordan Zinberg, Chief Executive Officer of Toronto-based Bedford Park Capital Corp., believes that Canadian small-caps are trading at a substantial discount to their large-cap peers, creating an opportunity for prudent investors. Atrium Research also noted in May that Canadian small and mid-caps are attractively valued compared to U.S. small-cap stocks.

Leaders Of The Pack?

Canada is home to many small companies that are growing in leaps and bounds. Goeasy Ltd. (TSX: GSY), a Canadian financial services company based in Ontario, has seen its stock price gain almost 30% this year. With analysts expecting both revenue and earnings per share to increase more than 20% YoY in 2024, the company seems well-positioned to enjoy a strong market run in the coming months.

Nuvista Energy (TSX: NVA), which has enjoyed a 10% increase in stock price so far this year, is an oil and gas company that has substantial reserves in the Western Canadian Sedimentary Basin. With energy prices continuing to remain at elevated levels at a time when the company is enjoying operating efficiencies resulting from improved cost management practices, the company seems an attractive bet to gain exposure to the Canadian small-cap sector.

“Eh" Promising Proposition

Gaining exposure to Canadian small-cap companies that operate in regional markets will help investors diversify their portfolios, potentially enabling them to weather market downturns better. In addition, Canadian small-caps are attractively valued compared to large-cap stocks from a price-to-earnings multiple perspective, which enables investors to invest in growth companies at a cheap price. On the other hand, investing in small-cap stocks exposes investors to increased market volatility. Limited resources enjoyed by some of these companies and the higher risk of failure compared to large companies may lead to losses for investors if the Canadian economy enters into a recession in the next couple of years.

Neither Dilantha DeSilva nor Stocks.News have positions in any of the companies mentioned in this article.