Some gems in the small-cap space

Canada’s small-capitalization equities market is unlikely to be particularly strong in 2014.

“I would be tempering my return expectations to look for below historical averages,” says Martin Ferguson, director and portfolio co-manager, small-cap equities, with Mawer Investment Management Ltd. in Calgary.

Although investment returns may not be as high as they have been in the recent past, Brandon Snow, principal and portfolio manager with Cambridge Advisors, a unit of CI Financial Corp. in Toronto, believes there are good finds within the small-cap world: “There’s a lot of opportunities out there. You just have to work a lot harder and turn over more rocks to find [them].”

Many of the opportunities are in the consumer discretionary sector:

– corby distilleries ltd. Ralph Lindenblatt, senior vice president with Calgary-based Bissett Investment Management, a division of Toronto-based Franklin Templeton Investments Corp., and lead portfolio manager of Franklin Bissett Small Cap Fund, likes Corby, a manufacturer and marketer of spirits and coolers, because of its good market share, strong balance sheet and history of returning cash to shareholders via regular and special dividends.

– k-bro linen systems inc. Mark Pugsley, vice president of equities with Standard Life Investments Inc. in Montreal, is interested in K-Bro, a provider of laundry and linen services to Canadian hotels and hospitals.

– dhx media ltd. Snow says DHX’s recent acquisition, which is subject to regulatory approval, of the Disney Channel from BCE Inc. “provides an incremental, stable, underlying cash-flow stream that [DHX] can use to help grow its production business.”

– autocanada inc. purchases car dealerships and is well positioned to buy businesses from retiring dealership owners in the future, says Paul Taylor, chief investment officer for fundamental equities with BMO Asset Management Inc. in Toronto.

Among industrials, Snow likes transportation logistics company TransForce Inc. because of its management, its “nice dividend” and the recent overhaul of the business, which is likely to stabilize earnings.