While blue-chip stocks are essential for the core of any portfolio, it’s usually a good idea to add in some small-cap growth names to beef up your long-term returns. Small-cap stocks are riskier; however, they can offer next-level returns for those who are open to taking on a bit more risk.
While small-cap investing is known to be riskier in general, there are steps that investors can take to reduce the additional risk that comes with small-cap investing. You’ve probably heard the saying “high reward implies high risk”, but that doesn’t always have to be the case. If you find a small-cap business with a durable competitive advantage and a promising long-term growth profile, then you can get your high reward with just a marginal amount of added risk.
Consider Boyd Group Income Fund (TSX:BYD.UN), a security that has returned 482% over the last five years (almost a five-bagger in five years!). The company has a market cap of $1.75 billion and a yield of 0.55%, which is definitely minuscule when you consider that the security is called an income fund. The name of the fund may be misleading, since many investors are in it for the huge amount of capital gains and not for the distributions.
Boyd has been a consolidator of collision and glass repair shops in North America. The industry is still extremely fragmented, so there is still a tonne of room for potential acquisition opportunities over the next decade.
The management team has done a fantastic job of buying up its smaller competitors and using its expertise to drive synergies. Boyd has been ramping up on acquisitions, while keeping its balance sheet relatively healthy and its debt levels fairly low.
Over the last 10 years, Boyd has grown its revenue from ~$190 million to ~$1.47 billion and has seen its operating margin jump from 3.6% to 6.5%. That’s a ridiculous amount of growth that usually only small-cap stocks can offer. The long-term momentum that the company is experiencing seems unstoppable; however, more recently, shares have taken a ~12% dip from peak to trough.
Approximately 63 of Boyd’s collision repair centres in Florida and Georgia were closed during the hurricane season, but they have since been re-opened. None of these locations sustained major damage, but the third-quarter results will be negatively affected. Should a sell-off occur following the release of the company’s Q3 earnings, it may be a wise move to load up on shares if the general public makes a big deal of a temporary short-term issue.
Bottom line
Boyd is a high-flying growth stock that has flown under the radar of most investors. The company is not showing any signs of slowing down, so investors should expect management to continue wheeling and dealing, which will continue to drive the stock to much higher levels.
Stay smart. Stay hungry. Stay Foolish.
