If you want a chance to experience life-changing returns, small-cap stocks are the perfect place to look. Stocks with market capitalizations between $100 million and $500 million are ideal. They are big enough that they have an established business but small enough that they have years of growth ahead.
Constellation is a small-cap growth case study
18 years ago, Constellation Software (TSX:CSU) completed its initial public offering for around $18 per share. Its market cap was around $385 million. Today, it trades at a price of $3,791 per share, and it has a market cap of over $80 billion.
With a total return of 20,670% in that time, Constellation has been one of the best-performing stocks in Canada. Its stock has earned a 34% compounded annual return. Its best returns were in its first five and 10 years.
Given its substantial size today, returns eventually will slow for Constellation. It will be much harder to double and triple. However, that does not mean Constellation can’t deliver market-leading returns in the future. It just means its rate of return is likely to moderate.
If you are looking for some Canadian stocks still early in their growth trajectory (like Constellation was), here are two to contemplate today.
A tech stock for the healthcare industry
VitalHub (TSX:VHI) is only in the early stages of its growth journey. It has a market cap of $353 million, so it is a similar size to Constellation in 2006. Now, that is not to say it will replicate the same returns. However, it could still multiply considerably in the coming years.
VitalHub provides specialized software solutions for the healthcare industry. Its focus is on patient flow, operation and asset management, and patient experience/care coordination. Healthcare operations are incredibly complex. VitalHub’s software helps improve flow, create efficiency, and improve patient outcomes.
The company has used a smart merger and acquisition (M&A) strategy to consolidate smaller healthcare software providers. It has used its M&A to expand its geographic presence, customer mix, and software expertise.
This stock has compounded revenues by 48% over the past five years. Earnings before interest, tax, depreciation, and amortization (EBITDA) have soared by a 97% compounded annual rate. Free cash flow per share is up 43 times! Since the company is starting at a smaller base, its growth rate can seem enormous as it scales.
VitalHub has a very strong balance sheet with no debt. That should sustain a strong runway for growth in the years ahead.
A tech stock with a very stable customer base
Another stock with significant potential is Sylogist (TSX:SYZ). It only has a market cap of $215 million. Sylogist provides essential resource planning software for municipalities, school districts, and non-for-profits.
Its stock performance has not been nearly as good as Constellation or VitalHub. It is up 54% in the year but down 20% in the past five years.
This is a turnaround story. Sylogist was mismanaged for several years. However, a new management team has been transforming their sales strategy, improving the customer experience, and adding core technological assets.
Recently, it has made some significant customer wins and substantially increased its recurring revenue base. The turnaround is only starting to reflect into financials results. You might have to be patient, but this company could have a huge market to take if it can execute.
