Sentiment around Canadian small-caps has chilled amid U.S. tariffs, but current conditions may offer a good entry point.recep-bg/iStockPhoto / Getty Images
Canada’s small-cap market is often overlooked because many investors consider it too speculative, and it’s likely even more neglected now amid the trade uncertainty with the U.S.
Yet, money managers who cover the sector argue that conditions can hide highly profitable, growing and undervalued companies.
“When market psychology turns, investors tend to flee small caps,” says Jeff Mo, portfolio manager with Mawer Investment Management Ltd. in Calgary. He co-manages the long-running Mawer New Canada Fund, a small-cap strategy with some Canadian mid-cap exposure that’s now only available as part of managed portfolio solutions.
Small-caps are generally a tough sell for advisors whose clients have no stomach for the downside risks, even if they’re intrigued by high-growth opportunities.
Discretionary money manager Rob Tetrault notes most clients have limited exposure, if any, to Canadian small-cap companies because of liquidity constraints and concentration risk, as many names are “thinly traded or overly reliant on a single product or customer.”
Typically, small-cap exposure appeals to a sliver of growth-oriented clients with long time horizons, adds Mr. Tetrault, portfolio manager with the Tetrault Wealth Advisory Group at CG Wealth Management in Winnipeg.
That said, his investment team has, in the past, increased tactical exposure to Canadian small-caps during early market recoveries, when the sector can experience substantial short-term growth.
To that point, Canada’s small-cap market, which suffered through rising interest rates, appeared poised for a renaissance at the start of 2025. A January BMO Global Asset Management outlook report forecast that the sector’s historically low valuations were set to rebound as interest rates continued to fall amid a more bullish outlook.
Sentiment has since chilled amid U.S. tariffs, although current conditions may offer a better entry point.
“The market has indiscriminately sold Canadian small-cap equities, unduly pushing down the valuation of high-quality, profitable companies, which we believe should be able to navigate the unpredictable U.S. trade policies,” says Mike Richmond, portfolio manager with ClearBridge Investments in Calgary, who co-manages Franklin ClearBridge Canadian Small Cap Fund.
For example, the fund holds business information technology service provider Converge Technology Solutions Corp. CTS-T, which has gained more than 500 per cent since its initial public offering in 2018.
Still, the small-cap space is volatile even for profitable companies. Converge Technologies’ performance since the pandemic illustrates the downside risk, declining about 50 per cent in value from its peak in 2021, although it’s still up significantly from its IPO.
Generally, Canadian small caps benefit from stock-picking backed by fundamental research, says Ryan Irvine, president and chief executive officer of Keystone Financial Publishing Corp. in Vancouver.
“Is there an opportunity, if you know what you’re doing, to find good companies? Yes, there is,” he says.
Keystone provides research for institutional investors and advisors on more than 8,000 Canadian and U.S. stocks, including Canadian small-caps, using a growth-at-a-reasonable-price model.
Among the companies on Keystone’s Canadian small-cap buy list is women’s fashion retailer Groupe Dynamite Inc. GRGD-T, with the brands Garage and Dynamite. Founded in 1975, it only went public in November, listing at $21 a share.
Its price has since fallen, reflecting “the backdrop of a tariff war,” he adds.
Despite trading down almost 50 per cent, Groupe Dynamite has strong fundamentals, Mr. Irvine says, with growing revenue and operating income. Keystone forecasts Groupe Dynamite has a near-term fair value of $23.50 a share, which could mean it begins paying a dividend in the next 18 months.
The outperformance of a few stocks aside, Canada’s small-cap space is generally not conducive to low-cost, exchange-traded fund strategies “because it leans heavily toward junior resource companies,” says Tyler Mordy, chief investment officer with Forstrong Global Asset Management in Toronto, adding that many stocks face liquidity issues and solvency concerns.
As an ETF-driven strategy manager, Forstrong typically avoids small-caps because of their volatility. Still, Mr. Mordy notes that because small-caps receive less research coverage, leading to pricing inefficiencies, active managers with “deep expertise” may generate alpha for investors.
To that end, Franklin ClearBridge Canadian Small Cap Fund has outperformed the S&P/TSX Small Cap Index over a five-year period by 400 basis points annualized.
The current conditions undoubtedly represent downside risk, but experienced managers see opportunities to buy profitable small-cap companies at even deeper discounts, Mr. Richmond says.