RBC RBC Capital Markets’ Head of Equity Strategy Lori Calvasina thinks U.S. small-caps stocks are oversold and “now is a good time to add exposure looking into 2024.”
“Our work points to bottoming sentiment with relative valuations near the low-end of their historical range (even dating back to the dot-com bubble) and much improved balance sheets having taken advantage of the earlier lower rate environment, something we feel the group is not getting credit for,” she said. “And importantly, now there’s a catalyst for small caps, the Fed. Small Caps typically outperform when the Fed starts cutting, an event reflected in consensus forecasts, but which seemed far off while investors were still debating a December hike. The worse than expected pickup in the unemployment rate and the better-than-expected moderation in inflation finally seemed to convince investors that the Fed was done and provide the spark that Small Caps needed to generate increased interest. Flows will be key to monitor, particularly in the 1st quarter of 2024 when we often see big changes in funds flow trends. It’s worth noting that while flows for Small Cap have generally been improving since mid-October, they have softened a tiny bit recently and bear watching. The push back to our call is that the economy of course still matters and should fears of a hard landing return, they’ll take their toll on the group while a better-than-expected economy in the year ahead could help to pull in more buyers.”
In a research report released Tuesday, the firm updated its “U.S. Small Cap Growth Idea List,” adding four stocks, including Montreal-based commerce software vendor Lightspeed Commerce Inc. . The list is now comprised of 32 companies across its coverage universe.
“A cleaner, better positioned Lightspeed is emerging, as original skepticism around its ability to drive higher payment penetration without higher churn and pricing discounts for software has being disproven in recent quarters, with payments penetration increasing to 25 per cent (up from 21.8 per cent sequentially) and software ARPU growing in the high single digits, all coupled with a focus on profitability heading into FY24,” he said.
Analyst Daniel Perlin has an “outperform” recommendation and US$21 target for Lightspeed shares. The average on the Street is currently US$18.79.
“Our Outperform rating reflects: 1) the company streamlining its business to focus on two large verticals, retail & hospitality, with two consolidated tech platforms; 2) increased focus on unified payments, which has seen a recent acceleration in payments penetration to 25 per cent up from 19 per cent prior to its more aggressive strategy and is designed to drive higher aggregate ARPU; 3) Software ARPU increased in the HSD in 3Q23, despite the salesforce’s focus on payment adoption, which is driven by an increasing focus on larger more sophisticated clients and its new flagship products coming with a higher percentage of software attachment; and 4) renewed focus on profitability with a goal of achieving adj EBITDA breakeven by FY24 and accelerating thereafter,” he said.
The other Canadian company on the list is Toronto-based Tricon Residential Inc. with an “outperform” recommendation and US$9.50 target. The average is US$9.70.
“We have a favorable view of the single-family rental sector given available rent growth that will likely be above the multi-family average and a significant opportunity for greater scale,” said analyst Brad Heffern. “TCN’s strategy of targeting relatively lower-rent homes, mainly in the U.S. Southeast, has generated higher rent growth and lower turnover than peers over time. The significant amount of joint venture capital at TCN’s disposal should also enable the company to grow its portfolio more quickly than peers. While the JVs and nonSFR [single-family rental] businesses add complication, we expect TCN to simplify over time, and fee income is likely to grow faster than the portfolio when acquisition pace picks up again. Leverage is elevated, but we think higher leverage is acceptable in the SFR space.