Bring On Lower Interest RatesI still have confidence in companies such as Well Health and am in no hurry to trim. I understand each stock is down due to a range of different factors but the underlying theme might be capital flight from smaller growth companies. My question is what might be the impact on small and midcap Canadian stocks if the BofC lowers rates June 5 and again in the next few months. Is this enough of a spark for these stocks to see any kind of recovery in the next 12 months?
WELL is quite cheap; the stock has been under pressure recently as the company is quite sensitive to interest rates. For example, its net debt/EBITDA is at 3.6x, and any movement in interest expense could meaningfully affect the company’s earnings. In addition, its size as a Canadian small-cap which has been out of favour for a while is also one of the reasons it has been quite cheap. We continue to like it here and think it could have some upside potential as the interest rate trend reverses. Generally, small caps are not directly impacted by rates as many do not have enough debt to make for meaningful earnings leverage on rate declines. But lower rates can still go a very long way towards sentiment on small caps. Sentiment has been quite negative for years and is only recently starting to turn. Thus, we think the sector outlook could be quite improved with an actual rate shift (instead of just talk of such). (5iResearch)