Every largecap stock was once a no-name smallcap company, hell-bent on proving out its value proposition, forced to rely on early, eagle-eyed investors to recognize their potential before it was obvious enough for herd mentality to sink it.
That said, the truth about investing in smallcap stocks is that you’re constantly faced with two diametrically opposed outcomes. Either your pick doesn’t match up with reality and you end up suffering a permanent loss of capital, or you find a diamond in the rough and change your life through transformational returns. The common denominator is due diligence.
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.
To control for the higher risk entailed by smallcaps’ often unproven businesses, lack of investor/analyst awareness and difficulty raising capital, your research process must step up to the plate, offering you a reliable, replicable means of narrowing down your investable universe and tilting the probabilities of satisfactory returns in your favor.
The problem is that developing such a process and filling up your watchlist with prospective names can become a full-time job, requiring you to cozy up with a pile of financial statements instead of a novel or a newspaper, or go for a run to an annual earnings call instead of your favorite podcast, just to make sure you’re optimizing long-term performance.
For those looking for a little more balance in life, or simply to expedite their smallcap due diligence to burn a little less midnight oil, joining an investment community that emphasizes idea generation can be just the ticket.
Smallcap Discoveries, a Canadian smallcap and microcap membership service, is one such community worth considering, having recommended 15 tenbagger stocks over the past decade, plus numerous other multi-baggers, through a proprietary process focused on hypergrowth and profitability backed by long-term results.
Members gain access to more than 300 company interviews to supplement their due diligence with a sense of management, more than 20,000 thread posts of original research to widen their opportunity set, and more than 400 community members, many of which attend Smallcap Discoveries’ annual conference, each keen on uncovering the next best smallcap stock.
All of this is wrapped up in a weekly update, two annual reviews and a team of analysts that writes on a regular basis, constantly scanning new SEDAR filings to make their best ideas just a little bit better.
I spoke with Founder, Paul Andreola, about the intricacies of smallcap investing and how he’s made a life out of pursuing high-quality names in the space, while teaching others how to find them too.
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Trevor: You’ve been active in the smallcap space for more than 30 years, including co-founding two public technology companies, leading another and more than 10 years as a stockbroker focused on smallcap stocks, but I wonder how it all began. What sparked your initial interest in investing and how did that interest evolve to steer you towards smallcap stocks?
Paul: My start, probably in my late teens, I got an interest in investing because I thought it was a simple path to wealth instead of working hard. You can just make a couple investments and the rest would take care of itself. Obviously, after 30 plus years, I’ve found that that’s not the case. You have to work just as hard, if not harder, in a lot of instances, to be able to see a decent return. But my interest started very early, and it made me decide to read a lot of different books on the subject. I actually got started in real estate investing quite early, which I think had a big effect on my stock market investing as well.
It’s a combination of a whole bunch of things. A desire to find sort of another stream of, call it income, passion for this type of process and just, you know, working my way through the system to understand what works and what doesn’t.
In terms of smallcaps, I find a lot of investors take two common paths. They either start at smallcaps and kind of stick there, or they start at largecaps and kind of make their way to smallcaps. Once you spend enough time, you realize you’ve got a big advantage in the smallcap space. It took me years to figure out this opportunity and advantage, I tried more or less everything else first, but then it got to the point where I started to see some success and really started to focus on the small stuff.
T: There’s always a tuition to be paid as we make our way in investing.
P: I’ve got a master’s degree in that.
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T: On the official Smallcap Discoveries website, your bio states that fundamental cash flow and earnings are some of your pillars when it comes to identifying attractive smallcap stocks. What differentiates an underlying company rooted in these metrics compared to one that isn’t, supposing they both end up delivering a satisfactory return?
P: There are different kinds of risks in the stock market, but one we find to be often ignored and probably not properly understood is dilution risk. Companies that are losing money likely have to go back to the market and raise money to keep the business operating. If you want to delever that risk, you want to focus on companies that are predominantly profitable, and so that’s what Smallcap Discoveries does. We lower our risk, and thus increase our upside, by finding companies that are cash flowing and actually producing capital as opposed to needing it.
Smallcap Discoveries has identified companies that grow 20, 40, even 200 times our original investment, and they were all profitable and growing when we first bought them. You don’t have to go and take these big and wild chances on stuff that’s really speculative. You can make just as much money and sometimes more by buying these lower-risk businesses.
T: Is that to say that Smallcap Discoveries would never play in the venture capital space, where one success out of 100 is meant to carry most of the weight of your overall return?
P: I won’t say never, but we would definitely size our investments differently if we were going to take something on that’s more venture, more speculative. So that’s the key difference, we want to find companies where we know the odds are greatly on our side, and when we achieve that, we deploy big capital. It’s almost like playing poker. If you know the odds are on your side, you’re going to bet big. If the odds are not on your side, you want to definitely bet small to start.
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T: You list management quality as another essential gauge of investment merit. In your own words, when you interview a given team, what set of traits constitutes a green light for an investment decision and how do you de-risk the fact that trust is an inevitable part of the process?
P: I’ve been investing for long enough to know that when you find the right kind of investment, you tend to have a pretty long runway with it, such that you don’t have to deploy your full amount of capital on day one. This is why Smallcap Discoveries mitigates risk by taking on a starter position when we see a business we like, motivating us by having something at stake to really understand it and decide if management has earned our trust. If they do, touching on how they treat their employees, how they treat their customers and how they treat their shares, they will earn more of our capital.
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T: It’s pretty much a universal rule that challenges offer the best lessons. With that adage in mind, what are some experiences as a co-founder and CEO that have found their way into your due diligence process?
P: I can tell you that it’s given me so much value in trying to understand dynamics when we’re investing. It goes without saying that most investors don’t see everything that goes on behind the closed doors of a business, and having been on the other side and understanding the pure chaos that some of these businesses are in, I can feel for the management team and can understand some of the dynamics a little bit better.
There’s a great book that I think anybody should read that’s interested in business of any type. It’s called The Hard Thing About Hard Things by Ben Horowitz, and it’s all about startups and early-stage companies, and the chaos going on behind the scenes that the public rarely sees. That’s just the nature of these businesses, especially if they’re innovative, because, by definition, there’s not really a rule book for that type of business.
So, having seen it all, learning how financing works, how investment bankers work, understanding how hard it is to get customers, and how hard it is to turn a non-profitable business into a profitable business, I can really feel for these management teams and garner a bit more comfort when a stock pulls back, or when there’s some insider selling.
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T: Tell me about why the circumstances were right, both personally and professionally, to hang up your own shingle with Smallcap Discoveries and what the vision was at the outset.
P: One of the startups that we took public did extremely well and I more or less retired. In doing that, I had to find myself something to do. So what I was actually doing is I was blogging online, just some of my investment ideas at the time, and I literally bumped into an old client of mine who had been writing a newsletter. He asked me what I was doing, I told him I was just writing a blog, and he said, Hey, I know what you can do as far as investing, I want to help you start a newsletter. That’s how Smallcap Discoveries started, with his advice and backing to get me motivated to write to a larger audience.
Our first pick went up by about 20 times in value in about two years. Obviously, that was a good way to start. And since then, we’ve built an audience I would almost describe as friends rather than members. We’ve built a phenomenal community that I feel blessed to be a part of. At the same time, I’m also around a bunch of other investors that are like me that want to talk about things that, you know, my wife and my family don’t necessarily want to hear me talk about. It’s a lot of fun and we make some good money doing it.
T: Is there a fairly even split between professional investors and retail investors in terms of your audience or how does it tilt?
P: What I love is it’s all kinds of investors. We have everything from small retail investors to professional family office managers, fund managers, analysts … The common denominator is we all have a passion for smallcaps and microcaps, predominantly of the Canadian variety. And by the way, we’re global. We have investors in Spain, we have them in Italy, in Asia, all over the place.
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T: Smallcap Discoveries deploys a proprietary discovery process to generate stock picks. Can you give us a taste of your secret sauce when it comes to establishing a margin of safety without giving too much away?
P: Our process is pretty in-depth. I’ve got a team of analysts and what we do is we review every SEDAR filing in Canada, including every quarterly and annual statement, looking for the criteria that we typically require from an investment.
When we find something, that’s when we put a quick report together for our membership. But at least twice a year we go through the whole filing list from A to Z and try to find ideas that may have slipped through or something that we haven’t properly tracked.
Realistically, the way the world really works is you don’t find something every quarter, you find something when it shows up. We might find five ideas in one month and then nothing for the next three months. But we flip over every rock in Canada to find our good ideas.
T: Is it fair to assume you use technology to make due diligence more manageable?
P: You know what? We still do it old school. We read every single filing, going through it manually. We do use tools now to upgrade our process, but it’s hard to rely on a screening system or tools to capture nuances in financial results or with management teams. You have to read through MD&As to understand a company fully. I’m sure AI will make our lives easier over time, but it can’t help but let companies everybody else is missing slip through the cracks.
One of my biggest wins ever was a stock that went up over 200 times in value. If I had tried to screen for it, I would have never found it because of the symbol and some of the details around it. That’s the key that keeps me motivated to put all the effort it.
Continuing our discussion about process, I’ve never made it a secret that the majority of our investment criteria is a customized version of what’s called CAN SLIM, a phrase coined by William O’Neil in a great book called How to Make Money in Stocks. The CAN SLIM framework groups different criteria that have historically worked very well to find early-stage hypergrowth stocks. Our version, customized for the Canadian market, emphasizes hypergrowth, with at least 20-25 per cent year-over-year revenue growth on a per share basis. We then want to see that growth paired with profitability. If you look for companies that are growing at least 25 per cent per year or higher and are profitable, that’s about 80 per cent of our criteria. These are in addition to a whole bunch of other quantifiable factors we consider, including management ownership, cash flow profile and number of shares outstanding.
T: In terms of the profitability element, is there a little bit of wiggle room to bring adjusted EBITDA or a related metric into the picture when net income is far away and a company won’t actually have cash in hand for a long time?
P: That’s a question of position sizing. If we see trends going in the right direction, we’re prepared to move a little bit sooner than we usually do, but it means we’re going to deploy significantly less capital. That said, it’s amazing how often it happens when everything looks like it’s going towards profitability, but something stops it from getting there. I would argue that, if you just wait for at least two quarters of profitability, where cash is showing up on the balance sheet, that will significantly lower your risk and dramatically increase your upside.
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T: Where are you and Trevor Treweeke, your partner at Smallcap Discoveries, seeing the highest probabilities for value creation in the currently geopolitically tense and inflation-spooked market environment?
P: We see a bifurcated market between the Mag 7, which have really moved the markets like crazy over the last little while, and a tremendous opportunity in the smallcap space, where acquisitions are still seeing very nice premiums telling us there’s still really good value down market.
As far as sectors, that’s something that we don’t do. We don’t practice top-down investing, where we look at a sector first and say, OK, let’s try to find the best company in that sector. We actually take the opposite approach, bottom-up, looking for names that are seeing an inflection in their business, often recognizing sector trends before the market does.
Right now, we’re noticing a very strong uptick in defense tech spending benefiting some of our names. We’re starting to see a decent uptick in infrastructure companies as well. So too for any kind of hardware-as-a-service (HAAS) business. There’s a company we like called Zedcore (TSXV:ZDC), for example, that deploys surveillance towers on construction sites and different business sites. HAAS companies can have a much stronger moat than even software-as-a-service companies thanks to AI and related technologies that grant them an unprecedented level of protection.
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T: Smallcap Discoveries will be hosting its 8th annual conference in Vancouver from September 28–29, 2026, providing a forum for your investing community to meet and learn more about some of your featured companies. How would you describe the qualitative value-add the conference offers above and beyond an investor pouring over data on their computer screen in a silo?
P: One of the things I enjoy the most about going to conferences is the networking capabilities with other like-minded investors. That’s one of the things you won’t get by just sitting at a computer and looking at spreadsheets.
We also try to build relationships with management teams to get a good understanding of where they’re at. You get the opportunity to do that one-on-one at our conference over the course of a 30-minute meeting. There’s a lot of information you can extract by sitting down and meeting people face-to-face.
The other value-add is we have keynote speakers and sector experts that we bring on to help you understand different kinds of businesses. You get to hear about new technology that’s coming down the road and who the players are. That’s information about an opportunity set you wouldn’t have access to on your own.
It’s one thing to sit in front of a computer and get your data, but the non-numbers part, the more personable stuff, it might be hard to come by with Fortune 500 companies, but with smallcaps, you get this opportunity and we provide it for you at our conference to help you further your ability as an investor.
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T: Please share one of Smallcap Discoveries’ stock picks, whether current or past, painting a picture for my readers as to why it aligns with the membership service’s proven due diligence process.
P: I’m going to give you a two-for-one. I’ll give you a past one and a current one that we’re pretty proud of.
The company that I told you about that went up over 200 times in value – if I actually do the math, it went up closer to 400 times in value – is called XPEL (NASDAQ:XPEL). It manufactures paint protection films for your car, almost like a Saran Wrap that goes around your car and prevents it from getting dings and scratches. This was a TSXV-listed company about 15 years ago, trading at about C$0.17 when I found it, that was growing revenue at more than 100 per cent annually. It was already profitable at that point and was trading around six or seven times earnings, which was relatively cheap.
This obscure little company, sporting a .U ticker because it traded in US dollars, wouldn’t have shown up on most screening software, but I ended up identifying it through our in-house process, and within several years, the stock reached US$100 and we made some good money. It’s an example of what happens when you find them early, before capital markets coverage starts.
Institutions, in fact, are not geared towards finding profitable early-stage businesses, because they actually don’t generate much of a return for them.
T: And you’d have to buy the whole business probably.
P: Well, exactly. And, quite frankly, most institutions in Canada and around the world make their money by financing companies like these. If the company doesn’t need money, then there’s very little they can extract in terms of fees.
A more recent pick is Firan Technology Group (TSX:FTG), a company that produces electronic components for the airline and defense industry, which, of course, has recently taken off. We discovered it about 3 or 4 years ago, trading at about C$2.50, with a profitable, rapidly growing business, and the last I saw, it was around C$21, having delivered a phenomenal return and become a significantly institutionalized, well-covered company. Firan is the kind of company that’s really our bread and butter and there’s plenty of them in Canada, if you look hard enough.
T: Paul, the stage is yours for some parting words for our readers.
P: You know, the markets are fraught with minefields everywhere you look and it takes time and effort to get good at investing, like anything else, and we think we’ve learned a number of the things that are needed here. We’re also advocates for the microcap system in Canada, doing a lot of work to help companies go public and foster a stronger support system for them.
With that, I encourage anybody who is interested in smallcaps and microcaps to reach out to us for a trial membership and potentially benefit from our learnings. If you do the work, the Canadian smallcap space can change your financial future. There’s no question about it. It’s done it for me, it’s done it for many of our members and we hope that we can be a conduit to that for interested investors.
Learn more about the Smallcap Discoveries investment community at smallcapdiscoveries.com.
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