The fundamental relationship between risk and return in the stock market, where businesses must bet on their best ideas and face failure for a chance at reaping rewards, makes it essential that all investors, fresh-faced and market-tested, keep an unwavering focus on the quality of these bets to build high conviction in their portfolios.
This point is especially relevant for investors in small-cap stocks, who must research an asset class where information tends to be scarce and volatility high, putting a psychological price on exposure to its historically superior returns.
In the interest of equipping readers with a solid risk framework on which to base their small-cap due diligence, here are three stocks across the risk spectrum that make a high-conviction case for shareholder value.
Blue chip: Olympia Financial Group
At the lower end of our risk scale for small-cap stocks is Olympia Financial Group, a dividend payer licensed to conduct trust activities in Alberta, British Columbia, Saskatchewan, Manitoba, Quebec, Newfoundland and Labrador, Prince Edward Island, New Brunswick and Nova Scotia. The group’s operations are focused on administering self-directed registered plan accounts, corporate trusts and providing transfer agency services, as well as currency exchange, global payment, private health and information technology services across its numerous subsidiaries.
The company earns its blue-chip grade by having more than doubled revenue since the pandemic, posting C$48.62 million in 2020 and C$99.82 million in 2023, supported by a tripling of net income from C$7.99 million to C$23.96 million over the period.
Backed by undeniable results on the income statement, not to mention a track record of increasing dividend payments, the high-conviction small-cap stock has its sights set on increasing its national scale, according to its latest investor presentation, with 34 per cent insider ownership ensuring operations are conducted in the key of shareholder value.
Olympia Financial Group stock (TSX:OLY) last traded at C$100.60 per share. The stock has added 13.03 per cent year-over-year and 121.05 per cent since 2019.
Craig Skauge, Olympia Financial Group’s executive vice president, recently joined Stockhouse’s Lyndsay Malchuk to celebrate the company’s inclusion in the 2024 TSX30. Watch the interview here.
Growth: Clean Air Metals
When small-cap stocks don’t have the benefit of profitable operations for upward momentum, we must take their growth prospects into account. Clean Air Metals, a development and exploration company advancing its flagship Thunder Bay North critical minerals project 40 kilometres northeast of Thunder Bay, Ontario, offers exposure to the kind of exponential upside that epitomizes what draws investors to the junior mining space.
Thunder Bay North is host to two deposits housing a combined 13.8 million tons of indicated mineral resources containing 2.4 million platinum equivalent ounces (1.2 million ounces of platinum plus palladium, 56,800 tons of copper and 33,800 tons of nickel) representing more than US$2.3 billion in the ground at the time of writing, with significant data-driven potential for expansion. Project development is further supported by:
- A management team with analogous mining experience
- Being one of the few platinum resources outside of South Africa
- Residing in a stable and mining-friendly jurisdiction
- Longstanding relationships with local First Nations
Clean Air Metals knows it has an attractive asset on its books, and has wasted no time putting its drill bits to work, with summer 2024 drilling yielding a recent highlight of 51.79 metres of 4.92 g/t platinum, 4.66 g/t palladium, 1.07 per copper and 0.55 per cent nickel, strengthening management’s view that both deposits can feed a smaller-tonnage, high-grade and low capital-cost mine, with a technical study planned after the next phase of drilling.
Despite owning an asset with billion-dollar potential, Clean Air Metals stock (TSXV:AIR) has given back more than 80 per cent since consolidating Thunder Bay North in 2020, creating a multi-bagger opportunity for investors willing to wait for exploration to evolve into minable ounces.
Mike Garbutt, Clean Air Metals’ president and chief executive officer, spoke with Lyndsay Malchuk about the company’s latest drill results at the Thunder Bay North project. Watch the interview here.
Venture: LQWD Technologies
When small-cap stocks don’t even have established markets to participate in – like those tied to copper, nickel, platinum, palladium and financial services – they fall into the venture-stage category, where promises of outsized returns have little to no tangible evidence for high conviction, making those that do well worth your consideration.
One of these stocks is LQWD Technologies, a leading provider of institutional-grade liquidity services for Bitcoin’s payment layer, known as the Lightning Network, whose tech, finance and crypto-focused management team (slide 14) is actively contributing to more efficient and cost-effective Bitcoin transactions.
For those who have managed to avoid it, Bitcoin is a cryptocurrency, a non-government-backed store of value that has accumulated a market capitalization of C$1.7 trillion as of the time of writing. Millions of people across the world own it as an investment, transact with it and build businesses to harness its user base. Given Bitcoin’s ability to process less than 10 transactions per second on its own, the viability of the network depends on secondary networks such as Lightning, which uses payment channels to increase transaction volume into the millions per second, significantly reducing costs.
Despite generating a more than 14,500 per cent return since 2016, currently trading at more than C$85,500 per unit, Bitcoin stems from the aftermath of the Global Financial Crisis of 2007-2009, making its history too short to build confidence in its long-term viability, or that of businesses built upon its network such as LQWD Technologies.
That said, should a spot in the highest-risk portion of your portfolio remain vacant, LQWD makes for a compelling option-type play, given:
- The Bitcoin technology stock’s 20 nodes on Lightning rank an impressive sixth in the world, positioning it to benefit from increased transaction and liquidity provider fees should transaction volume continue to rise exponentially (slide 10) as it has since 2022.
- A more than five times increase in funding for Lightning Network companies to more than US$530 million in 2022, according to River Financial.
The LQWD option eventually being in the money depends, of course, on the coin flip of whether Bitcoin and cryptocurrency at large will play a fundamental role in global finance. With the asset class currently commanding a market capitalization of C$2.96 trillion, chances are it’s here to stay, though in what form is anybody’s guess.
LQWD Technologies stock (TSXV:LQWD) last traded at C$0.62 per share. The stock has added 63.16 per cent year-over-year, but remains down by more than 90 per cent since shifting its business to Bitcoin’s Lightning Network.
Shone Anstey, LQWD Technologies’ director and chief executive officer, spoke with Stockhouse’s Coreena Robertson about the company’s new liquidity service contract with Alby, a pioneering technology company active in Bitcoin’s Lightning Network. Watch the interview here.
Join the discussion: Find out what everybody’s saying about these high-conviction small-cap stocks on the Olympia Financial Group Inc., Clean Air Metals Inc. and LQWD Technologies Corp. Bullboards and check out Stockhouse’s stock forums and message boards.
This is sponsored content issued on behalf of Olympia Financial Group Inc., Clean Air Metals Inc. and LQWD Technologies Corp., please see full disclaimer here.
(Top photo of a transaction on Bitcoin’s Lightning Network: Adobe Stock)