Growth stocks are companies that are expected to grow at an above the average rate of return compared with the overall market. In general, when investors buy growth stocks, they are looking to generate capital gains, as opposed to dividend income. However, some growth companies do pay dividends, but this has not been the norm historically as high-growth companies typically reinvest retained earnings into growing the business. Return on Equity (ROE), defined as net income/shareholders equity, is a common criteria growth investors should look at to identify undervalued stocks. With that said, investors expect management to allocate capital into business opportunities will optimize the highest likelihood of ROE, generally for the medium to long term. Today, we have identified three small-cap Canadian stocks that have stood out with their Return on Equity (ROE) over the past five years. For comparison purposes, the average five-year ROE for TSX-listed companies with a market cap between $200 million and $2 billion is -5.7%.

*Share prices as at close January 10, 2019, data obtained from S&P Capital IQ

Chorus Aviation Inc. (TSX:CHR) – $6.17
Airlines

Chorus Aviation operates scheduled passenger service on behalf of Air Canada under the Air Canada Express brand name with approximately 700 departures per weekday to 59 destinations in Canada, as well as 15 destinations in the United States. The Company also provides charter services through a fleet of Bombardier aircraft for corporate clients, governments, other organizations, and individuals, as well as ground handling, dispatching, flight load planning, training, and consulting services. Also, the Company is involved in the aircraft leasing contract flying operation businesses; and provision of maintenance, repair, and overhaul, including parts sales. Chorus has paid a $0.04 monthly dividend (7.8% dividend yield) per share (Class A and Class B) since March 2015.

  • 5-Year Annualized Return on Equity (ROE): 51.9%
  • Annual simple dividend yield: 7.8%
  • 1-Month Stock Price Return: +6.9%
  • 1-Year Stock Price Return: -32.9%
  • Market Cap: $862.3 million

Medical Facilities Corporation (TSX:DR) – $16.21
Health Care Facilities

Medical Facilities owns and operates specialty surgical hospitals and an ambulatory surgery center in the U.S. The Company’s specialty surgical hospitals provide scheduled surgical, imaging, diagnostic, and other pain management procedures; and other ancillary services, such as urgent care and occupational health. It also offers an ambulatory surgery center, which performs scheduled outpatient surgical procedures; and third-party business solutions to healthcare entities, such as physician practices, facilities, and insurance companies. The Company paid a $0.09375 dividend (6.9% dividend yield) in December 2018 – this will be its 177th consecutive dividend payment.

  • 5-Year Annualized Return on Equity (ROE): 24.3%
  • Annual simple dividend yield: 6.9%
  • 1-Month Stock Price Return: +4.2%
  • 1-Year Stock Price Return: +16.9%
  • Market Cap: $503.4 million

Cascades Inc. (TSX:CAS) – $10.69
Paper Packaging

Cascades produces, converts, and markets packaging and tissue products in Canada, the United States, and globally. The Company offers products such as paperboards for the food packaging and furniture backing industries, honeycomb paperboards, and uncoated paperboard partitions for the beer, wine, and spirits industry. In addition, CAS provides egg filler flats for egg processors and four-cup carriers for the quick-service restaurant industry, as well as polystyrene foam trays, plates, and bowls for processors and retailers in the food industry. The Company also produces bathroom and facial tissues, paper towels, paper hand towels and napkins, parent rolls, industrial wipes, and other products under the Cascades brand name. On December 6, 2018, Cascades announced that it had acquired assets in the U.S., doubling its production capacity of ecological packaging manufactured in moulded pulp.

  • 5-Year Annualized Return on Equity (ROE): 7.8%
  • 1-Month Stock Price Return: -14.5%
  • 1-Year Stock Price Return: -22.8%
  • Market Cap: $1,007.0 million

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This article was originally published at SmallCapPower.