Canada’s Fastest-Growing Companies are best known for blazing trails in product development and management thinking. It’s time they got their due as solid investments as well.
While even the most savvy investors are more likely than the average Joe to mention “growth companies” and “speculative small-caps” in the same sentence, the businesses that form the PROFIT 100 Portfolio shatter any myth that superlative top-line performance means high risk with inconsistent rewards. In fact, shares in the 47 publicly traded firms from last year’s PROFIT 100 and Next 100 lists appreciated by an average of 30.9% in the year ended May 10, 2006 (the last date we could consider before press time). If you’re on the hunt for relatively safe investments with high potential, the 2006 PROFIT 100 Portfolio could be among your best bets.
As the standard disclaimer reads, past performance of the PROFIT 100 Portfolio is no guarantee of future results. However, Canada’s Fastest-Growing Companies have generated market-beating returns in each of the years they’ve been tracked. Shares in the Class of 2003 rose an average of 57.2% year over year, versus 21.4% for the benchmark TSX Composite Index. Similar results were seen in 2000, when the PROFIT 100 and Next 100 posted share-price gains of 91%, even as the TSX jumped 31%.
With its 30.8% increase over the past year, the 2005 PROFIT 100 Portfolio once again beat the TSX-but only slightly. Driven by stellar returns in the mining and energy sectors, the TSX Composite climbed 29.7% year over year. (The PROFIT 100 is devoid of resource-production firms.) Meantime, the TSX Venture Composite Index, which is dominated by the junior mining and energy stocks favoured by speculators, soared by 94%. In fact, the TSXV was the only major North American equities exchange to outperform the PROFIT 100 over the past year.
One simple reason the PROFIT 100 Portfolio performs well in any given year is that it’s a diversified portfolio of growing companies, most of which are profitable and penetrating markets worldwide. While those are characteristics any fund manager would look for, there’s something unique to the composition of the PROFIT 100 Portfolio. Unlike your average mutual fund, which contains stocks in the amounts deemed appropriate by its managers, or a stock index, in which the weightings of its component stocks correlate to their market capitalizations (a so-called share-weighted index) or prices (a price-weighted index), the PROFIT 100 Portfolio is assembled with unwavering adherence to a mathematical formula that reads as follows: buy $1,000 worth of each stock.
Indeed, our approach is simply the equivalent of dollar-cost averaging. Apply this principle at the gas pumps — say, by putting $25 of fuel into your tank at each and every visit — and you’ll purchase more fuel at lower prices and less fuel at higher prices, thus cutting your total bill over time. Apply the idea to equity investing, and you’ll buy more shares of low-priced stocks and fewer shares of expensive stocks. Because each of these value stocks has lots of room to grow but little distance to fall — while the opposite is true for the expensive stocks — your resulting portfolio will have loads of potential with less than the usual risk.
So, had you called your broker on May 10, 2005 and plugged $1,000 into each of the 47 publicly traded companies of the 2005 PROFIT 100, your $47,000 would have grown to almost $61,522 by May 10, 2006.
Leading the pack with a 772% gain was CRH Medical Corp., which rocketed from penny-stock status ($0.39) to a respectable $3.40. Other big winners were Garda of Canada, which rose 175% to $23.41, and Sierra Wireless Inc., up by 174% to $22.78. Among the worst performers were Unity Wireless Systems Corp., which dropped by 53% to US$0.14; AirIQ Inc. (down 59% to $0.21); and Honeybee Technology Inc. (down 95% to $0.11). But that’s the beauty of the fixed-value weighting method: no single stock can kill you, but just one or two can send your whole portfolio skyward.
What if the PROFIT 100 Portfolio were weighted by price rather than by value? Recent results suggest it might still do fine. A price-weighted fund would have generated a healthy 19.7% return over the past year, topping the NASDAQ Composite Index (18.2%) and S&P 500 (13.4%). As for the 2006 PROFIT 100 Portfolio, it actually performed better as a price-weighted index (8.2% versus 6.7%) during a recent three-month period.
Where the stocks of Canada’s Fastest-Growing Companies will be a year from now is anyone’s guess. But no matter how you slice it, the PROFIT 100 Portfolio is worth a good look.
—with files from Calvin Leung; share price data from Bloomberg