Three top small-cap stock picks from Penderfund’s David Barr

Penderfund’s Chief Investment Officer and manager of its Small Cap Opportunities Fund likes buying at a discount

 
Doctors using a tablet
As Canada plays catch-up to other countries at digitizing medical records, QHR technologies should benefit. (Ariel Skelly/Getty)
David Barr, Chief Investment Officer at Penderfund Capital Management.
David Barr, Chief Investment Officer at Penderfund Capital Management.

Finding inexpensive stocks is more difficult today than it was a few years ago, but David Barr can still locate good buys. Why? Because he’s not afraid to jump on something that suddenly falls in price.

“The great thing about the stock market is that some days it will tell you a certain company is worth a lot of money, and the next day it will tell you that it’s not worth that much,” he says. PenderFund’s CIO and manager of its Small Cap Opportunities Fund—rated with five stars by Morningstar—finds cheap small-cap stocks by looking at newly listed companies and operations that lose value as the result of a news event.

He buys more mature businesses at a 30% to 40% discount, while upstarts without a track record of one full business cycle should be trading at 50% below their true value. He also likes to see at least 20% earnings growth every year.


QHR Technologies Inc. (TSXV: QHR)

P/E: N/A
Yield: N/A
1-year total return: 18.4%

Chart showing QHR Technologies trailing 12-month stock performance

This Venture Exchange–listed business provides electronic medical records and billing services to doctors. With a $72-million market cap and 5,000 customers, the Kelowna, B.C., firm is still small, and it made two unfortunate acquisitions that it’s trying to extricate itself from, says Barr. But it’s one of only two companies in this niche in the country. Canada is way behind other developed countries in adopting digital medical records, but it’s coming. “Even by just maintaining current market share, [QHR] will double its client base,” he says. Sales will also increase as older doctors retire and more tech-savvy ones enter the profession.


Espial Group Inc. (TSX: ESP)

P/E: 347
Yield: N/A
1-year total return: 32.4%

Chart showing Espial Group’s trailing 12-month stock performance

Most Canadians have a set-top box, usually provided by their cable company, that allows them to watch TV and record shows. Unfortunately, the software on these boxes is difficult to update. Espial has created a set-top box that runs over the Internet, which makes updating easy. It has traditional PVR recording and a scrolling TV guide, and it also comes with Twitter, YouTube and other applications. For cable companies, this model beats rivals on price. It’s still early days, but Espial recently signed a deal with Orange, a European wireless company, and it has been working with an unnamed North American cable company since 2013, says Barr.


Nobilis Health Corp. (TSX: NHC)

P/E: 59.4
Yield: N/A
1-year total return: 604.1%

Chart showing Nobilis Health Corp.’s trailing 12-month stock performance

Looking for an American business to own but still want to stick to the TSX? Then consider this Houston-based health-care company. Nobilis, which runs doctor-owned medical centres in Texas, had a rocky start. It fell about 96% between 2007 and 2009, but it’s up 162% year-to-date. The improvement stems from a change in management and target market—it’s now bringing in more day patients instead of people who need to stay overnight. Hospitals are looking to reduce costs by moving their day surgery patients into these clinics, says Barr. Nobilis’s top line was US$40 million in 2014; Barr expects that to soar tenfold in 2016.

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