By Tyler Laundon, Chief Analyst Cabot Early Opportunities

Early-Stage3Canadian GrowthStocks to Buy Now

3 Early-Stage Canadian Growth Stocks to Buy Now One of the generally accepted wisdoms is that the U.S. stock market is where the action is. But there are market-beating returns available to investors willing to step abroad too. And one of the easiest places to find them is just over the border with our neighbor to the north, Canada.

For the modestly adventurous investor, there are many early-stage Canadian growth stocks worth a look right now.

Buying Canadian stocks is a relatively easy pitch to U.S. investors. It’s a stable, developed economy and an established trading partner. The country is friendly both for travel and investment. Also, most Canadian small- and mid-cap stocks have considerable exposure to the U.S. economy.

A lot of investors head to the Vancouver Stock Exchange for Canadian stocks. This is an exciting exchange where very early-stage companies can gain a listing. In most cases these stocks will carry considerably higher risk.

There is also the Toronto Stock Exchange, and there are plenty of Canadian stocks that trade directly on U.S. exchanges. Companies that trade in these two places tend to be more stable and more advanced, which means they carry far less risk than those that trade on the West Coast. Here is a selection of three early-stage Canadian growth stocks that are in varying phases of their lifecycles. All are intriguing for different reasons and have different risk profiles. Enjoy!

Descartes Systems (DSGX) It’s hard to argue against a stock that’s performed as well as Descartes Systems over the last decade, especially given that the company still has a market cap of just $2.7 billion and trades in the U.S. Sure, there have been some choppy periods here and there. But most dips in the stock have attracted buyers who seem all too eager to snatch up shares of the Ontario-based logistics management software company.

The big-picture trend powering the stock is demand for supply chain software solutions. That demand stems from increasingly complex global trade networks that are often disrupted, which slows down delivery time. Descartes helps customers overcome these challenges by offering faster deliveries to market. The secret sauce is a proprietary logistics data and analytics platform that automates and optimize inefficient processes.

Products range from connectivity and document exchange, route planning and inventory and asset visibility, to wireless dispatch, rate management and warehouse optimization. These solutions help customers manage the flow of data and documents that track and control inventory, assets and people in motion, whether they interact with high- or low-tech partners.

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In short, customers come to Descartes to get plugged in to the world’s largest multi-modal logistics network. They stay because Descartes gets the job done and offers partners and solutions that help clients differentiate themselves from the competition.

There is a lot to like here if you just step back and look at the numbers. For starters, the company has been around since 1981. But a transition to cloud-based software and the evolution of Descartes’ Logistics Technology Platform ushered in a new era of growth starting around 2010.

The company has grown revenue at an average annual rate of 15% over the last decade, including 20% in fiscal 2018 and 17% in fiscal 2019, which ended on January 31, 2019. The company has been profitable for years too. In fiscal year 2019 EPS jumped by 14% to $0.40.

Provided management continues to execute, the stock should grind higher over the coming years. The general trend has been up for years, with the occasional dip to, or just below, the stock’s 200-day line offering good entry points.

GoEasy (GSY.TO, EHMEF)Note: All prices for GoEasy are listed in Canadian DollarsCanadians looking for alternative financing solutions, or a little help leasing furniture, appliances or consumer electronics, can turn to one early-stage Canadian stock that has been delivering handsome returns to shareholders for years. It’s called GoEasy, and its pitch is that it is a “leading full-service provider of goods and alternative financial services that provides everyday Canadians with a chance for a better tomorrow, today.”

Why wait, when you can live better right now?!

The $560 million market-cap, Ontario-based company was founded in 1990, and since 2001 has grown revenue at an average annual clip of 12.7%. So why do I call it early-stage if it’s been around for 30 years? Let me explain.

In the early years GoEasy’s growth came from its first division, easyhome. Easyhome is Canada’s largest lease-to-own company and helps customers acquire brand-name household furniture, appliances and electronics from both corporate and franchise stores, and pay for them under weekly or monthly leasing agreements.

Revenue in the easyhome segment hit $137.9 million in 2018 and generated operating income of $21.5 million on $52 million in leased assets. To be clear, the fixed annual interest rate is far from cheap

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at 29.99%. I guess that’s what unsecured, non-prime borrowers pay these days. (My inner voice is screaming for these clients to just say “NO” to financing that comfy couch – “go get a cheap used one you can afford!”)

Growth in the easyhome segment hit a brick wall in 2009 and 2010 during the financial crisis when revenue topped out at around $170 million. The segment has shrunk since but is stable and operating margins are growing.

The real growth engine is a new segment, which is in the early stages of growth. The company moved quickly during the recession and launched its second segment, easyfinancial, a non-prime consumer lending company that bridges the all-too-massive gap between traditional lenders and predatory payday lenders.

Financing options include secured or unsecured installment loans ranging from $500 to $25,000, with interest rates starting at 19.99%. Repayment terms are nine to 60 months for unsecured loans, and up to 10 years for secure loans.

The easyfinancial segment has been expanding and offers an omni-channel model so customers can complete transactions through a national branch network of 241 locations, online through a digital application platform, or through call centers. The company’s investor relations materials tout the quality of GoEasy’s risk analytics technology, which helps avoid bad loans and facilitates loan offerings at the point-of-sale through third-party merchants. In 2018, revenue in this segment hit $368 million (73% of total revenue) on gross consumer loans of $834 million.

The bottom line is that sales in the easyfinancial segment have soared over the last eight years while sales in the easyhome segment have declined. All in, revenue in 2018 of $506 million was up 26% over 2017, while adjusted EPS of $3.56 was up 20%. GoEasy pays a dividend with a forward yield of 2.3%. The stock has been a relatively steadfast performer, albeit with the normal pullbacks and consolidation periods over the years. The most dramatic retreat was in late 2018 when shares fell from 53.5 to 31 over just three months. But they bounced back quickly afterward and were back near new highs by mid-2019. Like most stocks on this list, it’s wise to build a position gradually.

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Eco Atlantic Oil & Gas (EOG.V)Note: All prices for Eco Atlantic Oil & Gas are listed in Canadian DollarsBack in April 2018 when I first recommended this company in a Special Report for Cabot Small-Cap Confidential subscribers, shares of Atlantic Oil & Gas were trading for under 0.60. Given the ensuing meltdown in the price of crude oil you’d think this early-stage oil exploration stock would have suffered too. But it has soared over 300%!

What gives?

First the backstory. Atlantic Oil & Gas’ exploration activities are focused on offshore Namibia and Guyana. As with most junior exploration companies, a lot of the pitch here is based on having great property that’s close to proven reserves.

In Namibia, the company has interests in four offshore blocks in the vicinity of blocks with farm-in activity from majors. It’s notable that Eco Atlantic is partnered with Tullow Oil, AziNam, ONGC Videsh, and NAMCOR, and is operator on three of the four blocks.

In Guyana, Eco Atlantic (15% working interest) is partnered with Tullow (60% working interest and operator) and Total (25% working interest).

The stock’s doing so well because of activity in Guyana, including a recent oil strike!

Here’s the history. Back in September 2018 Total exercised an option to acquire a 25% working interest in the Orinduik block, offshore Guyana, for $12.5 million. That capital was expected to cover Eco’s cost to drill two wells and reimburse the company for some back costs related to 3D seismic survey work.

In February management announced the partners had contracted a drilling rig, the Stena Forth, and that drilling was expected to begin in June 2019, targeting the Jethro-1 prospect. The estimated chance of success going into the drill date was around 45%. Management believed there could be 250mmbbl of gross prospective resources under the ocean floor in that location.

A quick side note here: Africa Oil (AOI.TO), a smallish exploration company that was the first to strike oil in Kenya, also took a stake (of about 19%) in Eco Atlantic (for $14 million) and that company’s CEO, Keith Hill, was appointed to the board. This added another layer of legitimacy to Eco Atlantic as Africa Oil has had relative success with its partner Tullow (and now Total and CNOOC too) in East Africa, even though the timeline to first oil there has been pushed back for years.

Back to Eco Atlantic.

In August the Stena Forth drillship began drilling in 1,350 meters of water and at 4,400 feet struck liquid gold—high-quality oil-bearing sandstone reservoirs of Lower Tertiary age which are estimated to hold 55 meters of net oil pay.

Tullow Oil, a seasoned exploration company and the operator on the well, says the find “significantly de-risked other Tertiary age prospects on the Orinduik license, including the shallower Joe prospect …”

This discovery sent shares of Eco-Atlantic soaring. And for good reason. The company is a more viable takeover target now and there are other prospects, which it has an economic interest in, starting with the Joe-1 prospect, which was spud on August 2019, also by the Stena Forth.

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With an estimated three-week drill time (in only 700 meters of water) investors should know in mid to late September what the deal is. I should note the risks are still high and this is a different play, so there are no guarantees. The image below shows the lay of the land down in Guyana.

Eco Atlantic is also funded for six more potential exploration, appraisal or development wells on the Orinduik Block. So while Joe-1 is the next big story, the stock should provide plenty of excitement for speculators over the next 12 months.

Eco Atlantic’s chart looks constructive going back a couple years, with a long consolidation period in 2017 broken up by a nice rally when Africa Oil came to the table. The stock rallied to fresh highs in September 2018 when Total decided to step in, then pulled back going into the Jethro-1 drilling project, after which it blasted off to new highs.

It should go without saying that this stock is going to move a lot, up or down, as drilling results come in. Have fun and scratch your speculating itch. But don’t invest your kids’, or grandkids’, college funds!

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This special report is published by Cabot Wealth Network. Cabot Wealth Network is neither a registered investment advisor nor a registered broker/dealer.Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error.Recommendations, opinions or suggestions are given with the understanding that readers acting on the information assume all risks involved. We encourage readers of this report to consult with an independent financial advisor with respect to any investment in the securities mentioned herein. Any opinions, projections and predictions expressed in this profile are statements as of the date of this publication and are subject to change without further notice.

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