The beauty of small-cap growth stocks is that once the right name is chosen, the returns could be highly attractive, while the long-term runway remains tremendous. There is a small subset of companies in the capital markets that can compound shareholder capital by 30% a year for an extended period of time. This group of companies is so rare that if investors were lucky and skillful enough to own one of these names, it could mean life-changing returns, making the investing effort in individual stocks worthwhile. 

For investors’ information, a 30% compounded annual growth rate (CAGR) being sustained for 10 years is equivalent to a 13.8 times original investment. That being said, finding and holding these names is anything but easy. Drawdowns are an indisputable component of above-average returns, as these companies tend to experience significant volatility because growth may be faster in some years and slower in others. Owning these names has proven to be a tax-efficient way to compound capital, as investors practically do not pay any taxes until the investment is sold, and capital gains are treated at a more favourable rate compared to dividends and interest income, most of the time. 

A few necessary mindsets a growth investor should have:

1. Holding tight is more important than buying right: It is not the buying or selling, but holding is where investors can make big money from growth stocks. Because investors can pick the best long-term compounder, but without the necessary patience, investors can easily sell the winners too early or sell when near-term challenges happen.
2. Being wrong is part of the game: When investors invest $100 into a name, all an investor can really lose is the initial investment, but when picking the right growth stocks, the investment could turn into ‘multi-baggers’. Therefore, unless the situation becomes a clear mistake, it is better to take the risk of selling the losers late than selling the winners too early.
3. No need for huge “conviction” early: Investors do not need to size the initial position too aggressively in an effort to demonstrate “conviction”. Investors have plenty of time to add to the position over time as management executes. In addition, the willingness to average up into winners can’t be understated.
4. Portfolio Concentration is a natural outcome of a superior growth portfolio: As a result of these huge outliers, a portfolio will be naturally concentrated in a few of these names. Though this is a nice problem to have, investors need to consider their individual comfort levels and balance well between letting the winners run and sleeping well at night. 

Below we have screened for companies with the following criteria:

• Market cap larger than $100 million
• Total Return of at least 30% compounded annual growth rate (CAGR) over the last 10 years
• The average last three years’ revenue growth rate
• Prices compared to their 52-week high
• Forward Price/Earnings ratio

The criteria for the screen are quite simple, as there are only two criteria we use to screen for companies. As usual, we look for companies with a market capitalization of at least $100 million, as these companies not only have decent operating track records for investors to evaluate, but also these companies are more liquid in trading volume, allowing investors to acquire/dispose of positions. Secondly, we screen for companies with the highest total return CAGR. We also present these companies’ profiles in terms of profitability (return on equity on a trailing-twelve-month basis) and valuation (forward P/E).

The screener came up with some interesting names; members will recognize some of the names that we cover in our Model Portfolios and coverage lists, such as TerraVest Industries (TVK), Celestica (CLS), Kraken Robotics (PNG) and Goeasy (GSY).

Although some are much larger in size now, given their impressive returns, some of them are still relatively small. In addition, strong topline growth is the number one commonality between these names. Most of these names have consistently grown by double digits over a long period. Despite a decent run, they still look like attractive candidates for long-term holdings.

Again, these companies on the list are not recommendations but a starting point that helps investors generate potential investment ideas and strategies. Investors can view our previous screener blog here.

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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.