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Canadian Small Caps May Lose Edge: report

Canada's smallest companies will trail the rest of the market after rallies in metals and fuel prices pushed valuations close to a record high, according to the country's best-performing investors in so-called small caps, Bloomberg said.

Ralph Lindenblatt, co-manager of the Bissett Microcap Fund, reportedly said the shares will return about 5% annually during the next five to 10 years after more than doubling in 2009 and 2010. Allan Jacobs of Sprott Inc. (SII.TO) reportedly said he has let cash accumulate in his Sprott Small Cap Equity Fund (SSMCEQA) as bargains became harder to find. They beat all other Canadian mutual funds specializing in small caps last year, returning 60% and 50%, respectively, according to Bloomberg data.

Bloomberg said the S&P/TSX Venture Composite Index and S&P/TSX SmallCap Index have risen about twice as much as the S&P/TSX 60 index of Canada's largest stocks during the bull market that began in 2009 as the economic recovery spurred investment in riskier assets, and oil, silver and copper more than doubled. It added the SmallCap Index's enterprise value, which measures the value of equity and debt, rose to almost 13 times earnings before interest, taxes, depreciation and amortization in April, within 0.3% of the post-2001 high reached on Dec. 30.

"We're up 200% from market lows," Lindenblatt reportedly said, referring to the Venture Composite Index of companies on Canada's junior stock exchange. "It's not surprising small caps are going to pull back or at least give up leadership to large caps. If you look at the valuation for small caps today, we're at the point where we have to expect much lower returns."

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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