Small-cap manager invests $6.3 billion in Kits Eyecare and Integra Resources

Investing in the right stocks can be a daunting yet rewarding experience, especially in the dynamic world of small-cap investments. As financial managers navigate this landscape, their choices often reflect not only market trends but also a keen insight into emerging opportunities. In this context, let’s delve into the strategic insights of Alex Etsell, a seasoned portfolio manager who is making notable investments in the Canadian market.

Understanding the Small-Cap Investment Landscape

Alex Etsell, a partner and senior portfolio manager at Hillsdale Investment Management Inc. in Toronto, emphasizes the continued appeal of Canadian small-cap stocks. These stocks, generally characterized by their market capitalization of under $2 billion, often present unique investment opportunities.

Despite a robust performance last year, where the S&P/TSX SmallCap Index saw an impressive total return of 50.2%, driven primarily by precious metals, Etsell believes that the sector boasts a diverse range of options beyond just gold and silver.

• Industrials: Companies involved in manufacturing and production.
• Technology: Innovators in software, hardware, and IT services.
• Consumer Products: Brands that cater to everyday needs and desires.

Portfolio Management and Strategy

Etsell oversees approximately $6.3 billion within Hillsdale's total assets of $11 billion, working alongside CEO Chris Guthrie. Together, they manage the Hillsdale Canadian Micro Cap Equity Fund, which has a focus on investors willing to embrace higher risk for potentially higher rewards.

This fund, currently valued at $190 million, has yielded an impressive 29.6% return over the past year, and its three- and five-year annualized returns stand at 22.5% and 18.4%, respectively. These figures underscore the potential growth within the micro-cap sector.

Highlights of Current Investments

When asked about his top stock picks, Etsell highlighted three companies that exemplify his investment philosophy, along with one stock he recently divested:

Key Investment Picks

• Haivision Systems Inc. - A Montreal-based company specializing in real-time video technology. Purchased at approximately $5 per share last September, Haivision is benefiting from increased defense spending and a strong foothold in entertainment.
• Kits Eyecare Ltd. - This Vancouver-based eyeglasses and contact lens retailer was acquired at $15.40 per share in December. Kits is experiencing rapid growth, particularly in its contact lens segment, aided by its vertical integration model that fosters higher profit margins.
• Integra Resources Corp. - A precious metals producer based in Vancouver, Integra was bought at $2.55 per share. With a focus on expanding production in a relatively safe jurisdiction like Nevada, it represents a strategic choice for those looking for exposure to gold.

Investment Rationale

The rationale behind these investments is multifaceted. For Haivision, the alignment with sectors that are experiencing increased spending, particularly defense and entertainment, positions it for sustained profitability. The company's recent contracts and consistent profit reporting further strengthen its outlook.

Kits Eyecare's unique business model allows it to maintain competitive pricing while ensuring quality control throughout its production and fulfillment processes. This approach not only reinforces customer loyalty but also enhances profit margins, making it a compelling choice in the retail landscape.

Integra Resources stands out due to its proactive management and strategic investment plans, which aim to expand production capabilities. This is particularly appealing in a market where gold prices can fluctuate significantly, and having a strong management team can mitigate risks associated with investment volatility.

Recent Divestment Insights

In terms of recent sales, Etsell noted his decision to sell Zedcor Inc., a Canadian security systems provider, at approximately $5.80 per share. Despite a strong performance since its acquisition at around $4.20, Etsell felt the valuation had become too stretched, prompting the move. This decision reflects a critical aspect of investment strategy—knowing when to cut losses or take profits.

Looking Ahead: The Small-Cap Market Potential

As Etsell continues to navigate the small-cap investment landscape, his approach reveals important lessons for both seasoned investors and newcomers. The ongoing appeal of Canadian small-cap stocks, combined with a strategic focus on sectors poised for growth, suggests that there are still numerous opportunities for those willing to do their research and embrace risk.

Investors should consider factors such as:

• Market Trends: Understanding current economic conditions and how they affect specific sectors.
• Company Fundamentals: Analyzing balance sheets, earnings reports, and management strategies.
• Diversification: Spreading investments across various sectors to mitigate risk.

As the investment landscape continues to evolve, staying informed and adaptable will be key to capitalizing on the potential of small-cap stocks.