Why small-cap tech stocks are attractive
Small-cap tech stocks are often overlooked by the market, but they offer hidden opportunities for investors who are looking for growth and diversification, according to a portfolio manager and investment advisor.
Grant White, who works at iA Private Wealth, told BNN Bloomberg on Tuesday that he sees more upside from smaller tech companies than larger ones, which have already reached high valuations and face more competition and regulation.
“We’re looking to take a much more diversified approach to it, but (we are) getting access to those areas of the market that have largely been left untapped and frankly overlooked by the nature of people just focusing in on big tech, like Meta and Amazon and Alphabet,” White said in a television interview.
How to invest in small-cap tech stocks
White said he likes to invest in small-cap tech stocks through holding companies that acquire and manage a portfolio of diverse businesses. He said this strategy allows him to benefit from the growth potential and innovation of the underlying companies, while also reducing the risk and volatility of individual stocks.
One of his favourite examples is Tiny Ltd., a Canadian company that owns subsidiaries across various sectors, such as e-commerce, software, media, and education. White said Tiny has a disciplined approach to how it buys and operates other small tech companies, and has generated strong returns for its shareholders.
“What I like about Tiny is that they’re taking a very disciplined approach to how they acquire other small tech companies,” he said. “By the nature of them being a holding company of small tech businesses, we’re getting a very diverse approach to how we’re buying into small-cap tech.”
White also said he has larger positions in small-cap tech stocks outside of Canada, especially in the U.S. market, where he sees more opportunities and liquidity.
What are the challenges and risks of small-cap tech stocks
White acknowledged that investing in small-cap tech stocks is not without challenges and risks. He said some of the factors that investors need to consider are:
- The impact of higher interest rates on the cost of capital and valuation of growth-oriented companies.
- The availability and quality of financial information and disclosure from smaller companies, which may not have the same level of scrutiny and transparency as larger ones.
- The competitive landscape and barriers to entry for smaller companies, which may face more pressure from larger rivals or new entrants.
- The regulatory environment and potential changes in policies or laws that may affect the operations or profitability of smaller companies.
White said he mitigates these risks by doing thorough research and due diligence on the companies he invests in, as well as diversifying his portfolio across different sectors and geographies. He also said he monitors the market conditions and adjusts his positions accordingly.
“I think you have to be very nimble when you’re investing in small-cap tech,” he said. “You have to be willing to take profits when they’re there, you have to be willing to cut losses when they’re there, and you have to be willing to rotate into different areas of the market as things change.”
