Kim Bolton, a portfolio manager at Black Swan Dexteritas, recently shared his top picks in the Canadian small-cap aerospace and defense sectors. He highlighted three companies: Firan Technology Group, Magellan Aerospace, and Kraken Robotics. Bolton looks for profitability in small-cap stocks, which he notes is quite rare in this market segment. He also considers the attractive margins often found in the aerospace and defense industry.
Finding Value in Small-Cap Tech
When looking at small-cap technology stocks, it’s a bit different from the big names. Bolton points out that profitability is a key factor, and it’s not always easy to find in this space. The three companies he picked are all profitable and are Canadian, with market caps under a billion dollars. The aerospace and defense industry, in particular, tends to have pretty good profit margins, which is a plus.
Firan Technology Group: Cockpit Interfaces and Beyond
Firan Technology Group is a company that makes printed circuit boards and illuminated cockpit interfaces for aerospace and defense. If you’ve ever been in a cockpit and seen all the lights, that’s likely Firan’s work. They are big suppliers to companies like Boeing and Lockheed Martin, though sometimes indirectly through other aerospace system integrators. This indirect approach might help them handle tariff issues.
Key Takeaways:
- Current Trading Price: Just over $11.
- Strong financial momentum driven by organic growth and strategic acquisitions
- Expanding aerospace footprint, especially through FLYHT acquisition and industry certifications
Magellan Aerospace: Precision and Propulsion
Magellan Aerospace is a more recognized name, known for precision machining and aerospace engine components. They also work on space systems and rocket propulsion. Their main customers include big players like Pratt & Whitney and Rolls-Royce. They also team up with the Canadian Space Agency and the Department of National Defence.
Key Takeaways:
- Current Trading Price: Just under $18.
- 12-Month Price Target: $19.
- Valuation: Magellan’s gross margin is around 13.5%, and their full-year revenue growth for 2024 was just over 7%. Extrapolating this growth helps reach the $19 price target.
Kraken Robotics: Undersea Mapping and More
Kraken Robotics is a stock traded on the TSX Venture Exchange. They specialize in sonar technology and subsea batteries, focusing on mapping the ocean floor with their machines. This technology isn’t just for the ocean; it can also be used on land, for example, to map bedrock and identify weaknesses, which is useful with the increase in earthquakes.
Key Takeaways:
- Current Trading Price: Around $2.15.
- 12-Month Price Target: $4.
- Venture Exchange Volatility: Investing in venture exchange stocks means expecting more volatility. For these smaller caps, Bolton suggests a maximum position of 2.5% to 3% of a portfolio, rather than the 4% to 7% for larger or mid-cap stocks. It’s more about trading than long-term investing due to the volatility and less detailed financial reporting compared to TSX-traded companies.
What These Small Caps Have in Common
All three of these small-cap picks share a few important characteristics that make them attractive to Bolton. First, they are all profitable, which is a big deal in the small-cap world, especially for venture stocks. Second, the margins in their respective spaces are quite good. While Magellan’s margins are in the teens, Firan and Kraken have margins between 40% and 50%, which is very appealing.
