"Small caps" boost economic growth

Many Canadians know that Canada is coming to the end of a "U" shaped business cycle.The"U" shaped business cycle is characterized by a longer cycle with slower growth at either end and faster growth in the middle. So the end of the cycle is characterized by slow growth.Years of 2 and 2.5% growth before the cycle turns down.In these years the government will spend billions of dollars to boost economic growth.But  these macro measures are not as effective as the economic growth that comes  organically or from small companies with 1 to 100 employees.It is the contention of this blog that it is "small caps" that deliver economic growth to the country."Small caps" are defined as a company with a market capitalization of less than $1.5 billion.A lot of steady employment comes from larger companies but new growth comes from the smaller ones.That is, companies with a market capitalization or value of less than $1.5 billion.
  Industry Canada in it's website shows that from 2001 to 2011 small firms accounted for 43% of all jobs.And the biggest increase comes from companies with less than 100 employees.Still it is true that the greatest number of employees in the work force are employed by companies with more than 500 employees.But growth in the work force comes from employees with 100 employees and less.                                                                                              These companies also usher in innovation and new ways of doing things.Small companies ,by their nature, need a new way of doing things or a cheaper way in order to attract customers.If the new product is successful it may actually increase the size of the entire market.That is, innovation can increase demand;it is not always a win-lose situation; it sometimes is a win-win situation.In other words,the business that a "small cap" makes is not always taken away from a bigger firm sometimes it is new demand created because the new product brings in new customers.An example of this situation occurred in the telephone handset market in Canada.In order to keep integrity in the telephone market Bell Canada had for many years refused any third party to interconnect to it's system.But the CRTC overruled that decision with their interconnect decision.Suddenly other producers entered the market and because of the new features on the new handsets the total market increased in size as did Bell's market share.This was a  win -win situation.
  " Small" caps bring innovation and productivity
 Canada trails all G-8 countries in productivity.But what is productivity?It is a measure of the amount of inputs used to produce a given amount of output.Being productive means that you use less inputs to produce the same output as previously.So less productivity originates in large caps.They have production lines and processes that tend to rely on repetivity in order to produce economically.Costs remain down but so does productivity."Small caps",in order to break into a market,need to bring in new ideas.They have to offer something that is not already on the market.This requires a new way of doing things or even making things.This often means that their products are more expensive and that their profit margin is smaller.But it also means that productivity is raised.Many of these new ideas come from recent university graduates.They like to challenge the existing way of doing things but it is more expensive.
      University graduates and Innovation
    New ideas and new processes come from schools and universities.But these new ideas must be applied and "small caps" provide the vehicle to do this.As a large number of university grads get hired by "small caps" that are amenable to new ideas.It is believed  that university grads have an easier time getting hired by "small caps" than by the more rigid larger companies.Hence this is another source of innovation.
       Next year's forecast
    The theme of this essay is that "small caps" can and do give a boost to economic growth.But it would be seen to be more important when economic growth is lacking than if it was robust.So how much is a boost needed this year?I take my forecast from the TD bank website.They predict that growth this year will be 2% and again 2% for 2016.They also predict growth of .5% for the first quarter and perhaps as low as 1% in the second quarter.They feel that growth will be more vigorous in the second half of the year.Low interest rates  until 2016 should help the labour market and the housing market.However their growth forecast depends on the assumption that the price of oil will stay around $50 a barrel in 2015 and only move up to $65 a barrel in 2016.This should prove to be a little conservative.Nevertheless it should not change their forecast of unemployment by too much;they predict a 7% unemployment rate.
 This blog considers that the TD bank forecast will be substantially correct even allowing for a correction in the price of oil.So 7% is a considerable number of qualified unemployed workers.And this rate may understate the unemployment of skilled workers.Here is where "small caps" can be most beneficial.
    "Small caps" affect unemployment rate
"Small caps" according to Industry Canada create almost half of the new jobs.It is the position of this blog that their job creation is skewed towards skilled jobs.The salaries are lower but they are easier to get jobs in "small caps".It is likely that more of the new jobs created by "small caps" are for skilled workers.Also a skilled worker in a large corporation must start at the bottom position and may find it less interesting.So it is possible that without these new jobs in "small caps" that the unemployment rate may be skewed higher in the skilled worker ranks.Consequently it appears that the new jobs created lower the unemployment rate in the ranks of skilled workers.These are the jobs that have more innovation and productivity increases.Here is the fulcrum that "small caps" have in boosting economic growth.This will not make a dramatic change in the economic growth rate nor the unemployment rate but it will affect both. Also it is more efficient than spending billions of dollars on macroeconomic policy to create a .5% increase in economic growth.

Three press releases

    Workathon is the site I use to handle business matters that are slightly different or not normal business reporting.In this blog I cover press releases given by three separate companies:Holloway Lodging,Capital Power and Chorus Aviation.They are not reporting  quarterly nor annual business reports and they are not big enough to be handled in one blog so I bundle them together.All are certainly significant and positive factors for the companies involved.The first to be discussed is Chorus Aviation.
       Chorus Aviation
 Chorus Aviation is a regional aircraft service that has a semi-regulated connection to Air Canada.Prices and a part of their costs are set by Air Canada.There was a revision of the agreement in 2014 and it has been loosened up slightly.But revenues and profits are largely determined by Air Canada.However Chorus has been investing in  other opportunities outside of the regulated umbrella.To that point, they announced on March12,2015 that they have purchased a holding company that owns Voyageur Airways, a leading provider of specialized aviation services.Voyageur is a Transport Canada approved operator;it operates medical, logistical and humanitarian flights for government agencies.It has 18 aircraft of which 13 are owned.The majority are Bombardier Dash 8-300 and CRJ-200 aircraft.It operates in Canada, Africa and Central Asia.It also has specialized engineering and advanced maintenance operations and has a number of certificates for modifications and improvements to Bombardier aircraft.
 It has full in house design engineering and aircraft modification capabilities;it also does sales of parts and some manufacturing.Plus it has storage and parking capacity for up to 65 aircraft.It had adjusted EBITDA of $17 million in 2014.Chorus paid $80 million with $47 million in cash and $8 million in Chorus B shares and $25 million in deferred cash payments to acquire it.
    Closing
 This is seen as a good price as it is 4.7 times adjusted EBITDAand will be immediately accretive.A good rule of thumb is 4 to 5 times operating income for a going concern.This opens up new opportunities for Chorus but it will also require more investment in this multitasking business.It is possible that Chorus may sell the operation in North Bay as it is not too close to it's main operation in Halifax.Chorus will probably sell off the international operations and the certificates.But it is easy to see that the specialized engineering and advanced operations will fit in nicely with the existing Chorus operation.It is not clear at this time how profitable the medical and logistical operations will be. Only time will tell here. 
 Capital Power
   On April 2,2015 Capital Power announced that Epcor,an Edmonton utility,sold in a secondary offering 9,450,000 shares of Capital Power for $23.85 a share.The proceeds were $225,382,500.Epcor still owns 9.1% of Capital shares now and before the offering owned about 21% of Capital shares;Capital Power has about 85 million shares outstanding.
   These almost 10 million shares were a drag on Capital Power shares and prevented Capital from rising beyond $24 a share.Now that this tranche of shares has been bought there will be more pressure on the demand side to buy shares up.This acted as a damper on the share price while EPCOR was selling.Now with a good quarterly report coming up this could send Capital Power into the $25 level again.
  Holloway Lodging
  On April1, 2015 Holloway Lodging announced that it had sold it's Travellodge franchise for $21 million and a gain of approximately $6.5 million.The purchase was made through a $16 million cash payment and a issue of $5 million subordinated notes.Travelodge was a part oif the assets that Holloway got with the acquisition of  Royal Host, a lodging company listed on the TSX.Travellodge was considered as a non-core asset and let go for $21 million.Holloway will use the $16 million of cash to repay the loan used to finance the acquisition of Royal Host.This has been seen as a positive move by Holloway as the shares rose $.50 this week.