Hindsight Bias Buster 2025

In December 2023, I did a Hindsight Bias Buster quiz on Journalytic (an excellent investment journaling platform, by the way). The goal was to make a few predictions for 2024 and see how they turned out a year later. Two weeks ago, I got a reminder to look at the results, and they blew me away!

If you're curious about the 2024 results, I recently posted them on X and Linkedin.

Today, I will share my 2025 predictions, which I recorded on January 3^rd, 2025. I hope to give you more insight into my thinking process and then offer a few investment ideas. Please read the disclaimer at the bottom of this post.

1. What will the return on the TSX SmallCap Index be next year?

21%

The trading and financing volumes on the TSX Venture have improved dramatically over the last three months. Based on the recent trajectory, I expect to see continued meaningful improvements in those areas in 2025. Combined with valuations that remain reasonable on many names, I think we can see some more valuation improvements (multiple expansion), which could lead to another solid year.

2. What will the return on the Russell MicroCap Index (IWC) be next year?

14%

I don't follow the US market as closely as the Canadian market, so this is a total guess. The Russell MicroCap Index underperformed its Canadian equivalent in 2024. I feel valuations are less depressed in the US than in Canada. For this reason, we could see another year of outperformance on the Canadian side.

3. Will small caps outperform large caps (Russell 2000 vs 1000)?

Yes

I'm just playing the base rates here. Small caps have outperformed large caps over the long term, but this hasn't been the case during the last eight years in a row (and 10 of the previous 11 years). Given the colossal valuation discrepancy between large and small caps, there's definitely a lot of room for small cap outperformance. Is 2025 the year it happens? I sure hope so!

4. My top pick(s) for next year?

BQE Water (TSX-V: BQE) and Covalon Technologies (TSX-V: COV) are pretty close. Both are trading at 11-12x 2024 EBITDA and closer to 9x forward EBITDA (based on my estimates) with 20-30% revenue growth, stellar balance sheets and excellent management teams. If Covalon keeps executing like it has recently, I feel it might have more torque on the upside. On the other hand, I feel like the distribution of possible outcomes is narrower with BQE Water, meaning I have a little more conviction in the probability of a positive outcome.

5. My wildcard pick for next year?

Illumin Holdings (TSX: ILLM) would be my pick here. It's been a sleeper over the last few years as they've started a transition from Managed Services to a Self-Serve model. The top-line growth and bottom-line performance have not been inspiring.

The board hired a new CEO last year to reinvigorate the go-to-market strategy and, ultimately, improve the business's profitability. If Illumin shows decent revenue growth and operating leverage in 2025, the stock could rerate quite significantly. I peg the valuation at less than 5x EV/EBITDA on my 2025 forecast. Additionally, the company appears to have a bloated cost structure that could be meaningfully improved over the next few years. Assuming the company could reduce its R&D expenses by 50% and Sales & Marketing expenses by 25%, the stock would be trading at less than 3x earnings (pro forma).

6. The most attractive stock I don't own?

Haivision Systems (TSX: HAI) looks cheap at 5-6x EBITDA, especially with the expectation of higher revenue growth in the second half of 2025. I am a big fan of the management team. They've shown a willingness to think long-term and make tough short-term decisions, such as cutting unprofitable revenue streams. So far, they've executed everything they've said publicly. Their goal for the next few years is to reaccelerate the top-line growth. If they execute, I feel there's a good chance the market will reward them with a higher EBITDA multiple.

Another category I'm monitoring, which could fit in the "wildcard pick" category, is the Canadian cannabis space. The valuations in the industry have been very depressed lately and for good reasons. I'm not ready to share any specific names yet, but I'll aim to provide more details on my cannabis thesis in an upcoming post. Stay tuned for that!

Do you agree or disagree with any of my views?

I’d love to get your feedback and read about your 2025 top picks. Please share them in the comments!

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Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds positions in BQE Water (TSX-V: BQE), Covalon Technologies (TSX-V: COV) and Illumin Holdings (TSX: ILLM). Always do your own research and consult a professional before making investment decisions.

If you’d like to invest in small public companies, check out this post.