Finding Value in Small Cap Stocks | Philippe Hynes and Jimmy Connor

Key Concepts

• Small-Cap Investing: Focus on companies with market capitalizations between $600 million and $1 billion (with a range of $200 million to $10 billion).
• Concentrated Portfolio: Holding 20–30 high-conviction names for 3–5 years.
• Intrinsic Value: Investing in quality businesses trading at a significant discount to their true worth.
• Defensible Competitive Advantage: A core requirement for Tonis Capital’s stock selection.
• Recency Bias: The tendency to over-rely on the last decade of large-cap/tech dominance when evaluating long-term market trends.
• Multiple Contraction: A decline in the valuation ratio (e.g., P/E or sales multiple) of a stock, often used by value investors to identify entry points.

Tonis Capital: Investment Philosophy and Structure

Tonis Capital, based in Montreal, operates with a team of six, managing two primary funds: an original flexible fund for high-net-worth individuals and a pure-play US small-cap fund for institutional investors.

• Investment Approach: The firm focuses on "quality businesses" characterized by stable or growing free cash flow and strong balance sheets. They prioritize valuation, aiming to avoid overpaying for growth.
• Performance: Since 2007, the firm has achieved an average annual compound return of 12%. They emphasize capital preservation, noting that they have only experienced two negative years (2008 and 2018) in their 18-year history.
• Small-Cap Thesis: Philippe argues that the valuation gap between large and small caps is currently at a historic high. He suggests that small caps are poised for significant growth once the market pendulum swings away from mega-cap tech stocks.

Sector Perspectives

1. Precious Metals and Mining

Tonis Capital avoids the mining sector, citing a lack of "edge" compared to industry specialists. Furthermore, they view many junior miners as too speculative, noting that many lack consistent revenue or free cash flow, which contradicts their core investment framework.

2. Artificial Intelligence (AI)

While acknowledging AI as disruptive, the firm avoids "pure-play" AI companies due to the difficulty of predicting long-term winners in a rapidly evolving, over-hyped market. Instead, they have invested in the "picks and shovels" of the AI boom: companies involved in building data centers and upgrading the electrical grid.

3. Software

The firm has historically avoided software due to high valuations. However, following recent market corrections and "multiple contractions," they are currently researching the sector to determine if the earnings of these companies are durable enough to withstand the AI transition.

Case Studies and Current Holdings

Philippe highlighted three specific investment ideas currently held in their portfolios:

• Cineplex: After exiting in 2020 due to the pandemic, Tonis Capital re-entered in late 2025. They view the company as a "de-risked" monopoly in Canada (75%+ market share) that is well-positioned to benefit from a recovery in theater attendance and potential acquisition interest.
• IMAX: The firm views IMAX as a beneficiary of the "blockbuster" trend. Because directors and producers prioritize IMAX screens for premium releases, the company maintains strong pricing power and is actively expanding its screen count in a mature industry.
• Stingray: A music industry player that recently made a transformative acquisition. Their business model involves providing music apps to car OEMs (Original Equipment Manufacturers) for free, monetizing through advertising and revenue sharing, which the firm views as a superior, more consumer-friendly alternative to subscription-based services like SiriusXM.

Synthesis and Conclusion

Tonis Capital’s strategy is defined by patience, valuation discipline, and a focus on quality over popularity. By avoiding the "recency bias" of the last decade’s tech-heavy markets, they position themselves to capture value in overlooked sectors like cinema and infrastructure. Their approach relies on the belief that in volatile markets, companies with strong balance sheets and defensible competitive advantages will ultimately outperform, regardless of broader index trends.

For further engagement, the firm directs interested parties to their website at tonuscap.com or their LinkedIn page.