Promising Canadian Small-Cap Stocks for the New Year

The most thrilling investments often begin small. Canadian small-cap stocks represent a dynamic hunting ground for growth-oriented investors seeking tomorrow’s market leaders, where significant growth potential can translate into substantial rewards for early shareholders. As we turn the page to a new year, two standout companies, Propel Holdings (TSX:PRL) and Hammond Power Solutions (TSX:HPS.A), present compelling narratives and distinct catalysts that could drive impressive returns in 2026 and beyond.

Propel Holdings stock: A fintech graduating into a bank

Propel Holdings is a $980 million Canadian fintech stock on the cusp of a major transformation. In December 2025, it received regulatory approval in Puerto Rico to launch Propel Bank, a fully licensed International Financial Entity. Set to become operational in the first half of 2026, this move pivots the credit services company from an alternative lender to a fintech with a recognized banking institution, enabling it to offer customary banking services and expand into new markets, including the United States.

This strategic shift comes despite a puzzling disconnect in 2025. The company posted record third-quarter revenue, boasting 30% year-over-year growth and raising its dividend for the ninth consecutive time since May 2023. Yet, its stock saw negative 30% total returns year-to-date due to general macro fears. This disparity may set the stage for a compelling rebound in the New Year.

New investors in early 2026 may now buy a higher yield on a higher growth stock at a lower price than before. The latest dividend yields 3% annually, and it remains well covered by earnings.

Propel Holdings stock is entering the new year with positive momentum, including a 24.2% gain over the past month. Its new banking license is a game-changer. Coupled with a November-announced partnership with Column to expand U.S. credit access, the company is positioned for a lower cost of capital and potentially wider margins.

Trading at a forward price-to-earnings (P/E) multiple of 10.3, Propel stock represents a classic growth-at-a-reasonable-price (GARP) opportunity for investors looking ahead to 2026 and beyond.

Hammond Power Solutions

Hammond Power Solutions stock has been a standout performer, delivering staggering total returns of over 2,100% in the past five years. This $1.9 billion company’s strong growth has been fueled by soaring demand for its transformers and electrification products as global grids modernize. While its impressive revenue and earnings growth rates have moderated recently, powerful catalysts are lining up for 2026.

The company’s newly built facility in Mexico will increase production, liberating margins, and meet robust demand next year. This demand is being propelled by North America’s grid modernization and, critically, the surge in data centre construction driven by investments in artificial intelligence (AI) infrastructure.

With a backlog that grew 53% this quarter, Hammond Power will be converting more big orders into revenue in 2026. Significant data centre project wins in the fourth quarter bolstered this backlog and most deliveries will be made in the New Year.

Trading at a forward P/E of 19.9 and a PEG ratio of 0.8, the stock appears undervalued given its strong earnings growth potential, making it a compelling play on the ongoing electrification megatrend.

Investor takeaway

The journeys of Propel Holdings and Hammond Power Solutions stock highlight the transformative potential within the small-cap universe. Propel’s strategic evolution into a bank and Hammond’s central role in powering a digitizing economy provide clear and distinct paths to revenue, earnings, and share price growth in the coming year.

While small-cap investments generally carry higher volatility, they offer a unique opportunity to invest in foundational growth stories early. Investors with a longer-term horizon and suitable risk tolerances may buy these two growth stocks for the new year.

The post Promising Canadian Small-Cap Stocks for the New Year appeared first on The Motley Fool Canada.

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More reading

• 2 Stocks to Help Turn $100,000 into $1 Million
• Stack Your Portfolio Strong: 3 Mighty Stocks to Lead the TSX’s Climb in 2026
• 1 Incredibly Cheap Canadian Dividend-Growth Stock to Buy Now and Hold for Decades
• 2 TSX Growth Giants to Buy for Decades of Dividends
• Looking Forward to 2026? 1 TSX30 Winner to Buy and 1 to Skip

Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Hammond Power Solutions and Propel. The Motley Fool has a disclosure policy.