Smallcap Discoveries: Weekly Update: April 1

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Subject: Smallcap Discoveries: Weekly Update: April 1 - 5

Weekly Update: April 1 - 5

Market Commentary

Markets

Volatility was the word to describe equity markets this past week. Equity investors are getting nervous as several US Fed members are suggesting that rates may stay elevated for longer as continued strength in the US economy and slightly higher than expected inflation keeps the Fed hawkish a bit longer.

The DOW ended the week down 2.3% for the week, Nasdaq was lower by 0.8% and the TSX, spurred on by higher gold and oil prices, was higher by 0.4%.

Commodity stocks are back in vogue and likely help drive the TSX higher as well as bring more international capital into Canadian equities as a whole.

Financials

We saw another example of diverging economic data in the US and Canada. US labour data is surprising to the upside while in Canada job data is now coming in weaker than expected. I’ve been vocal about my belief that we are seeing much more weakness in Canada especially when we look at economic data on a per capita basis. Factoring in the rapidly growing population in Canada the economy is performing even worse than the headline data and this weakening data is allowing bond yields to drop a bit while bond yields in the US are staying stubbornly strong.

US 10 year treasury bonds

Canada 5 year bonds

Over the past 6 months we’ve seen a widening spread between US and Canadian bond yields and this is putting further pressure on the CAD/US currency spread.

Expect these trends to continue.

Commodities

Canada has a large reliance on its resource sector. Energy and mining still makes up a large part of our economy as well as a large part of our stock markets. Higher oil and high metal prices should help hold up the Canadian economy as the world’s appetite for raw materials continues while the Canadian consumer and Canada’s industrial base weakens.

Gold had another strong week climbing to another new all-time high and has climbed 17% in just over a month.

What’s interesting to note is that while gold is hitting new all-time highs the gold miners etf is still well below its highs.

There is lots of chatter among the junior gold exploration crowd about a bull market in gold stocks, maybe it’s still to come, but for now the junior miners have a lot of catching up to do. I remember back in the day when the gold miners and the juniors moved well before the shiny metal did, I guess this time is different….

The other hot commodity of late has been oil. Oil hit a new 5 month high and has now risen for 4 straight weeks with WTI oil breaking and closing above $85 per barrel. Oil is up over 18% since the start of the year and is something to watch as this may be the commodity that keeps world central bankers awake at night in their fight to curb inflation.

Stocks

Good times in microcap land continue.

We saw another company agree to be taken private. This week it was Indigo Books and Music (IDG.T). The company has agreed to be acquired by Trilogy Investments LP for $2.50 per share.

There continues to be a healthy number of our portfolio and watch list companies reaching 52 week highs. This week it was GateKeeper Systems (GSI.V), BeWhere Holdings (BEW.V), Faraco (FAR.T), East Side Gaming (EAGR.T), Enterprise Group (E.T), Atlas Engineered Products (AEP.V), Kraken Robotics (PNG.V), Zedcor (ZDC.V) Tantalus Systems (GRID.T) and Namesilo Technologies (URL.C).

We saw continued capital flows into the cannabis space and a number of new 52 week highs there too (see: CRON.T, HITI.V and CURA.T). As I said last week there are a number of potential catalysts that are exciting cannabis investors and more investors are starting to recognize that some of these companies have actually been able to grow and generate profits which seems to be bringing more generalist investors into the space.

Speaking of cannabis, Trevor and I (and some friends) managed to take in a site visit to Rubicon Organic’s (ROMJ.V) production facility in Delta British Columbia this past week. The big takeaway for me was how much more complicated these operations are and how well run ROMJ seems to be. I’m not quite sure if now is the time to be a buyer of ROMJ.V, as I think there are other cheaper opportunities, but it’s one we will keep on very close watch as we do see value here and continue to think the industry is giving us good opportunities.

Canadian housing continues to be a major political topic. The current Federal government continues to announce more initiatives and funding for almost anything that can help produce homes faster. This week the federal government intends to allocate more than $600 million for a series of new homebuilding innovation efforts to speed up the development of modular and prefabricated homebuilding in Canada.

It just goes to show that when there is a serious political concern like we are currently seeing with the housing shortage there is never enough tax payer money that can’t be thrown at a problem that private enterprise can fix on their own if the government would just get out of the way…

More signs the microcap bull market is in full steam….

Financings are picking up, as we can see by the two recent ones (including the one below) that we are participating in. It was a very pleasant surprise to see, first hand, the strong interest in both these offerings. It’s a sign we are noticing in other offerings as well. Up to a few months ago financings were almost unheard of, especially successful and oversubscribed financings. It’s all a sign of strengthening markets and capital flowing downhill to the smaller names. We expect this trend to pick up strength and view it as healthy momentum of an early stage Canadian microcap bull market. The fact we were able to get additional leverage to this bull market via warrants is exciting and could dramatically increase returns. It reminds me of our early positioning into Hamilton Thorne (HTL.V) at $0.10 with warrants back in late 2014. Let’s hope the end results are the same….

We expect we will have many more opportunities like this in the next few months. Stay tuned as we try to find opportunities to take advantage of the current environment.

Other Stuff

We were able to secure another financing opportunity for SCD members. Unfortunately, once again, it’s only available to accredited investors. This time it’s one of our Cheapies with a Chance list companies, ZTest Electronics, ZTE.V.

Due to overwhelming demand the initial $500,000 financing has been increased to $1.25 million. Both Trevor and I will be participating in this financing.

Ztest Electronics

CSE: ZTE

We have arranged a Private Placement with Ztest Electronics Inc (CSE: ZTE) for Smallcap Discoveries members only. Both Paul and Trevor will be participating in this offering.

Terms:

Non-brokered private placement (the "Offering") of up to 2,000,000 working capital units (the "WC Units") of the Company at a price of $0.25 per WC Unit for up to $500,000 to provide the Company with working capital.

Each WC Unit consists of one (1) common share of the Company priced at $0.25 per common share and one-half (0.5) of a common share purchase warrant. Each full warrant (a "WC Warrant") entitles the holder to acquire one (1) common share until eighteen (18) months from the closing of the Offering at a price of $0.30.

Eligible finders will be entitled to receive a fee of 7% cash and compensation options ("Compensation Options") equal to 7% of the number of WC Units sold under the Offering. Each Compensation Option entitles the holder to acquire a common share at $0.25 for eighteen (18) months from closing.

● Participation is for Accredited Investors only.

● Both Paul and Trevor will be participating.

● Size will be limited given the offering amount.

If you wish to participate please send a confirmation email, along with your requested amount to:

Trevor@smallcapdiscoveries.com and please CC: paul@smallcapdiscoveries.

Current structure:

Issued and Outstanding: 31.15 million

Options: 1.45 million

Fully Diluted: 32.6 million

Debt: $273K

Pre-money Market Cap: $7.79 million

Financial Trends:

Trevor and I are off to Calgary for a quick trip to visit Simply Solventless (HASH.V) and Zedcor (ZDC.V) this week. We’ll report back with anything noteworthy.

To your wealth,

Paul and Trevor

Buys and Sells This Week