Smallcap Discoveries: Weekly Update: April 29

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Subject: Smallcap Discoveries: Weekly Update: April 29 - May 3

Weekly Update: April 29 - May 3

Market Commentary

Markets

They say they never ring a bell at the top or at the bottom of markets but, this week, I think we heard some ringing. Markets have been hypersensitive to US economic data and surprised by the ongoing strength in the data and particularly US jobs data. Well, this week something snapped. US job data came in significantly weaker than expected suggesting that US economic strength may be waning and with that investors bid US treasury yields lower. This was enough to put a strong bid under the equity markets and the major North American indexes rallied into the weekend.

The DOW was higher on the week by 1.1% while Nasdaq finished up 1.4% and the TSX had a small loss of 0.1%.

Financials

The US economy created 175k jobs in April vs the expected 240k and wages rose less than expected. This sent bond yields lower and now investors are back to expecting a Fed rate drop before the end of the year.

And with a greater chance of US rates coming lower, so too do many other countries now see an easier path to lowering their rates, Canada being a perfect example. The Canada 5-year bond yield saw one of largest daily drops in months clearing an easier path for the Bank of Canada to begin lowering interest rates.

In my opinion it’s now almost a certainty that the Bank of Canada will lower the prime rate at their next meeting in June.

Commodities

Oil took a significant drop this past week. A shrinking geopolitical risk premium, bearish weekly inventory data in the US along with weaker US job data dropped the price of WTI oil back below $80 closing the week just above $78 per barrel.

Natural Gas on the other hand has been heating up and closed at its highest price in the past 3 months.

Gold had its second losing week managing to finish the week at $2300 per ounce.

Copper settled in a bit after a near parabolic move higher over the past few months.

Commodities likely remain volatile as investors reassess global interest rate direction.

Stocks

I can’t help but think that this week’s weaker than expected US jobs data drove a tectonic shift in equity investor sentiment. The tone of the market has changed. The prior 3-4 weeks saw the market convulse as it tried to find a reason to be bullish. Some big tech names struggled, and markets saw the first significant draw down since October. Investors were fearful for the first time in months.

It was a few weeks of uncertainty where I felt it made sense to play a bit of defence. It didn’t make sense to chase stocks and traders could lighten up on some of the parabolic movers we’ve seen over the past few months.

This week’s shift in interest rate sentiment gives me the courage to play a bit more offence. I’m prepared to be a bit more aggressive on a few of my favourite names. I think the environment for our favourite types of companies is very good. There is lots of capital on the sidelines. Many microcaps are still historically cheap and now interest rates seem poised to move down again. There was a recognizable stronger tone to a number of our watch list stocks by the end of the week. I expect this to continue.

Notable 52-week highs this week include Tornado Global Hydrovacs (TGH.V), Zedcor Inc (ZDC.V), Dynacor Group (DNG.T), Grown Rogue (GRIN.C), Simply Solventless (HASH.V) and BQE Water (BQE.V).

Other Stuff

If I’m right about the direction of interest rates and the Canadian dollar I think we have seen the bottom in several sectors, the obvious one for me is the Canadian construction sector. It’s highly sensitive to interest rates and with a growing and pent up demand any change in sentiment or bullish outlook for interest rates could and should unlock a massive growth in housing starts and with a drop in the Canadian dollar any company that can service the US market could see even more upside taking advantage of lower Canadian dollar expenses and higher US dollar revenues.

The other sector that got some attention this week was cannabis. Many cannabis related stocks jumped on news that the U.S. Drug Enforcement Administration has proposed reclassifying marijuana from a Schedule 1 controlled substance to a Schedule 3, which would recognize medical uses of cannabis, saying it has less potential for abuse than some other drugs.

I like the sector because it’s been beaten up and so hated that a few outperformers have popped up, with few people taking proper note of them, giving us an opportunity to pick and choose fundamentally sound companies at reasonable valuations. These valuations are a far cry from where they were a few years ago.

Bernard Baruch famously said to “buy when there is blood in the streets” but as I’ve stated in the past, I prefer to “buy when there is no one in the streets.” When it comes to the cannabis sector there might not be blood in the streets, but these streets certainly are not very crowded either.

To your wealth,

Paul and Trevor

Buys and Sells This Week