Smallcap Discoveries: Weekly Update: August 1

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

August 1 - 5

Market Commentary

Markets

We are at that stage in equity investing where bad economic news is good news and good economic news is bad news for equities. This past week we had good economic news. Friday’s US July jobs report was smoking hot, non-farm payroll came in at 528,000 more than double the expected 250,000. Equity markets opened weaker as these numbers increase the chance of further Fed tightening however investors shrugged it off and markets rallied. The DOW and TSX both ended the day in the black while Nasdaq rallied but still finished down by 63 points by day’s end. Buoyed by surprisingly strong earnings and the relief of an uneventful landing in Taiwan by Nancy Pelosi, markets held up well. Nasdaq had an impressive week ending higher by 2.2%. The DOW was down by 0.1% and the TSX was lower by 0.3%.

Energy

Energy had another rough week. WTI oil traded at its lowest level since the start of the Ukraine conflict and closed at levels last seen in February.

Natural gas was mostly flat for the week while gasoline traded lower, and it too is now trading lower than the levels we saw at the start of the Ukraine conflict. I’m sure it’s a chart that the Fed is happy to see heading lower. Gasoline is now down 34% from its June highs.

According to the Baker Hughes rig count data we saw a drop of 4 land rigs in North America. The first weekly drop in many months. We’ve seen more earnings reports this past week from energy service companies and most of them have been coming in quite strong with significant jumps in overall revenues.

Commodities

Gold couldn’t hold the $1800 level after flirting above that level for part of the week.

A stronger US dollar on the back of the US jobs report was able to hold most commodities in check.

Most of the food commodities were flat to lower. Lumber dropped to near year lows after the US commerce department slashed softwood lumber tariffs that were imposed on softwood lumber imports from Canada

Stocks

We continue to see good strength in the life science sector. Once again life science stocks dominated the new 52-week highs on Nasdaq. Of the 158 new, daily 52-week highs, 50 were healthcare/life science, 37 were in technology and 25 were industrial companies.

The life science sector saw several acquisitions and partnerships that lifted the XBI etf into a new, higher trading range.

Amgen (AMGN) announced that they were going to acquire ChemoCentryx (CCXI) for $3.7 billion.

Gilead (GILD) announced their buyout of private company MiroBio, a company with an antibody discovery platform and drug pipeline with one drug that just entered phase one studies (sounds a bit like another company we know). MiroBio is being purchased for US$405 million. And on Friday word got out that Pfizer (PFE) was interested in buying Global Blood Therapeutics (GBT) for US$5 billion. The news shot shares of GBT higher by 115% before settling the week up 95%.

There were also several “biobuck” deals that got some stocks moving. Roche signed two deals worth $190 million in upfront payments. One with Poseida Therapeutics (PSTX)

and the other with Kiniksa Pharmaceuticals (KNSA).

Both deals could result in billions of dollars of additional milestone and royalty payments from Roche.

AbbVie (ABBV) and Rigel Pharma (RIGL) both did deals of their own. Abbvie is handing over $40 million to private company Sosei Heptares and committing up to $1.2 billion in milestone payments while Rigel Pharmaceuticals is writing a cheque to Forma Therapeutics (FMTX) for $2 million up front and possible milestone payments of $215.5 million.

It’s clear that big and little pharma have their chequebooks out and are ready to play and investors are taking notice.

Ok, Let’s Make it Interesting…..

In preparation for my interview by ValueHive’s Brandon Beylo, I decided to re-read “How to Make Money in Stocks” by William J. 0’Neil. I can tell you this book changed my financial life. I’ve read many books on finance and investing that have influenced my investing strategy and there are a number of very good ones that I can recommend but this is the one I always recommend first to anyone seriously interested in investing, especially in investing in microcaps.

You’ve seen how I have been writing about stocks hitting 52-week highs and the importance of sector strength. It’s from this book, and the “CANSLIM” method of stock selection, that I’ve learned how to find companies that can have extreme upside and multi bagger potential. Over the next few weeks, I’ll highlight different parts of the strategy that can help us pinpoint which companies could be the next major movers and leaders of the next bull market.

My goal over the next few weeks is to highlight some of the key criteria for this strategy, why I believe these criteria work and ultimately to highlight one new stock every week that meets most of the criteria. These will be stocks that we will not have the time to do deep due diligence on but will check off a lot of the important boxes to showcase how this “simple” strategy works, or….. doesn’t work.

Each week one new stocks will be selected using the following criteria:

25% or higher quarterly revenue growth per share
25% or higher quarterly earnings growth per share
Recently having reached a new 52 week high in share price
A member of one of the top three leading sectors on Nasdaq (ie, life sciences, technology, industrial etc)
No, or low institutional ownership

That’s it. Each week we’ll highlight a new company that we feel best meets these criteria. We’ll post the week’s closing price and a few details about what the company does, some simple revenue and earnings data and then we’ll keep track of the results. Let’s see how we do.

This week’s pick is:

Sensus Healthcare (SRTS-Q)

Closing price: $14.55

Sensus Healthcare, Inc. is a medical device company specializing in highly effective, non-invasive, minimally-invasive, and cost-effective treatments for both oncological and non-oncological conditions.

Sensus offers its proprietary low energy Photon Radiotherapy known as superficial radiation therapy (SRT), which is the culmination of more than a decade of research and development, to treat non-melanoma skin cancers and keloids with its SRT-100™, SRT-100+™ and SRT-100 Vision™ systems. With its portfolio of innovative medical device products, Sensus provides revolutionary treatment options to enhance the quality of life of patients around the world.