Smallcap Discoveries: Weekly Update: August 28

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Subject: Smallcap Discoveries: Weekly Update: August 28 - September 1

August 28 - September 1

Market Commentary

Market

Happy Labor Day long weekend for many of you!

North American equity markets on both sides of the border were bolstered this week by weaker than expected economic data which allowed treasury and bond yields to ease and gave traders confidence that the US Fed and Bank of Canada will soon end their monetary tightening cycle. The DOW ended the week higher by 1.4% while Nasdaq climbed 3.2% and the TSX, helped by stronger energy prices, jumped by 3.6%. All eyes will be on the Fed and Bank of Canada to see where interest rates go in the coming months.

Financials

Weaker than expected job data in the US helped drive treasury yields lower with the 2 year treasury yield back below 5%.

In Canada it was GDP numbers that surprised to the downside showing that the country’s economy actually contracted at an annual rate of 0.2% in the second quarter. It’s clear that the Bank of Canada’s tightening monetary stance has started to bite and consumer and business spending is slowing. The Canada 5 year bond yield fell well below the 4% level and with that we can expect fixed mortgage rates to hold steady if not see a bit of decline.

The Canadian dollar was impacted by the softening economic conditions and softer bond yields. The Loonie had one of its sharpest drops in recent memory of Friday off almost half a cent on the day.

Commodities

Oil bulls are back in control. WTI oil gained over 7% on the week and closed above $85 per barrel for the first time in over 8 months. Bullish inventory data is outweighing weaker economic data and that along with the US slowly refilling its strategic petroleum reserves we get buyers back in the market and fresh concerns amongst some that we may be testing higher levels and with that, higher inflationary pressures. These higher prices are obviously helping Canadian oil producers, and many saw their stock prices rally nicely over then past few weeks helping the TSX close in on its 52 week highs.

If we see sustained higher oil prices we should start to see drilling activity pick up in North America however, that has yet to happen. According to Baker Hughes we saw another drop in rig activity this past week with one less in the US and three less rigs active in Canada in the past week.

Stocks

Markets tend to be quiet going into the last few weeks of summer however volumes and activity picked up this week and we even saw some activity spill into microcap land. We are starting to some slight volume increase and even some institutional activity down market. This is usually a sign that confidence is increasing. We’ll see what September and October bring as these months tend to be some of the most volatile months of the year.

We saw some nice action in one of our long time “Cheapies With a Chance” list stocks, AirIQ (IQ.V). The stock reached a new 2.5 year high and has gained 33% in the past 7 trading days since announcing Q1 results.

Zedcor (ZDC.V) is another stock that has managed to gain strength over the past few weeks and closed Friday at its 52 week high.

Another stock with upside momentum lately is Cipher Pharmaceuticals (CPH.T). Shares in this profitable biotech briefly broke above its 52 week and 5-year highs.

And shares in cannabis provider Grown Rogue (GRIN.V) hit new highs (pun intended) this week on news of the U.S. Department of Health and Human Services’ proposal to reclassify cannabis as a lower-risk substance boosting expectations of legalization at the federal level. Shares of GRIN.V closed the week up 17%.

To the downside this past week we saw Inventronics (IVX.V) drop sharply lower on disappointing Q2 results and lowering of expected future business activity. The company stated: “The surge in revenue and profitability of 2022 was the result of customers building up inventories in response to supply chain challenges at that time. Those challenges have subsided, and the pace of installations has moderated to align with the availability of installation crews. These factors have combined to reduce the 2023 revenue and profitability, which is likely to persist through the latter half of 2023 as threats of recession continue to be discussed.”

IVX.V closed on Friday at $2.15 resulting in a trailing 12-month PE of 5.4 and an annualized Q1 PE of 8 times.

The other company that announced disappointing results this past week was Ceapro Inc (CZO.V). The company announced another sharp drop in revenues (down 66%) and a loss of $1.15 million in the quarter. The company reported a cash balance of just over $11.3 million at quarter end. CEO Gilles Gagnon stated: "Despite a slower start to the year, our business remains solid, and we expect the reordering pattern from one major customer to resume shortly. Given our healthy balance sheet and the re-affirmed vote of confidence from our longtime partner Symrise, we will continue to leverage on our base business to enable the development of new products and technologies like the planned Phase 1-2a clinical trial with avenanthramides, the scale-up of the PGX Technology for the development of YBG as an immune modulator and the commercial scale-up of a malting technology to enable the production and selling of enriched oat flour with high concentration of avenanthramides to serve important nutraceutical market segments. The Company expects to complete these projects using cash on hand in 2023 while continuing to assess different, strategic market initiatives to unlock value.”

Thankfully August’s heavy earning reporting season is over. My frustration level was at a new 52 week high dealing with the new Sedar reporting system. That said, we did find enough interesting “Cheapies” over the past few weeks that we now have enough to get a new list put together. Give us a bit more time as we gather all our notes and deal with this week’s Planet Microcap Conference. We’ll get this new list out as soon as we can.

Other Stuff

I read a great little article this week from our friend David Barr, the CEO over at PenderFund Capital Management. The article titled: “The upside of pessimism and why investors should give small caps a look” pointed out reasons why “Negative perceptions of a stock can work in your favour if you know what you are buying”. To read the article just click here:

https://financialpost.com/investing/why-investors-should-give-small-caps-look

It reiterated many of the things I’ve said in the past. Investors need to view negativity and bearish sentiment as good things when it comes to opening up opportunities. It’s the old adage be greedy when other are fearful and be fearful when others are greedy. The negative sentiment that has overhung the microcap market over the last 2 years has allowed many savvy investors to step into some great opportunities, several of which we’ve been fortunate to find.

“Buy not on optimism, but on arithmetic.” So said Benjamin Graham, father of value investing and author of The Intelligent Investor, a perennial bestseller.

Microcaps continue to trade at near historic discounts to their larger cap brethren something that happens much less often than most people know. This situation is not the norm. Historically, the typically faster growing microcaps traded at premiums to the slower growing large caps and investors who understood this had outsized gains to prove it. One just needs to read “What Work on Wall Street” to see the proof.

The pessimism surrounding microcaps won’t persist for ever. Arithmetic will come to the rescue once again. No one knows exactly when but as long as we protect our downside by buying good, profitable and growing businesses at great values, we should be comfortable waiting. Let others be pessimistic and let’s take advantage where we can.

For those of you in and around Vancouver this week, a reminder that both Trevor and I will be at the Planet Microcap Conference on September 6-7 at the Fairmont Pacific Rim Hotel. Lots of companies to see and a great opportunity to network. We’d love to see you there. If you’re interested, you can register at:

https://planetmicrocapshowcase.com/page-2381

This Week I’m Still Reading: Meditations – Marcus Aurelius – Marcus Aurelius writings have become a key text in the understanding of Roman Stoic philosophy. Because I can use any extra stoicism I can get, lol.

To your wealth,

Paul and Trevor

Buys and Sells This Week