Mining service companies like Geodrill (GEO.T) and Foraco (FAR.T) should be well positioned for the next bull move in metal commodities.
Stocks
It felt like 2022 was a year when fundamentals started to matter again. Companies that generated real profits and cash flow were of interest again to investors. Growth at all costs without profits and with no regard to valuations was discarded like a pair of old soulless shoes.
Boring was beautiful.
Old school industrials were beautiful again. North American manufacturers trading at single digit PE ratios were sexy (at least to me, they were).
How many times did you hear us talk about double digit growers trading at single digit PE ratios?
While many of these types of companies did quite well, so many of them still trade at historically low valuations and continue to grow. I believe it’s because the majority of investors still have not come to grips with the sea change in the investing landscape. Higher interest rates for longer, on-shoring and many years of low re-investment and capital spending on manufacturing infrastructure doesn’t change industry over night and certainly, investor sentiment to it doesn’t change very quickly.
One of my major themes for 2023 and beyond will be the rebuilding of the North American manufacturing base that for the past 20 plus years has been decimated by globalization. If you could pick one location to locate a manufacturing facility today, where would that be? Consider the needs for cheap and reliable energy, a skilled and stable labor force, stable political environment, access to a safe supply of needed resources, stable currency, stable supply chain, and close and easy/cheap access to major demand?
We talk to many management teams, and it’s become obvious that securing stable supply of critical materials and components has become a major company directive. Security of supply, whether that be computer chips, energy, natural resources or even labor is a new mantra for both governments and businesses and as we advance more towards automation, secure supply of cheap labor is likely to become less important. Here’s an interesting video on this very subject https://www.youtube.com/watch?v=o6pCZFCywao
Valuations will matter again in 2023. It’s hard to imagine that valuations were ever important but with near free money for so long you can understand why investors didn’t need to see companies generate profit if these companies could just go and get capital at almost zero cost and raising money through equity raises was easy too because there was no competition from debt as everyone was looking for any kind of yield even if it was zero, lol.
Having cash on the balance sheet was considered a no-no. Cash was trash because it wasn’t being used to grow revenues or to acquire revenues. We have done a complete 180. Cash is king now because cash is hard to come by. Yes, investor cash might be on the sidelines, but investors are holding in tightly in their clenched fists, and they now have alternatives to no/low yielding equities. Cash in the bank actually offers a return now.
Capital light businesses, the holy grail for so many investors for the past decade plus are now being shunned due to high valuations and lack of immediate cash returns. Capital intensive businesses with an established footprint, which one would think is counter-intuitive in the current marketplace, are getting some love for a change. That’s because the replacement costs for these facilities now are sky-high. To build a new capital-intensive business would be very costly and time-consuming meaning that existing facilities should have increased demand for the near future and have pricing power while competitors scramble to increase supply capacity. It lends itself to an environment of buying existing operations vs building new. It’s another reason why we believe there will be an increase in mergers and acquisitions in a range of different manufacturing industries, especially in North America.
I think 2023 will be the year of the smaller company. Massive amounts of capital have gone into passive investing strategies that was just funneled into large liquid stocks because they were large and liquid. It will be easier for many of these big companies to grow through acquisitions of smaller, cheaper companies than it will be to build revenue organically for the reasons I stated in the last paragraph. Small companies are better positioned to be able to take advantage of changes in industry, pivot if necessary and many already dominate niches that are less effected by a slowing economy. Small companies that are self generating cash will also be in a position to take advantage of opportunities down market that may be too small for bigger companies. Maybe roll up niches or reinvest where new competitors can’t. And remember so many of these small companies have been ignored for so long that they are still cheap and have little competition because of the lack of investment into other small companies in their field.
And lastly, I think 2023 will be the year of the stock picker. The other major sea change I see coming is the move away from passive investing, index investing and large stocks. For the past 20+ years the move towards passive investing has been a major driver of returns and PE expansion in big stocks. Valuations in big stocks dwarfed valuations in small stocks. This has been a historic anomaly. Smaller, faster growing companies used to trade at premiums to their slower moving comps. I think we will see this reverse over time and get back to historic norms where smaller, faster growing companies trade at premiums to big stocks. It will be important to find companies that are not just momentum plays, like in the past, but have real fundamental reasons for investors to want to own them, not just fear of missing out (FOMO) or big capitals need for buying liquidity.
So, to summarize, I’ll continue to look for small, established and growing companies that operate in capital intensive industries with an established presence in North America and, in many ways, the more boring the business the better. Growth will be important and low valuations will be extremely important. Not only will cash be king, but CASH FLOW will be the king of kings!
It would not surprise me to see further downside on the major market indexes. If this continues to happen, I suspect we will see more mispricing in the micro-caps and nano-caps and potential for better buying opportunities as investors continue to flee to the sidelines and throw the babies out with the bath water. This would set us up for I would call GASP investing, growth at a stupid price. We saw plenty of that in 2022 and no reason to believe we won’t see more of it in 2023.
Other Stuff
I thought it would make sense to talk a bit about my largest holding and some of the stocks we spent a lot of time talking about this past year, a recap of some of the highlights and what I expect in 2023. We can cover more of them by request in our next few free-for-all's.
I’ll start with my largest holding, ImmunoPrecise Antibodies (IPA) (US$5.21) (-2.8%). 2022 was a somewhat uneventful year for the share price of the company but in my opinion, was a year of building for what should be a very pivotal year in 2023. In 2022 the company:
I expect we will see their Covid-19 polytope therapeutic enter clinical trials in the first quarter of 2023. This will establish the company as a clinical stage biotech and hopefully on success should lead towards a partnership to push this therapeutic forward to commercialization, where there are now no approved antibody therapeutics.
I’m also expecting more validation of the Biostrand AI offerings through both results from their Briacell partnership and announcements of new Biostrand partnerships with small and large pharma partners.
And lastly, I expect we will hear more news on the Talem pipeline of drug candidates with several possible biobuck opportunities in discussions.
At this time, I’m taking a wait and see approach. I’m personally well positioned and will wait for either a revenue inflection higher (not expected yet) or a major partnership announcement that gives me a better indication of future value. I view the stock as a hold at current levels.
