Smallcap Discoveries: Weekly Update: February 13

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Subject: Smallcap Discoveries: Weekly Update: February 13 - 17

February 13 -17

Market Commentary

Markets

This past week, US CPI for January came in slightly higher than estimates but was still lower than December. Equity markets shrugged off this data and traded baring changed for the week. The DOW was lower by just 0.1% while Nasdaq was higher by 0.6% and the TSX was lower by 0.5%.

The CPI data pushed bond yields higher as well as the US dollar. 1 year US treasury yields were back above 5% and the markets are pricing in more rate increases by the Fed. Inflation is coming down just not as fast as some were wanting to see.

Energy

It was another rough week for energy bulls. WTI oil closed the week at $76.76 down a few dollars from last Friday. WTI oil continues to try and find direction and is stuck in that $70 - $80 trading range.

Natural gas, on the other hand, has found its direction for many months and it continues to be to the downside. It would have been hard to believe in August when it was trading near $10, and with some calling for catastrophically higher prices, that within 6 months natural gas prices would be trading closer to $2. Natural gas prices are near 2.5 year lows.

I’ve turned more bearish the past few weeks on energy service companies even though the sector ETF’s were still testing new multi year highs. Late this past week however we seemed to have seen a sentiment shift and a number of energy service stocks saw a sizable drop late into the week. The sector ETF (XES) was down over 4% on Friday in one of it’s bigger drops in many weeks.

Baker Hughes drill rig data showed a drop of 3 drill rigs active at the end of the week. https://rigcount.bakerhughes.com/

Commodities

Slightly higher than expected US inflation data was bullish for the US dollar which put more pressure on some commodities. The US dollar index (DXY) was back above 104 for the first time in about 5 weeks.

Precious metals have been trading in the exact opposite direction of the US dollar with gold trading back down near $1850 an ounce.

Lumber has once again broken below $400 after spending the last month above $400 and as high as $535 at the beginning of February. It amazes me how volatile lumber continues to be.

Stocks

Stocks continue to feel a little ahead of themselves right now. Market leaders of late have been the popular names of the last bull market which continues to make me a little nervous. I feel we still need a healthy shake out before the market can properly move forward.

Microcap stocks that I’m closely watching are holding up fairly well although I’m still hopeful that we’ll get some better buying opportunities develop with any market shake out. I continue to stay patient.

A few familiar names made it onto the new 52-week high list this past week. Char Technologies (YES.V) had a very good week and now trades at $0.63 up 133% from a month ago.

Zedcor (ZDC.V), one of my current favorites also hit a new 52-week high this past week. I continue to hope for a pull back in share price to add to my position but it just isn’t happening.

We’ve interviewed H2O Innovations (HEO.T) a number of times. This week the water solution and wastewater treatment company reported Q2 numbers that impressed investors who sent their shares to a new 52-week highs.

And past Cheapies with a Chance list company AirIQ (IQ.V) reported decent Q4 numbers popping its stock higher. It’s encouraging to see that good financials in micro and nanocaps are being rewarded by investors again.

Other Stuff

I’m currently reading two great new books. One is called Global Outperformers by Dede Eyesan who kindly sent me the book last week. It’s the study of the top performing global listed companies that have each returned over 1000% in the past 10 years. Lots of interesting data points that I expect will help me refine my investing strategies.

The other book is called Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game - by Walker Deibel. Consider that one of the largest transfers of wealth in history is currently underway as trillions of dollars worth of existing businesses will be sold by baby boomers as they retire. Think of the opportunities that will be made available to entrepreneurs looking to buy instead of build from scratch. Data suggest there will be more wealth created by buying existing businesses than by new start ups. Much like profitable microcaps, the risk/reward opportunities and increased supply may change the way we look at investing in established businesses rather than riskier start ups. Serial acquirers of these types of businesses may be a big investment theme over the next decade.

I’ll put together a series of highlights from both books when I’m done.

To your wealth,

Paul and Trevor

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