Markets Markets ended the week and the month on a positive tone. The DOW finished the week down ever so slightly -0.1%, while Nasdaq gained 0.06% and the TSX was higher by 0.06% | | A resilient US economy and excitement around artificial intelligence is giving equity investors confidence ride the bull into March. What’s the old saying “March comes in like a bull and out like a lamb? We’ll see if that’s the way it works out.
The strong pop in gold prices on Friday and the upward trend in oil prices brough a few extra buyers out on the Canadian markets and the TSX had one of it’s better days in quite some time punching its way to new 52-week highs. | | Financials US inflation data (PCE) came in exactly as expected and this allowed US treasury to stay flat on the news but by week’s end we saw a downward push to yields with the US 10-year closing at its lowest in almost 3 weeks. | | In Canada we saw the 5-year bond yield trade back below 3.5% for the first time in almost a month as Canadian yields continue to weaken faster than their US counterparts. | | And that is having the expected effect on the Canadian dollar – US dollar exchange rate with the CAD $ dropping to its lowest level in almost 3 months vs the US $. | | Commodities Continued tensions in the Middle East may be outweighing softening global economic data. WTI oil was briefly back above $80 for the first time in almost 4 months. | | Gold Gold was one of the big movers this past week with almost all the price gains coming in a surprisingly strong move on Friday. Gold is testing the US$2100 level and has gold bulls excited again that we may finally break out to all time highs vs the US greenback. | | Stocks So far, so good. Major North American equity markets have done fairly well so far this leap year. The DOW is higher by 3.71%, Nasdaq has climbed 8.78% and the TSX is up 3.26%. Even the lowly TSXV, where most Canadian microcaps reside, was higher by 3.22%.
Investors continue to be fearless when it comes to equities, especially the big tech stocks…. | | As for me, I went on a bit of a spending spree this past week. We launched our first “Cheapies With a Chance” list of 2024 and I was a buyer of two names from the list, Ztest Electronics (ZTE.C), Canaf Investments (CAF.V) and one other name, Aurora Solar (ACU.V), that likely would have made the list if it had posted it’s financials the day before we finished the list rather than the day after.
The Cheapies list has had a spectacular track record since I began it over 10 years ago. Past names include XpelTechnologies (XPEL) up 30,758% (yes, you read that right), Hamilton Thorne (HTL.T) up 1230%, Biosyent up 966% and IBEX (IBT.V) up 1261%. More recent names like California Nanotech (CNO.V) up 362%, Nova Cannabis (NOVC.T) up 210% and Fab-Form (FBF.V) up 358% have been outstanding performers. | | It's always interesting to see what we can find. This year we selected only 8 companies, a few less than the usual 10-11 we’ve done in the past. Hopefully something for everyone with a variety of types of companies and industries.
Some companies from the recent list are repeat participants like, Ztest (ZTE.V), Spectra Products (SSA.V), Current Water (WATR.V) and Reklaim (MYID.V). It’s not unusual to see some companies keep making the list, many companies keep performing well and get recognized years later and grow out of the cheapies category.
This year, the names that stood out for men were Ztest Electronics (ZTE.V) and Canaf Investments (CAF.V). Coincidentally both companies released earnings reports last week and both reinforced their inclusion in this year’s list.
Ztest Electronics, through its wholly owned subsidiary, Permatech Electronics Corp., offers electronic manufacturing services (EMS) to a wide range of customers. Permatech'soffering includes material management and printed circuit board (PCB) assembly and testing services. Permatech operates from a 20,000-square-foot, ISO 9001:2015 certified facility in North York, Ont., Canada. Permatech is a contract manufacturer of complex circuit boards, serving customers in the medical, power, computer, telecommunications, wireless, industrial, trucking, wearables and consumer electronics markets. It specializes in servicing customers that are looking for high yield and require high quality and rapid turnaround on low-volume and mid-volume production of high-complexity products.
Ztest saw its revenues rise by 115% in Q2 over the same period last year. Net earnings came in at $504,329 for the quarter versus a loss of $112,126 last year. Outstanding for a company whose market cap was a lowly $3.0 million at the time of the report. The stock closed the week at $0.19 up 100% on the week. With the stock at $0.19 and a market cap of $5.9 million the company is trading at an annualized Q2 PE of only 2.93 times. If the company can maintain this level of revenues and earnings, and the MD&A seems to insinuate it will, the stock appears criminally undervalued at this price. | | The other company that made our list that I was buying was Canaf Investments (CAF.V). Canaf owns 100 per cent of Quantum Screening and Crushing Pty. Ltd., a South African company that owns 70 per cent of Southern Coal Pty. Ltd., a company that produces a high-carbon, devolatized (calcined) anthracite. Canaf also owns 100 per cent of Canaf Investments Pty. Ltd., a South African company that owns 100 per cent of Canaf Estate Holdings Pty. Ltd., a real estate investment company focused on suburban property in Johannesburg.
Canaf is another stock that looks extremely cheap. Now I’m not usually a big fan of mining companies but this one has a bit more service component rather than pure mining company. I’m also intrigued by what they are doing with their excess capital and profits. Their MD&A states that they will be adding to their real estate holdings as well as adding capacity to their core coal business.
Canaf reported their year end financials, and they were pretty impressive. Revenues for the year were up 46% and net income grew to $2,936,682 from $1,390,239 in the prior year, an increase of 111%. With an enterprise value of only $6.6 million, at $0.25 per share the company trades at an EV/TTM earnings of only 2.28 times. This stock looks dirt cheap to me. | | The third company that I was buying this past week was Aurora Solar, (ACU.V). Now for some of you SCD members that have been with us a while will remember Aurora from back in February 2020 when the company first appeared on our Cheapies with a Chance list at $0.13. We also made it a SCD pick and even participated in a private placement at $0.10. Within a very short period of time the company’s shares began to climb and rocketed to as high as $0.85. Around that time we suggested selling the stock and a number of us had some very outstanding returns. | | The pandemic, however, was not very kind to the business. You see, Aurora sells testing and monitoring systems for the solar panel market and this industry is dominated by Chinese manufacturers, and when Covid hit, travel to China ground to a halt. Ongoing delays crushed the business and the stock fell to as low as $0.015.
The company was on its heels and needed a change. Aurora changed management and pivoted their business by buying an Australian based company BTY Imaging Pty. BT Imaging is a global leader in photoluminescence measurement products for solar wafer, cell and module quality control. The company acquired BT Imaging to enhance its smart factory solutions and machine vision capabilities, capitalizing on emerging trends in materials, automation and process control. BT Imaging is a wholly owned subsidiary of Aurora Solar.
The company did an almost complete revamp of the management team and board of directors. The company became a turn around. And with the new managers and board investors were waiting to see signs of improvement and this past week the company announced pretty impressive results. Revenues in their latest quarter rose 26% but earnings went from a comprehensive loss of $299,620 to comprehensive net income of $636,937. Not bad for a company with a market cap of only $5.6 million at the time of the quarterly release. The stock closed on Friday at $0.055 for a pretty nice percentage gain for the week. | | We managed to catch the new CEO Kevin Dodd between flights and we think there is reason to keep a close eye on the company for further progress. Q3, their next reporting period is a seasonally slow one so we shouldn’t expect similar numbers to Q2 but business does seem to be trending in the right direction so we will continue to follow this one very closely and hope to have Kevin on a future SCD interview soon.
As far as other names of note, once again there was no shortage of watchlist and portfolio companies hitting the new 52 week high list. Once again familiar symbols such as DRX.T, NOVC.T, VHI.T, AEP.V, PNG.V, and E.T hit new highs. Interesting to note that Enterprise Group, (E.T) announced that a $5 million “bought deal” financing and additional $2 million private placement, for a total of $7 million, indicating that investors and likely some institutional investors are coming down market to play in the sub $50 million space. E.T had a $45 million market cap at the time of financing announcement. E.T has climbed over 150% in the past 12 months and was still able to garner institutional interest. | | With the continued climb in these small caps, many hitting new all time highs, and another financing of a small company like Enterprise Group, it all bodes well for microcaps in general…..the bigger boys continue to move down market and want to play in our sandbox. Bring it on!
To your wealth, Paul and Trevor |
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