Markets Despite some big names like Tesla and Intel reporting disappointing quarterly reports, indexes managed to finish the week on the upside. The US economy continues to show surprising strength with US GDP growing at 3.3% in the fourth quarter above the 2% forecast and with inflation subsiding, it’s becoming more likely that the US Fed has orchestrated a soft landing for the economy there. The Dow Jones index finished the week up 0.6%, Nasdaq was higher by 0.9% and the TSX finished up 1.0%. |
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The rise in the major indexes corresponds almost exactly to the topping out of interest rates. We’ve seen a very sharp increase since the October lows. Interest rates seemed to have peaked and now the question becomes when and how will the Fed and Bank of Canada change their interest rate policies. |
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The move higher in equities has pushed the Fear and Greed index back up into Extreme Greed territory. It’s been amazing how long the markets have been able to sustain this level of bullishness without any meaningful pullbacks. Still, I’m living by the adage “be fearful when others are greedy and greedy when others are fearful”. |
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Financials Stronger than expected US GDP data was enough to keep treasury yields steady. The slight uptick in yields of the past few weeks feel more like profit taking after a sizable move up in bond prices. My sense is that we still are in a longer term downtrend and expect yields to resume their moves lower relatively soon. |
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The Canada 5-year bond yield has bounced and stayed above the 3.5% level. Here too it feels like profit taking after the big move lower in yields. This latest bump higher drove some corresponding mortgage rates up a bit this past week. |
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Commodities Finally some bullish action that should satisfy some of the suffering oil bulls. WTI oil reached its highest level in almost 2 months. WTI is back above the $77 level and has broken out of the $70-$75 range that it seemed stuck in. Stronger than expected US GDP data as well as ongoing hostilities in the Middle East and important shipping lanes likely was the reason for the more bullish tone in energy. |
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Baker Hughes drill rig report showed an increase of 1 rig in the US and 7 more active rigs in Canada.
Gold has been somewhat lethargic this past week with prices closing the week at $2018. Gold traders are likely looking for better evidence of a change in Fed funds policy before deciding the direction of the shiny metal. |
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I’m hearing lots of chatter about copper lately. For a number of years now I’ve heard people talk of the upcoming shortage of the metal and how prices are likely to skyrocket. Most of this talk seems to be coming from those with a big vested interest in copper but it’s not unlikely that we will see a strengthening of prices over time but as for right now copper is still a barometer on global economic activity and right now it’s not looking too scarce. Copper for the week was higher but it seems to be firmly in the middle of the past year’s trading range. |
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Stocks We had another week of strong action in our sector of the investment landscape. Growing and profitable Canadian smallcaps, microcaps and nanocaps continue to perform well and we are seeing a growing list of these companies hitting new 52 week highs.
This week we saw Kraken Robotics (PNG.V), VitalHub (VHI.T), Enterprise Group (E.T), Nova Cannabis (NOVC.T), ADF Group (DRX.T), Foraco (FAR.T), Hammond Manufacturing (HMM.a.T), California Nano (CNO.V), Biorem (BRM.V), Grown Rogue (GRIN.C), Decisive Dividend (DE.V) and even Namesilo Technologies (URL.C).
Capital continues to enter the sector and I expect it to continue.
We are seeing other signs of capital coming down market. One way is through buyouts and this past week we had the announcement that MediaValet will be acquired for $1.71 per share or roughly $80 million. It’s likely that a good portion of that capital will flow back into the market once investors get their checks. |
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And while still a bit larger cap than we usually pursue, Kneat.com (KSI.T) managed to do a bought deal financing, the bulk of which will be coming from institutional investors. This roughly $250 million market cap company (at the time of the financing announcement) managed not only to attract a $15 million financing through Cormark Securities but the interest was such that they upsized the offering to $17.39 million. This is telling for a few reasons. First, there is financing interest in a smaller company, second a bought deal financing indicates extremely strong confidence by the underwriter that the minimum of $15 million will be committed, thirdly, this was done at barely any discount to market and without warrants and lastly, the stock actually rallied on the news! |
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We expect we will see more financings like this and we expect more interest will show up in smaller and smaller companies.
The fact that we are seeing a growing list of microcaps and nanocaps hitting new 52 week highs as I showed above is another indication that capital is coming off the sidelines and or coming down market. Remember, liquidity attracts liquidity and as a number of these smaller stocks become bigger and more liquid bigger pools of capital and institutional money become able to buy and hold more of these names.
This week we launched coverage on a new company, Biorem Inc. Biorem is a leading clean technology company that designs, manufactures and distributes a comprehensive line of high-efficiency air emissions control systems used to eliminate odors, volatile organic compounds (VOCs), and hazardous air pollutants (HAPs). |
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Not exactly a new name, the company has been a perennial “cheapie with a chance” and we’ve interviewed management in the past. Much like Thermal Energy we’ve been watching Biorem to see if the recent struggles could be overcome and if the business could recover its growth trends from past years. With their recent return to quarterly profitability and their large and growing backlog we felt they had reached an inflection point and now was the time to pounce.
Much like Thermal Energy there is a high degree of future revenue visibility with the large backlog of $54.5 million and about $75 million in outstanding bids, of which traditionally the company typically closes at a rate of around 35%.
The stock responded strongly to our report and finished the week up 34.5%. We feel the stock still represents very strong upside and look forward to following the company and its progress. To that we have scheduled a zoom call interview with management for thai coming Thursday.
I managed to talk to someone very familiar with DIRTT Environmental Solutions (DRT.T). You’ll recall this is the company I mentioned a few weeks ago that I felt presented an interesting opportunity in their convertible bonds. According to the company “DIRTT is a leader in industrialized construction. DIRTT's system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments.”
What I learned from my contact is the company has a loan agreement which expires on February 7 2024. This agreement stipulates that DIRTT cannot pay down any subordinated debt during the loan agreement. What I therefore expect is that once this agreement expires the company is free to begin buying back these outstanding debentures and, if so, we could see a quick rise in the price of these instruments. It’s also comforting to know that the large shareholders who took the lion’s share of the rights offering are also significant owners of the bonds. It’s clearly in their best interest to see a big debt paydown and a better price on the bonds. |
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Thermal Energy reported Q3 results this past week. Revenues continue to climb at a rapid pace. Q3 revenues increased 71% over the same period last year to $7.1 million. Net income was $486,000 compared with a loss of $266,000 in the same quarter last year and would have been even higher but the company is reinvesting profits back into the business “During the quarter, we hired additional engineers and sales staff and continued the digitalization and automation of key business processes.” This reinvestment should help the company continue to grow at a significant rate into the future.
Other highlights included order intake of $12.8-million for the quarter and $22.2-million for fiscal 2024 year to date (as at Jan. 23, 2024) and order backlog of $17.5-million as at Nov. 30, 2023, and $23.6-million as at Jan. 23, 2024.
The stock was mostly flat on the news and closed the week at $0.275 and is now up 120% since our initiation report last September. We continue to like this opportunity and will likely add on any weakness from here. |
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And here is something that might raise some eyebrows. Canada (74%), followed by Australia (67%) have the highest percentage of unprofitable companies in the world, while Japan has the lowest (14.8%). Those that have spent many years in the Canadian public markets may not find this too surprising. Both these countries have a very large amount or speculative mineral exploration companies that very rarely make money but with that comes a lot of speculator investors that don’t fear owning and betting on other speculative ventures. |
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