Markets The recession that most investors have been calling for has been postponed….again. US GDP data this past week was better than expected and that along with inflation data (PCE) coming in as expected was enough for the equity markets to have a solid showing for the week. A deceleration in the US Fed’s preferred inflation metric along with slowing consumer spending and wage growth, has investors expecting a smaller rate hike of 25 basis points at their meeting this coming Wednesday.
The DOW was higher by 1.8%, the TSX was higher by 1.0% but Nasdaq spiked by 4.3%. It’s the highest level Nasdaq has reached in over 4 months. This past week the markets were being led by the Communication Service, Consumer Cyclicals and Tech sectors. |
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Equities have seen a significant rally from the start of the year but are they getting a little ahead of themselves. It’s possible, and looking a bit more likely, that the US Fed may be able to pull off a soft landing of the economy. If so, those investors that are betting on a deep recession will be considerably offside and will have to adjust. The Bank of Canada raised interest rates by 25 basis points last week and have indicated that they will pause further rate hikes as they keep an eye on economic data. This Wednesday it will be the US Fed’s turn to adjust rates. We’ll need to see what they say. Expect markets to take a wait and see approach until Wednesday’s meeting.
Energy WTI oil had a calm week price wise moving slightly lower and closing a tad below $80 at $79.68. A missile strike into Iran over the weekend likely moves oil higher until more details are made available. |
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North American natural gas futures prices continue to move lower reaching new lows. Higher than normal supplies continue to weigh on prices. |
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Energy services stocks continue to show strength. The sector ETF (XES) once again reached new multi year highs. |
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Baker Hughes rig count data shows an addition of 6 rigs in action while the number was unchanged in the US.
Commodities The downward trend in the US dollar continued this week, however the effect on precious metals was subdued. |
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Precious metals did reach a new multi month high but closed the week mostly unchanged. |
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Copper was mostly unchanged on the week. |
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While precious metals and copper had a somewhat boring week it was a different story for steel and lumber. The steel index is near 10+ year highs. The index is up 17.5% since the start of the year and up 52% since September 2022 lows. |
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And the other strong commodity of late has been lumber. Lumber is up 37.5% from its lows of just 3 weeks ago. Stronger than expecting North American housing data along with a number of mills shutting down operations has boosted the outlook for lumber. It still has a long way to go to climb back to the record prices it reached during the spring of 2021. |
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Stocks Growth stocks are back in vogue – likely indicating a belief that rates will fall and things will be back to the way they were. We’ve been seeing strong bounces in some of the popular growth stocks of the past bull market. |
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Tesla (TSLA) for example is up 75% from the lows it reached less than 3 weeks ago. Even after that kind of move the stock is still down 54% from its April high and 57% from its all time high. Tesla shares would have to climb another 133% to get back to its old highs. |
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So while the Twittersphere seems to be consumed by every move in TSLA stock astute investors are looking elsewhere to find growth and their finding it in the not so sexy, and uncrowded, places. |
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Reviewing the list of new 52-week highs we continue to see new names mostly from the industries we’ve been noticing for some time. Continued strength in “blue collar” manufacturing as we’ve highlighted since early last year. And something else I’ve noticed recently is that there have been more NYSE stocks hitting 52-week highs than Nasdaq. This is interesting because there are just 2400 listings on the NYSE vs 3300 listings on Nasdaq. Nasdaq new highs usually outnumber NYSE numbers. What that might be confirming is the past overpricing of Nasdaq (mostly tech, biotech) vs underpricing of international, industrial “blue collar” industries are reverting to the mean. Could it be a sign that value is outperforming growth? I think so.
In Canada I’m noticing something similar. The TSXV new highs are heavily weighted in junior mining, although many of these have short life spans, the few non mining new highs are “blue collar” industries. The TSX 52-week highs tend to also be mostly from these same industries. Think paper products (SXP.T) and machinery or chemicals (CHE.un.T) and automotive (ATS.T, MRE.T).
This past week’s new 52-week highs included a number of companies familiar to SCD. Atlas Engineered Products (AEP.V), Biorem (BRM.V), Hammond Manufacturing (HMM.A.T) and Kits Eyecare (KITS.T) all broke out to their highs for the year.
So many of these names still trade at valuation metrics far lower than shares of flashier, more popular companies that continue to garner headlines and investor attention. And so many of these smaller “boring” companies have yet to get the attention of the institutional crowd. But I think this is starting to change.
I know I’ve been sounding like a broken record for the past year that institutional money is still far up market. I’m seeing some signs that this big pool of capital is starting to look down here.
Supremex for example just received analyst coverage from Cormark Securities. Cormark is a strictly institutional shop meaning they cater to fund managers, large family offices and large sophisticated accounts. They don’t take in small retail clients.
6 months ago, SXP.T sported a $90 million market cap. At Friday’s close its market cap was $189 million. Not exactly a nanocap right now but I’m sure they didn’t start following it last week. Likely they’ve been following the company for months now. The PE has gone from around 3.9 times in August to the current 7.1 times today. Still cheap by many standards but look at the change in share price velocity over the past few months. What’s changed to cause that? I’d argue it’s institutional money coming down market. |
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I’m also seeing it when I talk to CEO’s. Fund managers and analysts are more actively reaching out and calling companies, kicking the tires, so to speak. I’ve seen it firsthand with Atlas as well. The number of enquiries has jumped significantly over the past month or so. Something has changed and while the interest level may be rising along with the price of some of these companies, we still have not seen the kind of capital moves that I’m expecting. While I’ve yet to really see capital come down market there are early signs of interest. Any meaningful amount of capital coming into the micro and nanocaps and we would see an explosive move higher. It could happen. I’m watching for an uptick in analyst coverage on smaller names, marketing road shows, bought deal financings and in the market “crosses” and big block trades. When this starts to happen expect to see many more charts like the Supremex chart above.
Other Stuff TSXV - Where has the volume gone? |
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Volumes are near record lows for the Canadian venture exchanges. Without any hot sectors, like cannabis, blockchain, precious metals or ESG the interest level amongst retail and institutional investors has all but disappeared. The good companies were being ignored as well but much like in 2013-2015 it was the great little companies like Xpel, Biosyent and Hamilton Thorne that presented opportunities and led us out.
We’ve seen a healthy move in overall markets since the start of the year and lots of our nanocaps have had a good move over the past few months, so much so that I think we are due for a healthy pause. Lots of stocks need a breather. That could come in 2 ways. We could see a nice pullback or we could see a sideways consolidation. Either way, I’m waiting on the sidelines right now trying to pick my spots. I’m very happy with my portfolio and the healthy starter positions I took in November and December but now I’m going to try and be patient and sit on some cash until I see a fat pitch come my way. The two names that are the top of my buy watch list right now are Ceapro (CZO.V) and Inventronics (IVX.V). Both are in my buy zone right now, but we might see a little more shake out if the overall markets get shaky which I kind of expect. No rush.
We had an interesting development this week with one of our old Cheapies with a Chance companies, Posabit (PBIT.C). We had a scheduled Zoom call for Thursday, and they cancelled at the last minute and we soon found out why. The company halted trading in its shares and subsequently announced an acquisition and the stock popped nicely once it came back to trade. Note to self, next time a company cancels last minute assume a possible game changing news release, lol. |
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To your wealth, Paul and Trevor |
