Smallcap Discoveries: Weekly Update: January 8

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Subject: Smallcap Discoveries: Weekly Update: January 8 - 12

January 8 - 12

Market Commentary

Markets

Slightly higher than expected US CPI data wasn’t enough to stop major North American equity markets from finishing the week higher. The DOW was higher on the week by 0.3% while Nasdaq put on a better show by rising 3.1% and TSX squeaked out a 0.3% gain. The TSX briefly traded to a new 52 week high on slightly stronger energy prices and energy stocks.

With the US markets being closed on Monday we can expect quiet trading In Canada to start the week.

Financials

Mixed inflation data this past week had investors' heads spinning a little bit. US Consumer price index data for December came in slightly hotter than economists were expecting while later in the week US producer price index data came in weaker than expected. The result was some volatile trading in treasuries both in the US and in Canada.

While longer term treasuries like the 10 year bond yield dropped slightly there was a bigger move lower in the 2-year treasury with the yield dropping to new 8 month lows.

In Canada the drop in the 2-year yield was even more dramatic with the 2-year yield briefly dropping below 3.75%. This will continue to put pressure on mortgages and other lending rates.

The Canada 5-year yield was only slightly lower during the week.

Commodities

WTI oil has stayed relatively steady the past few weeks and this past week was no exception. Increasing Middle East tensions are being watched closely by oil traders but while oil was higher on the week it’s been held between $75 on the upside and $70 on the downside. Geopolitical tensions in one of the biggest oil producing regions continue to help maintain a bit of a floor for prices while weaker global economic data and increased US production weigh on prices.

Baker Hughes drill data shows that rig activity in the US was slightly lower with 2 less rigs active while in Canada 88 additional rigs were active on the week.

Gold was slightly firmer this week helped mostly by lower US treasury yields and flat to slightly weaker US dollar.

Stocks

Equity indexes have slowed their accent as investors digest a fairly strong past 2 months. I continue to expect a healthy pullback or at least a sideways trading pattern for the next few weeks or more.

Smaller stocks have put in a good run since November outperforming the bigger stocks and still appear to be the better value.

We continue to see an increase in volumes and prices for most of our favourite stocks although while volumes have been increasing they are still a far cry away from normal levels and still favour the buyer/owner.

A number of our stocks and watch list stocks continue to break to new 52 week highs. Thermal Energy (TMG.V) once again hit another new 52 week high and is now approaching its 15 year high of $0.28 last reached in 2021. TMG.V closed the week at $0.265, up 112% since our buy recommendation in September.

Other familiar names hitting new 52 week highs this week include repeat offender ADF Group (DRX.T). Which continues to hit new 52 week highs almost on a weekly basis.

Kraken Robotics (PNG.V) was another notable winner breaking to new 52-week highs. Prices and trading volumes jumped this week on no news that we could find. It looks to be an example of institutional discovery as more companies like Kraken are finding their way onto investors' buy lists.

Other notable companies hitting new 52 week highs include Foraco (FAR.T) and Knight Therapeutics (GUD.T)

Markets are trading as I expected lately. We’ve seen some good runs and I’m still expecting a pull back or more sideways action. Confidence has been building and that’s been encouraging more investors to come down market into the small and nanocap stocks driving valuations to more reasonable levels. We need to shake out some of these buyers to expose some cheap deals again.

We are not seeing as many screaming buys as we were up until a few months ago. Not that there aren’t things that we think still look cheap, they just are not as screaming cheap as they were a while ago. It’s time for a bit of patience. We’ll keep trying to find the bargains and special situations, but until then we are happy to slowly add to some of our favourites that haven’t run too much. I feel it’s time to try and sit on a bit of cash until we can find some interesting opportunities. They always show up sooner or later.

I find that markets like these can be frustrating and we are more liable to make mistakes. There are times in the markets when the best action is no action. We are not seeing extremes which are usually the best time to be buying or selling and we are long overdue for a fear inducing pullback where the bargains become a little more obvious.

Until then, I’ll be sitting on my hands and spending a bit more time reading and catching up on some research.

To your wealth,

Paul and Trevor

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