Smallcap Discoveries: Weekly Update: July 11

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Subject: Smallcap Discoveries: Weekly Update: July 11 - 15

July 11 - 15

Market Commentary

Another volatile week in equity markets. The DOW closed lower by just 0.2%, Nasdaq was lower by 1.6% and the commodity heavy TSX suffered the most ending the week down 3.3%.

The week started quietly as investors awaited the mid week US inflation data. Both the Consumer Price Index (CPI) and Producer Price Index (PPI) headline data came in smoking hot. Once again the headline CPI and PPI numbers were both higher than economists’ average estimates. CPI came in at 9.1% versus expectations of 8.8% and the more volatile PPI number came in at 11.3%. Interestingly, the CPI core number (minus food and energy) was 5.9%, below estimates and declined for the 3^rd straight month. Excluding food and energy, core PPI was 6.4% which was also below economists’ estimates.

Finished goods become more expensive with higher energy prices as energy is needed to produce many products as well as shipping them. Energy prices hit record levels over the past several months but have been steadily declining since early June. Industrial metals and other inputs such as wheat, corn and cotton continue to decline in price suggesting that we will see lower inflation in the months to come as these lower prices make their way through the system.

Digging a little deeper below the headline inflation numbers you start to see some interesting data.

Clearly food, and especially energy is driving the big jump in inflation. To help understand the impact of energy prices on the overall inflation rate a bit better: “Nearly 90 percent of the June increase can be traced to a 10.0-percent jump in prices for final demand energy,” the US Bureau of Labor Statistics (BLS) said. “The increase was broad-based, with the indexes for gasoline, shelter, and food being the largest contributors,” BLS said of its consumer price index. “The energy index rose 7.5 percent over the month and contributed nearly half of all items increase, with the gasoline index rising 11.2 percent and the other major component indexes also rising. The food index rose 1.0 percent in June, as did the food at home index."

Right now, as goes energy (especially gasoline), so goes inflation. Gasoline dropped 7.2% just this week and is down roughly 26% since its high in early June.

The Commodity Research Bureau Index (CRB), a broad measure of commodity prices peaked in early June and has dropped by roughly 16% since then, and as I’ve pointed out over the last few weeks many individual commodities such as copper and corn have dropped a lot more than that.

Copper hit new 18-month lows this past week.

While I expect we will continue to see elevated inflation numbers in the near term it seems clear to me that the trend for many inputs continues lower and with that so should overall inflation numbers as these lower prices make their way through to finished goods and services.

I expect the US Fed to maintain a tightening posture and we likely still see another 75-basis point increase in interest rates. Some are calling for a 100-basis point move like what the Bank of Canada did this past week. As I’ve said in the past the Fed will want to be sure they’ve stopped inflation dead in its tracks before they change course.

I’m encouraged by some of this data and think we may have the Fed in a position to reverse course before the end of the year or early 2023. This starts to build a stronger case for the bulls and the stock market’s actions this week indicates that maybe investors think the worst may be behind us. This week we witnessed 2 of the strongest inflation prints in the last 40 years and the markets basically shrugged it off and closed the week down small amounts. Remember, it’s a bullish sign when we get bad news, and the market does not go down….

Energy

We continue to keep a very close eye on energy. We saw more weakness this week which is good news for the inflation picture and the overall markets, however lower energy prices weigh down energy stocks. WTI dipped to 4.5-month lows and closed the week at $97.59 down from last Friday’s close of $104.90. Natural gas had a strong week closing at $7.02 up from $6.045. Gasoline closed lower at $3.20 vs $3.45 last week.

Most oil stocks had a very rough week. I’ve been making some very small trades on some of small producers hoping to catch some dips and bounces but haven’t been very successful. I’ll let the downtrend run its course and watch from the sidelines for now. I’m happy to hold my energy service stocks as I continue to believe they offer the best risk/reward right now in the sector as I do want to maintain some exposure as a bit of a hedge against supply shocks.

We saw another solid increase in drilling rigs this week, especially in Canada where we saw another 16 rigs in action. That’s up 11% on the week.

Life Sciences

The life science sector continues to get us excited. The XBI has been consolidating its strong recent moves off its bottom from June. The XBI closed down 2.4% for the week after gaining roughly 33% in the last month.

Life science names continue to dominate the Nasdaq new 52-week high list. 18 of the 37 new daily 52-week highs were life science stocks followed by 4/37 consumer staple stocks and 4/37 technology stocks. We continue to view the life sciences as the sector with the best risk/reward outlook. We nibbled on a bit more shares of Ceapro Inc (CZO.V) this week.

What we are keeping an eye on….

China GDP came in lower than expected. It actually shrank by 2.6%. This could be a considerable drag on the global economy and inflation. There has been a fair bit of news on real estate and mortgage/banking issues in China as well. It will be interesting to see how the government reacts and whether these things spill over to other economies.

Gold – it’s not acting as an inflation hedge. Or is it telling us something? The sell off in gold, which has been known historically as a hedge against currency debasement and higher inflation has seen a sharp selloff. Maybe gold investors see a rapid slowdown in inflation coming?

Covid – Omicron BA.5 is now the new dominant variant in many countries. What will the impact be? This new variant has some new tricks up its sleeves…

Move over, measles: Dominant Omicron subvariants BA.4 and BA.5 could be the most infectious viruses known to man

A new dominant omicron strain in the U.S. is driving up cases — and reinfection

Stay safe…

To your wealth,

Paul and Trevor.

Buys and Sells This Week

Bought Ceapro Inc, CZO.V @ $0.56

Smallcap Discoveries

Select Portfolio

AirIQ (TSX.V: IQ) Price - $0.26 Market Cap - $8M

AirIQ Announces March 31, 2022 Year End Results Reports Double Digit Growth and Fifth Consecutive Year of Increased Recurring Revenue
Q4 Recurring revenue of $939K
Q4 Revenue of $1.09M
Q4 Net income of $74K
FY Recurring revenue of $3.5M
FY Revenue of $4.37M
FY Net income of $566K
Press Release https://tinyurl.com/4mu5k7j8

Ceapro (TSX.V: CZO) Price - $0.54 Market Cap - $42M

Ceapro Bolsters Executive Management Team with Appointment of Sigrun Watson as Chief Revenue Officer
Press Release https://tinyurl.com/mr2jxs4n

Immunoprecise Antibodies (TSX.V: IPA) Price - $4.99 Market Cap - $124M

Histopathology Data of Preclinical Repeated Dose Toxicity Study and ex vivo Human Tissue Cross-Reactivity (TCR) Analysis Support Safety of IPA’s PolyTope® TATX-03, a Synergistic Antibody Cocktail against SARS‑CoV‑2
Press Release https://tinyurl.com/3ttny7e3