Smallcap Discoveries: Weekly Update: July 25

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Subject: Smallcap Discoveries: Weekly Update: July 25 - 29

July 25 - 29

Market Commentary

I hope everyone is enjoying the long weekend (for those that have one).

Markets were sharply higher this past week. Nasdaq led the way rising by 4.7%. The DOW was higher by 3.0% and the TSX on the back of stronger financials and energy was up by 3.7%. The trend is up for now.

Again, this past week bad news was good news for the market. The Fed raised rates by 75 basis points and the US economy (GDP) shrank by 0.9%. Two consecutive quarters of negative growth is what is traditionally viewed as a recession although a few are trying to argue that this alone doesn’t qualify as a recession. In any event it was enough to have investors continue to think that an economic slowdown will allow the Fed to loosen its interest rate policy.

Also helping markets were some positive earnings announcements as companies such as Amazon (AMZN) and Apple (AAPL) were able to beat analyst estimates.

We saw a significant increase and greater diversity in the stocks hitting new 52-week highs last week. I counted 136 new daily 52-week highs on Nasdaq last week. Life sciences still led the group with 28 new highs, but this tied with financials (mostly banks). Right behind them was technology with 27 new highs. Interesting to note that a subcategory within technology sector (electronic components) is starting to dominate the new highs in that category. I’m sure we will know in time why this sector is gaining strength.

Many solar energy related companies were jumping for joy last week as the US government announced a major climate bill with significant new spending and tax breaks.

Most solar energy companies saw big jumps in share price including one of our closely watched companies, UGE International. Long suffering UGE.V was up as much as 45% on the news. It will be interesting to see if this is the turning point for the ESG sector as it’s been one of the worst performing parts of the market.

Energy

Energy stocks had a strong week on the back of stronger oil prices and strong earnings reports. WTI oil was up 3.6% on the week but the US energy ETF (XLE) was up 10.2%. The US energy services ETF (XES) did even better and was up 18.7% for the week. I’m gaining conviction that we’ve seen the bottom for now in the energy sector stocks and we likely see a resumption in strength especially in the energy service sector. The number of drilling rigs in operation continues to increase. The US oil patch added 9 more land rigs last week as did the Canadian patch and we now have over 200 rigs in operation in Canada, a number that hasn’t been seen in many years. A few of the smaller Canadian energy service companies have announced earnings and they’ve been quite impressive. Better still is the forecast for continued strong demand for their services. I’m becoming more bullish and am looking to add to some of my small energy service names.

Commodities

Most commodities saw moves higher in reaction to weakness in the US dollar. The US dollar index looks to be breaking down as a slightly more dovish Fed gives the US dollar some selling pressure.

Grains and most metals also saw strength this week. Unleaded gasoline was flat. Lumber was lower.

Gold had one of its best weeks in months. Spot gold was up 2.2% this week, its largest move since March and is now well off (up 6%) its recent lows reached only a few weeks ago.

Stocks

This week we saw a large number of earnings reports. One of our portfolio companies, ImmunoPrecise Antibodies (IPA.V) announced year end financials. We had a Free-for-All on Friday that covers all my thoughts but in short, I felt that there were now major surprises. Revenues continue to grow, they had their first +$5 million revenue quarter. As they continue to push their Talem assets closer to the clinic and with the additional costs associated with the Biostrand acquisition the company’s expenses increased and generated a larger loss for the quarter and the year. If there was one interesting take away from the conference call (there were a few), it was the mention that should the company be successful with their Polytope Covid therapeutic in phase 1 there are interested parties, on standby, willing to sponsor the rest of clinical testing. Two of their Talem Assets are in ongoing licensing discussions. Hopefully we hear some news on concluding a successful licensing deal. My belief is that if they can monetize one of their assets it will validate the whole discovery platform. We continue to await further news.

In general, we’ve seen more buyside volume in the microcaps that we are watching. We’ve seen a decent bounce in a number of our names including our latest addition to our portfolio, Ceapro (CZO.V). Ceapro shares are up about 15% from our inclusion price in about 3 weeks and is quickly approaching its 52-week high.

I’ve noticed an increase in Canadian companies announcing share buybacks and 4 companies announced new Substantial Issuer Bids (SIB’s) and extensions of such bids this past week. Stelco Holdings (STLC.T), Algoma Steel Group (ASTL.T), Interfor Corp (IFP.T), Frontera Energy (FEC.T) have all made such announcements. Healthy companies with large cash balances are finding it most productive to buy back their “cheap” shares. Lots of Canadian oil & gas producers have been aggressively shrinking their share count thru these share buy backs. The supply of shares in many companies are being lowered dramatically at valuations that are at multi year lows. It will be interesting to see what happens if investors gain the courage to start buying these companies again.

My Top Three…

I’m being asked frequently what my top 3 buys are so to answer that question I’ll say I’m actively trying to buy Ceapro, (CZO.V) below $0.60, Bri-Chem (BRY.T) below $0.70 and Enterprise Group, (E.T) below $0.40. With a bit more buy side liquidity lately some of these names may get a bit more difficult to buy.

Microcaps = Innovation

It is rumoured that around the start of the 20^th century, Charles H. Duell, the Commissioner of the US Office of Patents considered closing the US Patent Office because he felt that all important inventions had already been invented. He may have been a bit premature.

Investing in microcaps usually means you’re buying into earlier stage innovating companies. While early-stage companies usually come with higher risk, if you catch the right ones at the right time, you can make very big returns. While we may be in a recession, innovation doesn’t stop because the economy slows down. We want to keep looking for great, little growing companies that are solving old and new problems, and certainly, there are no shortage of problems that need solving.

I found this interesting graphic that reminded me of some of the great innovations we’ve witnessed and some of the things we still have to look forward to. It’s our jobs as microcap investors to be optimists and continue to invest in companies that are changing the world for the better. Remember, there is always a bull market somewhere. Sometimes we just need to look harder.

We’ll keep trying to find great little, growing companies that are innovating and solving problems….

To your wealth,

Paul and Trevor

Buys and Sells This Week

Sold Siga Technology (SIGA) @ $17.45

Bought Beta Pro Natural Gas Levered Short, (HND.T) @ $1.37

Sold Beta Pro Natural Gas Levered Short, (HND.T) @ $1.45

Bought GCM Mining Corp. (GCM.T) @ $3.73

Smallcap Discoveries

Select Portfolio

Medexus Pharmaceuticals (TSX: MDP) Price - $2.35 Market Cap - $47M

Treosulfan NDA Resubmitted to FDA
Press Release https://tinyurl.com/bddr9fjm

Immunoprecise Antibodies (TSX.V: IPA) Price - $5.29 Market Cap - $131M

ImmunoPrecise Reports Financial Results and Recent Business Highlights for Full Fiscal Year 2022
Q4 Revenue of $5.23M
Q4 Gross profit of $3.3M
Q4 Net loss of ($4.64M)
FY Revenue of $19.36M
FY Gross profit of $10.98M
FY Net loss of ($16.7M)
Press release https://tinyurl.com/yhdd28np

Smallcap Discoveries

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Alphinat (TSX.V: NPA) Price - $0.075 Market Cap - $5M

Alphinat Announces an Increase of 87% in Its 3rd Quarter Year Over Year Profit of $197,285 for the Quarter Ended May 31, 2022
Revenue of $548K
Net income of $197K
Press Release https://tinyurl.com/3kdmumnt

INEO Tech (TSX.V: INEO) Price - $0.18 Market Cap - $11M