Smallcap Discoveries: Weekly Update: June 19

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Subject: Smallcap Discoveries: Weekly Update: June 19 - 23

June 19 - 23

Market Commentary

Markets

Several central banks were back at it hiking their bank rates to try and stem persistently stubborn inflation. The Bank of England and Norwegian central bank both raises their key lending rate by 50 basis points while the Swiss Central Bank raised rates by 25 bps. Higher global interest rates seem to be having an effect as economic indicators are showing more signs of weakness. European and Japanese equity markets both lost an average of 2.5% while Chinese equity markets dropped by 5%.

In North America we saw the DOW drop by 1.7%, Nasdaq was lower by 1.4% and the TSX finished off by 2.8%.

Equity markets have been on a surprisingly strong first half of the year and in my opinion have gotten ahead of themselves and need a pullback. This weekend’s events in Russia are also a reminder that black swan macro events can also put a damper on markets especially when they get priced for perfection. It will be interesting to see how markets treat the latest news of a near coup on the Kremlin.

Financials

US dollar index ended the week on a bit of a high note.

Canadian dollar continues to find some strength and briefly pierced above $0.76 for the first time in 9 months. The C$ is up almost 3 cents in 3 weeks.

US treasury yields continue to stay firm at near multi year highs.

While Canadian bond yields are at levels last seen over 15 years ago.

It’s hard to imagine the Canadian economy can maintain its current strength in this type of interest rate environment. I’m expecting the economy to shows signs that higher interest rates are having their expected effect.

Commodities

With interest rates around the world climbing gold suffers and gold was down again this past week closing at $1920.20

WTI oil had another down weak on additional signs of global economic weakness. Oil finished the week at $69.16

According to Baker Hughes drill rig data there were 5 fewer rigs operating in the US and 10 more rigs operating in Canada.

Stocks

Stubborn global inflation (outside of China and Japan) continues to keep world central bankers in tightening mode. As I said earlier it’s getting tougher to imagine equity markets will thrive in this kind of environment. Most equity markets have done well anticipating a soft landing but maybe investors have overstayed at the party. Most of the major indexes have been driven by big tech, the breadth of the markets has been weaker than one would think with so many indexes at or near their 52 week highs. This bull market seems to me to have shaky legs.

It's important that, rather than focus too much on the major markets, we stay ultra focused on individual stocks. While the environment for stocks in general may be a bit frothy it doesn’t mean there aren’t great individual opportunities out there. It feels like now more than ever it’s a stock picker’s market. Stick with stocks that show signs of growth and are self generating cash. Companies in need of money are likely to continue to struggle in this type of market.

My discussions with bankers and institutional investors tell me that equity financings, especially for money burning microcaps, are a tough go right now. Institutional investors continue to stay up market and are not deploying much capital down markets.

Other Stuff

The TSX has been the laggard index of the major North American markets. Weaker energy prices have negatively impacted energy stocks and higher interest rates have impacted Canadian bank stocks, two sector that are heavy weightings on the TSX.

Canadian Bank ETF

Suncor (SU.T)

With these two heavily weighted sectors in the dumpster the TSX will be hard pressed to test highs any time soon and actually looks to be in a technical break down. A stronger Canadian dollar will also weigh on exporting companies.

Many of the stocks we follow have been fairly resilient. It’s been a while since I felt comfortable to step in and do some buying as I’ve been waiting for decent dips which haven’t really materialized so I continue to be patient. I did however add a bit of Total Telcom (TTZ.V) this past week and it happens to be the only one in our SCD microcap universe that hit a new 52 week high this past week.

And on that note….

Some of you may have noticed that I’ve joining the board of Total Telcom. Much like the old Remington shaver commercial and Victor Kiam phrase…. “I liked it so much, I bought the company", I liked the company so much that I decided to join the board of the company.

Not that I don’t already have enough on my plate, but I thought I’d explain the reasons I joined the board.

I am a significant shareholder of the company so I have a vested interested to make sure the company makes the right moves, and my hope is that I can help guide them especially in the capital markets strategy. It’s tough enough to grow a small business and even tougher as a publicly listed nanocap. These companies need all the help they can get. My goal is to help where I can so that management can focus on what they do best.

The company meets all the major criteria that I look for in a nanocap. It’s growing, profitable, and is still quite undiscovered in my opinion.

It’s also my opinion that the company is at a major growth inflection point and, much like when I joined Atlas Engineered Products (AEP.V), staff are stretched, and management have little available time to properly communicate with shareholders and interested investors. I hope to help with that. I intend to introduce the company to the right investors and help streamline how they effectively communicate their story. My goal is to take a technical product and service and “dumb it down” enough for most investors to understand. If I can understand it, anyone should be able to, lol.

Tiny companies like Total Telcom need company sponsors, someone with a vested interest to keep an eye out for the company and steer it away from the mistakes that many small companies make in the public markets. The company hasn’t put any effort into investor relations for over a decade but feels they are at a point where this will become more important as they expect to have lots to say over the coming months and hopefully longer. For goodness’ sake, they even went so far as to build a new website, which for those that remember the old website, now doesn’t look like it was straight out of the 1990’s. You can check it out here: https://www.totaltelcom.com/

So, while Total Telcom will still be in the SCD portfolio and watch lists I will no longer be suggesting buying or selling its shares. You can feel free to ask me about the company, but I will be limited to publicly available information and can no longer give you my buy/sell opinions. And in due time we hope to have a Zoom interview with management so everyone can get even more up to speed.

So, stay tuned…..

And some great news for our conference. We are very excited that we’ve secured our keynote speaker. We’ll mention who it is soon. I’m curious to know what they’ll be talking about because if it’s anything like their past talks you’ll not want to miss it.

This week I’m reading: How to Invest – Masters on the Craft – David M. Rubenstein – A master class on investing featuring conversations with the biggest names in finance including Stan Druckenmiller, Sam Zell, Larry Fink, Seth Klarman and others.

To your wealth,

Paul and Trevor

Buys and Sells This Week