Smallcap Discoveries: Weekly Update: June 20

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Subject: Smallcap Discoveries: Weekly Update: June 20 - 24

June 20 - 24

Market Commentary

Markets

North American markets had one their strongest weeks of 2022. The DOW was higher by 5.4%, the energy heavy TSX was higher by 0.7% and Nasdaq jumped higher by 7.5%. Weaker economic data spurred investors into believing that the FED may need to slow down its rate hiking as a slowing economy will lessen inflationary pressures. Have we entered that phase of the market where bad news is good news for stocks? Interest rate sensitive growth stocks and tech were the big winners while energy stocks were one of the bigger losers on the week as a weakening economy could dampen demand for oil.

While the strong move was welcomed by bullish investors technically speaking however the markets are not out of the woods yet.

Energy

Energy and energy stocks have been a hot topic around here for a while now. This past week energy stocks posted a significant loss and continued under pressure due to headwinds on the macroeconomic front. That by itself is nothing unusual but the breadth and timing of this weakness had a lot of investors confused and concerned. Many energy stocks, mostly the producers, are off 20% - 40% from their highs they reached just 2 weeks ago. While the underlying WTI oil and natural gas prices have declined in recent weeks their representative company shares have declined much more. WTI closed the week at $107.60 and Nymex natural gas dropped to close at $6.22. Since the stock markets are forward looking instruments does this portend to much lower prices for the commodity? Or does the market have it wrong and these stocks are mispriced once again? The fact that these oversold stocks broke down below their year-long trend lines has many believing that the once overcrowded energy trade needs to take a multi month breather.

The fundamentals continue to be very bullish for energy, energy markets remain tight and longer-term supply remains a major concern. This is expected to intensify as a result of Russia's shrinking supply. I am still bullish energy longer term but I'm now in the camp that we may be in a short-term downtrend for energy stocks, especially the producers. Take note however that long term investor Berkshire Hathaway was back in the market this past week adding to their oil exposure by increasing their stake in Oxy Petroleum. Some have suspected that Mr. Buffett and Munger may be interested in taking over OXY. This would clearly be bullish for energy.

My BTE trade went from oversold to even more oversold and broke below its multi month trend line. It even gapped lower and suggests significant investor outflow. I'll be looking for a bounce to fill that gap to sell out this position.

The larger sector ETF (XLE) had a very similar trading pattern and suggests to me that this isn't a normal trading dip. Let's look to regroup and watch from the sidelines.

The energy service companies performed a bit better than the producers, probably because they were lagging the performance of the producers on this bull run. Underlying fundamental data continues to improve for the sector as North American rig count continued to increase. US rigs increased by 13 rigs and Canadian rigs dropped by 2 for a net increase of 11 rigs. I continue to prefer owning shares in the small energy service companies over the producers for the time being.

Life Science - Are we there yet?

Summer is here. Road trips with the kids, sweltering heat, bathroom breaks, roadside fast-food joints, all in an effort to make it to the lake to cool off. Mom, dad...... are we there yet?

We've been watching the life science sector very closely for some time now in hopes of signals that this crushed sector has bottomed and the environment becomes a little less hostile for quality life science companies. The life science/biotech sector, measured by the XBI Biotech ETF, has dropped as much as 64.7% from its February 2021 peak. According to life science investment banking firm Torreya Partners, over one third of biotech's have lost at least 75% of their market value since the peak and over 200 companies are trading below their net cash on their books.

As bad as things have been for the space, there are some hopeful signs.

In technical terms the XBI appears to have put in a "double bottom" and appears to have encouraged some investors to believe that the worst may be behind for the sector. There has also been a dramatic uptick in fund flows into the XBI as of late.

Another signal I have been waiting for is an increase in the number of life science companies breaking out to new 52-week highs. This is usually an early indication of a trend reversal and can indicate a new bull market for a sector. A noticeable increase in the number of new highs can confirm increased capital flow into a stock and/or sector. The number of life science companies on Nasdaq reaching new 52-week highs indeed did increase this past week. Over the past 5 trading days, 29% of the new 52 highs triggered on Nasdaq have been life science companies. I don't think we have seen that number since mid 2021.

And new capital is entering the sector. ATLAS Holdings closed a $3.1 billion fund in mid 2021. Apollo Global Management, Carlyle Group and other top-level VCs are committing new capital to the sector. Blackstone Management's Flagship fund and many others have all raised record amounts of capital for investment in biotech in recent months.

This new capital sees opportunity. The past year has seen a funding drought in biotech companies. Many companies struggled to raise much needed capital. This has helped cull the herd of capital vaporizing biotech's. There have been very few new life science IPOs. Valuations have suffered. With the shrinking aggregate market cap of the sector the investment supply and demand may have finally turned to a more appropriate balance. In this process many of the good companies have been thrown out with the bad. Opportunities, for the savvy and patient investor, abound in these types of markets. New capital formation to address these lowers valuations is another good signal.

The other signal we want to see is healthy M&A activity. These low valuations amidst companies that continue to execute have to appeal to the bigger players in the space. Buy outs do a few things, they highlight the values and opportunities in the sectors, they shrink the pool of available investments, and they cash up investors who likely want to repeat this success. We want to see more M&A activity. Here's an example of another take over this week that will leave many investors with capital burning a hole in their pockets looking for the next big take out. InvoX Pharma to Acquire F-Star Therapeutics.

But will we see more acquisitions? PWC predicts M&A activity will increase in the second half of 2022.

"Deal values are down by 58% and volume has decreased by 33%, but fear not, the pharmaceutical and life science industry is poised for a "flurry of deals" in the second half".

So, while there is never a green light that is flashed when a stock or sector has entered a new bull market there are signals that increase the odds that a new trend is in place. We think the odds are increasing that the life sciences sector is entering a new bull phase. To that end we are more bullish on the names that are appearing on our bottom's up list of stocks that are part of the life science sector. I was a buyer of both Ceapro, CZO.V this week as well as long-time favorite ImmunoPrecise Antibodies, IPA.V. I expect to increase my exposure in these names. For some of these stocks to get their mojo back the sector needs to be moving in the right direction. Having a bullish sector tailwind helps me build a bit more conviction. Now we wait and see.....

Mom, dad...... are we there yet?

To your wealth,

Paul and Trevor.

Buys and Sells This Week

Bought Ceapro Inc. (CZO.V) @ $0.57

Bought ImmunoPrecise Antibodies (IPA.V) @ 5.35

Smallcap Discoveries

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Atlas Engineered Products (TSX.V: AEP) Price - $0.51 Market Cap - $30M

Atlas Engineered Products CEO Terminates Automatic Securities Disposition Plan
Press Release https://tinyurl.com/2p96t47d

Medexus Pharmaceuticals (TSX: MDP) Price - $1.93 Market Cap - $38.5M

Medexus Generates Revenue of US$76.7 Million in Fiscal Year 2022 and US$20.3 million in Fiscal Q4 (Strongest Q4 Revenue in Company History)
Q4 Revenue of $20.3M
Q4 Adj. EBITDA of $1.1M
Q4 Net loss of ($5.3M)
FY Revenue of $76.7M
FY Adj. EBITDA of $1.1M
FY Net loss of ($2.9M)
Press Release https://tinyurl.com/24kjwhk9

Smallcap Discoveries

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D-Box Technologies (TSX.V: DBO) Price - $0.105 Market Cap - $23M

D-BOX Technologies and Mila announce partnership to use Artificial Intelligence for haptics
Press Release https://tinyurl.com/4wtrs69s

Cathedral Energy Services (TSX: CET) Price - $0.59 Market Cap - $81M

CATHEDRAL ENERGY SERVICES ACQUIRES COMPASS DIRECTIONAL AND FURTHER ADVANCES ITS INDUSTRY CONSOLIDATION STRATEGY
Press Release https://tinyurl.com/yevtjffa

CWC Energy Services (TSX.V: CWC) Price - $0.27 Market Cap - $138M

CWC ENERGY SERVICES CORP. ANNOUNCES ACQUISITION OF 3 HIGH-SPEC AC TRIPLE DRILLING RIGS FURTHER EXPANDING ITS U.S. PRESENCE
Press Release https://tinyurl.com/fyhxxp7x