Smallcap Discoveries: Weekly Update: March 18

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Subject: Smallcap Discoveries: Weekly Update: March 18 - 22

Weekly Update: March 18 - 22

Market Commentary

Markets

It was another strong week for equity investors as the bulls continue to stampede. All three major indexes we follow hit new 52 week highs. The DOW ended the week up 2.0%, Nasdaq was higher by 2.8% and the TSX gained 0.6%.

The strong reception of the Reddit IPO was another indicator that investors are happy to keep this bull market party going. Reddit closed up 48% on its first day of trading. It’s been a while since we saw a major new IPO get this kind of reception.

Financials

Some dovish chatter from US central bankers was enough to bring US treasury yields a tad lower for the week. The US 10 year treasury yield fell back below 4.25%.

Canadian CPI data for February came in lower than expected and this allowed Canadian bond yields to ease back below 3.5%.

The trend in Canada continues to be generally lower inflation data, lower treasury yields and lower Canadian dollar.

Commodities

The trend for oil prices continues to be up. WTI oil prices reached a new 4 ½ month high as tighter supply and higher US demand buoys prices keeping them firmly above $80 per barrel.

Gold saw a big spike in price mid-week to new all-time highs in US dollar pricing. Gold broke above the US$2200 level before levelling off the week around $2166. Generally lower treasury yields and a weaker US dollar are providing tailwinds for gold bulls and more anticipation of still higher prices.

Stocks

It seems every new week that goes by another new microcap has a face ripping rally. This week it was Zedcor (ZDC.V). Over the past 10 trading day’s shares in the security tower supplier has seen its shares go from a low of $0.57 to a high of $1.10 or a move of approximately 93%.

The growing number of microcap and nanocap stocks seeing extended moves and hitting new highs is another indication that new capital is entering the space. This new capital is partly the result of institutional and international investors finding opportunity in Canadian listed, growing and profitable small companies.

The amount of capital that sits outside the Canadian small stock sector is massive and even if just a tiny fraction of that capital turns bullish on Canadian microcaps we will see a much higher move in some of our favourite names. I believe this has started and I don’t think it’s going to end any time soon.

Just look back at the charts of companies like DRX.T, VHI.V, CPH.T

Not only has the price increased, look at the trading volume! On a dollar volume basis these stocks have seen a very big increase and that usually only comes from institutional buyers. DRX.T has gone from a market cap of $39 million 12 months ago to over $150 million. CPH.T has gone from $80 million to $230 million, and VHI.T has grown from $115 million to over $285 million. This isn't your small retail investor that’s grown these market caps.

These are just three companies that have turned into institutional market darlings. The question of course is who’s next?

Thanks to Ryan Telford who supplied this chart on twitter, we can see here that institutional ownership as a percentage of TSX and TSXV issues has been steadily increasing along with the market volume. Institutions are coming down market and having an impact at the same time that the number and overall dollar value of this sector has been shrinking. Lack of supply, meet rising demand…

I’ve been suggesting for many months that the supply/demand squeeze that we were seeing for the past 2 years, with the supply of good quality companies shrinking due to buyouts and share buybacks and the slowly growing demand for these kinds of companies, would create this kind of bull market rally, and for some select stocks a “face ripping” rally.

I still think we are in the early innings. I’m expecting more ZDC.V style mark ups in valuations. Some of these profitable and growing companies are so historically undervalued that sharp re-valuations are going to continue. It’s just a function of supply and demand. There just is too much capital sitting up-market starting to come down and nowhere near enough good opportunities big enough right now to satisfy this demand. At some point before the year is done I expect we will start to see new IPO and go public transactions to start to satisfy some of this capital but until then there is very little else to let the steam out other than to keep picking off the next DRX.T, CPH.T, VHI.T and ZDC.V. Patience should be very well rewarded.

New highs this week

Another batch of new highs amongst our watchlist and portfolio companies. CPH.T made the list again as did GSI.V, BEW.V and FAR.T. Some newer names tapping 52 week highs included, Zedcor (ZDC.V), DIRTT Environmental (DRT.T),

The Good Shroom Company (MUSH.V)

and Namesilo Technologies (URL.C).

As these companies see a rising share price so too does their market caps and liquidity which becomes more inviting for those institutional investors that need higher trading volume and market cap to be able to participate.

Another thing I noticed this week is the fact that Canadian housing related stocks have finally started to play a bit of catch up with their US listed comparables. US home builder related stocks have been on a tear over the past year.

You’d think this was the chart of the latest hot AI stock but it’s the chart for Builders FirstSource (BLDR), a company that makes and sells various construction related products including prefabricated roof trusses and wall panels.

It’s up 147% for the year and up 2,230% since the pandemic lows of 2020. Yes, a construction supply company that has been a 21+ bagger in roughly 4 years!

Of course it, and a number of other builder related stocks hit new 52 week highs this past week. And finally some of the Canadian names finally decided to tag along.

Canadian building product suppliers Adentra (ADEN.T), and Doman Building Products (DBM.T) both hit new 52 week highs this past week.

Welcome to the party boys.

I’ve come to realize a few things in my 30+ years in the markets: Investing trends tend to work like this, first it shows up in the US large caps and trickles down into smaller US and larger Canadian stocks, and then eventually it makes its way into Canadian smaller stocks.

And much like German philosopher Arthur Schopenhauer’s description of the lifecycle of a new idea where he stated: “All truth passes through three stages: First it is ridiculed; Second it is violently opposed; and Third, it is accepted as self-evident.” So too does an investment trend go through the same three stages, only add in the bit about large caps first and small caps last, lol.

Stocks I’m watching this coming week

ADF Group (DRX.T) looks like it’s giving us a tempting buying dip down roughly 20% from its recent highs, may nibble a bit there.

I like Biorem (BRM.V) in the low $1.40’s and managed to grab a tiny bit more at $1.41 this past week.

We managed to speak with Ztest Electronics (ZTE.V) CEO and CFO and they didn’t say anything that turned us off so I nibbled on a bit more and will likely try to get some more if the stock stays around current levels.

And have yet to take a deep look at the Canaf Investment (CAF.V) Q1 numbers (too busy with my son’s hockey tournament) but may add to that small position if I don’t see anything too negative in their financials.

BeWhere Holdings (BEW.V) pulled back a few pennies from its new 52 week high. If it manages to get back into the low $0.30’s I’ll likely try to grab a few more. If not, I'll keep enjoying the ride.

Might trim a bit more Zedcor (ZDC.V) (I sold a bit at $0.82, too soon) if it gives me another chance above $1.00.

Weed stocks might get a bit of interest around potential excise tax relief in the upcoming Federal budget. I might nibble on a few of my watchlist names to build a bit more of a basket (CANB.V, MUSH.V, OILS.C, LOVE.V) in anticipation of some excitement. Most of these names look cheap enough that if we don’t see a tax change they should still be ok holds.

To your wealth,

Paul and Trevor

Buys and Sells This Week