Smallcap Discoveries: Weekly Update: March 27

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Subject: Smallcap Discoveries: Weekly Update: March 27 - 31

March 27 - 31

Market Commentary

Markets

With the recent banking crisis slowly drifting out of investors minds, the equity markets got a bit of good news on the inflation front and rallied higher this week. The US PCE inflation data came in slightly lower than expected for February and continues to show a lessening of inflation over a year to year basis. The DOW was higher by 2.6%, while Nasdaq finished up 3.4% and the TSX gained 3.1% on the week.

Nasdaq is back testing the highs we saw in early February. A break above this recent high likely gives the bulls more conviction and may usher in some short covering.

Equity markets seem to continue to bet that the US Fed can orchestrate an economic soft landing.

Commodities

Oil will most likely be the hot topic in commodities circles this coming week.

While it managed to add to recent gains this past week news just broke that OPEC+ has committed to a surprise 1 million barrel production cut with Saudi Arabia committing to 500k of this cut. This Sunday WTI oil futures jumped 6% on the news and now trades back above $80.

Expect oil prices to remain volatile as the battle between concerns over a global slowdown and reduced OPEC production weigh on energy investor’s minds. Also keep in mind that many OPEC producers are notorious for cheating on their quotas. Maybe this time will be different….

Natural gas futures continued their slide this past week and are in danger of reaching new multi year lows.

Another significant drop in active drill rigs this past week. The Baker Hughes drill rig data showed a drop of 29 rigs in action most of these (26) in Canada as typical spring weather slowdown takes hold.

Most other commodities were little change with gold up slightly closing at $1987 per ounce and copper almost unchanged. Lumber was lower and is back to testing multi year lows.

Financials

Treasury yields were much less volatile this past week compared to the prior two weeks. Most treasury yields were slightly higher by week’s end but are still down considerably since the start of the banking crisis.

The US dollar is back to testing the 102 level.

And in Canada bond yields have been closely following US yields and closed higher on the week.

Volatility in yields and currencies likely continue. We’ll see how the news out of OPEC+ effects global markets as it’s likely to cause some concerns amongst investors.

Stocks

It always nice when a few of your stocks hit new highs. We had a few of our favorites hit new 52 week highs this past week. Geodrill (GEO.T) traded up to new +10 year highs.

One of our recent highlighted favorites, Total Telcom (TTZ.V) also moved to new 5 year highs.

And KITS Eyecare (KITS.T) has continued its climb and reached a new 52 week high.

We had some solid financial results from one of my favorites, Inventronics (IVX.V). The company reported a 43% jump in year end revenues and a 40% increase in Q4 revenues over the prior year. Ebitda jumped by 100% for the year and 96% Q4 over Q4. Very impressive for a company that still trades at only 7.9 times earnings. I managed to pick up a tiny bit more at $3.15 on Friday.

Cannabis company Canadabis Capital (CANB.V) released year end numbers showing continued profitability. One of the very few companies that has been able to turn a profit in the highly competitive space, Canadabis grew revenues by 146%, profit by 374% and ebitda by 175%, in Q2. This is the 5^th consecutive profitable quarter and the stock trades at a shockingly low 5.3 times trailing 12 month earnings. The stock closed Friday at $0.10 and it looks very cheap. I’m going to get Trevor to schedule another update as soon as possible.

One other past favorite that announced year end numbers was Bri-Chem Corp. (BRY.T). 2022 was a solid year for the company as revenues grew by 73%, however digging into Q4 numbers we saw a considerable drop in gross margins and ebitda margins. The company states “The decrease is due to a lower realized margin in Q4 2022 resulting from increased shipping costs and an unfavorable adjustment to the Canadian sales return provision.” While we think energy service companies like Bri-Chem should do well in the long term, short term weakness in energy prices particularly natural gas prices, are likely to result in lower revenues and/or lower margins as competitors fight for business. We have been selling down our position in Bri-Chem over the last few months and will watch for possible re-entry opportunities in the months to come.

Other Stuff

Last week we got an update from private company, Alchemy Nanotechnology. This past week it was Ola Media. For those that missed the live interview you can find the recordings on the SCD forum. Both companies have launched financings with expectations of their public listing sometime near the end of 2023. For those that are interested in either of these financings please reach out to Trevor or I and we will put you in contact with company contacts.

Ok, prepare yourselves.…. We are finalizing dates and venue for our world famous (ok maybe I’m exaggerating) Smallcap Discoveries conference. It’s been too long since we’ve been able to meet in person with everyone and now that most of us have been boosted up and free to travel again, we think it’s time to dust off the presentation podium, start practicing our handshakes and get down to some in-your-face microcap due diligence. Look to block off a few days in early October and, if you attend, expect to hear from some of the best Canadian microcap companies and keynote speakers available. It’s a great way to mingle with company management and with other SCD members and with a little bit of luck you can rub elbows with Russell! We promise this will be the best SCD conference we’ve had so far. Stay tuned for more details.

To your wealth,

Paul and Trevor

Buys and Sells This Week