Smallcap Discoveries: Weekly Update: May 22

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Subject: Smallcap Discoveries: Weekly Update: May 22 - 26

May 22 - 26

Market Commentary

Markets

US tech stocks led the way this past week and helped the Nasdaq index gain 2.5%. Both the DOW and TSX registered losses on the week. The Dow was lower by 1.0% and the TSX suffered a 2.1% loss.

Nasdaq has significantly outperformed other North American indexes over the past 6 months after considerably underperforming the prior year.

Artificial intelligence related tech companies like NVDA and SMCI are on a roll.

Nvidia (NVDA) exploded higher this past week on stronger than expected financial results, helping to drive Nasdaq to near year highs. The chip maker saw its shares climb 24.4% and has now overtaken both Facebook (META) and Tesla (TSLA) in market cap.

Super Micro Computers (SMCI) blasted higher as well.

No doubt about AI is hot.

Financials

Stronger than expected inflation data has interest rates climbing.

Commodities

Gold has lost its shine lately on higher rates and the stronger US dollar. You’d think that higher inflation and debt ceiling uncertainty would have gold perform better but it’s pretty clear that gold needs lower rates and a weaker US dollar if it’s to regain the US$2000 mark.

WTI oil has been uncharacteristically quiet lately as it trades near a tighter range. US oil inventories fell sharply this past week and WTI oil closed on Friday at $72.96, up very slightly from this time last week.

Current energy prices just don’t seem to be high enough to encourage more drilling. The latest Baker Hughes drill rig data shows North American land rigs down by 7 rigs from the previous week. There has been a sharp drop off in active rigs since the beginning of the year.

Stocks

Select tech stocks seem to have collected all the excitement the past few months. And the big ones much more than the small ones. While some large US tech stocks are exploding higher on big volume liquidity in small stocks seems to continue to disappear.

It’s clear that not much new capital is flowing down into the microcaps right now. I had an interesting discussion with a broker friend of mine, and he has seen a pickup in investors selling out of microcaps and taking cash out of their accounts to pay bills. If institutional investors aren’t willing to come down market and existing retail microcap investors are taking cash out liquidity will continue to dry up along with weaker share prices. Quality microcaps may buck the trend but if they’re the only ones seeing volume, they too may be impacted by needed selling. It’s hard to tell when this may stop but until we see capital flows in, rather than out it will continue to be lonely for the buyers.

This past week we had several of our closely watched stocks report financial results. Atlas Engineered Products was out with Q1 results. You can view the press release here: https://www.atlasengineeredproducts.com/news/atlas-engineered-products-reports-first-quarter-2023-financial-and-operating-results

Shares in AEP.V were down 9% on the news.

Zedcor (ZDC.V) released quarterly financial results as well. Revenues in Q1 were up 39% over the same period last year and earnings were up by 75%. Solid growth for the company however investors are likely waiting to see what kind of impact we see as they wind down their contract with Trans Mountain Pipeline which likely temporarily hits revenues.

Ceapro (CZO.V) posted disappointing Q1 results. Revenues were lower by 43% over Q1 2022. Weaker sales of the company’s Avenathremides resulted in the company posting a loss of $385,000 compared to net income of $1,813,000 last year. Q1 financial results took the shine off of the positive of their research study evaluating PGX processed yeast beta glucan for the treatment of interstitial lung disease. Shares in CZO.V traded to new 52 week lows before bouncing to close the week at $0.45.

Another watch list stock and old darling RIWI Corp. (RIWI.V) posted improved results. While still not profitable the company did show an improvement in revenues. Revenues were higher by 34% to US$1,201,240 and their loss shrunk to US$127,943 from US$174,781.

And a newer name on our watch list Tornado Global Hydrovacs (TGH.V) posted a stellar jump in revenues and earnings. The maker of hydrovac trucks saw revenues jump 112% to a record $21 million compared to $9.9 million in the year ago quarter. Net income climbed 66% to $785,000.

This is Tornado’s 5^th consecutive profitable quarter. We’ve reached out to management and hope to have an interview scheduled soon.

Other Stuff

I’ve read a lot of books on investing, finance and successful people. Last week it was “The Gambler” about industrialist Kirk Kirkorian, this week I’m reading “Am I Being Too Subtle” about Real Estate mogul and investor Sam Zell. I know it’s a great read when I come away with at least one new solid actionable idea. Sometimes it isn’t even a new idea, but it reinforces an old one in a new way.

With “The Gambler” the message to me was about chart your own course. How many times have you heard me say you need to find and develop your own investing strategy? One that works for you. If you do what everyone else does, you’ll get the same results as everyone else. If you want to outperform you have to do something different and you have to get good at it.

In this latest read from real estate mogul Sam Zell, I’m hearing a lot about understanding and seeking out supply and demand imbalances. Almost the first thing you learn about in Economics 101 is the law of supply and demand. As investors we need to place ourselves in an advantageous position. To improve our chances of success we need to seek out opportunities where easy and cheap capital hasn’t increased supply too much and where lack of capital has created scarcity. Whether that’s a commodity, manufactured product, a service or a certain kind of investment. Remember, supply and demand also are a factor in stocks too. A stock that has 200 million shares outstanding can have a different supply/demand effect than a stock with 20 million. And even 2 different stocks with the same amount of shares outstanding can have a different supply/demand effect depending on who owns the stock. And of course, even sectors can have different supply/demand levels. Think of how many cannabis stocks flooded the market several years ago, or blockchain companies after that. All that cheap capital pushed out more and more companies to a static investing public.

It's all fine if the demand can overwhelm the supply, but sooner or later that cheap and abundant capital funds a supply surge, the supply overwhelms demand and down go prices.

Supply and demand effects prices. It should be our goal to seek out those supply and demand imbalances where lack of capital has created a lack of supply. It’s usually in out of favor sectors, out of favor stocks. And right now, many microcaps sure seem to be out of favor.

To your wealth,

Paul and Trevor

Buys and Sells This Week