Subject: Smallcap Discoveries: Weekly Update: May 9 - 13

May 9 - 13

 

Market Commentary

More Market Volatility....


Major North American markets continue their downward trends. Nasdaq led the way down dropping 2.8% for the week while the DOW fell 2.1% and the TSX fell 2.6%. Year to date the DOW is down 12.68%, the TSX is down 5.29% and Nasdaq is down 27.32%.


Markets, especially Nasdaq are considerably oversold and due for a good rally, and I think we saw that rally start halfway through the trading day on Thursday.


Lots of retail money doesn't seem to want to sit on the sidelines and we saw near record inflows in ARK Innovations once again. So, while I think we see a strong rally in the near term until we see capitulation from the retail crowd, who continues to be content to chase the leaders of the last bull market, I think we have yet to see the market bottom.

Stay vigilant and cautious. We continue to believe that patient investors will be better served looking at the energy space and at companies that are able to grow revenues and sport single digit PE ratios.

We continue to find single digit PE's in domestic manufacturers serving North American markets. Here's a chart showcasing this trend. Here we see that revenue generated by S&P 500 companies with a greater proportion of their revenues sourced domestically continue to gain ground vs those with more international exposure. This is also likely a reason that smaller companies are doing a little bit better than those larger internationally exposed companies. 

Energy


The International Energy Agency (EIA) and OPEC revised their forecasts as part of their latest monthly report on oil markets. The EIA expects that an increase in United States, as well as OPEC production, will offset the decrease in Russian supply which is expected to reach as much as 3 million barrels per day. OPEC, however, continues to fall short of their stated production levels with many of its members not pumping to their quotas and the group is estimated to be around 1.5 million bpd below its quota. https://oilprice.com/Energy/Crude-Oil/OPEC-Misses-Production-Target-By-Whopping-27-Million-Bpd.html


If OPEC members aren't managing to produce at these higher levels when oil is at 10-year high prices maybe, it's because they can't... This will put tremendous pressure on North American production if we are to see any chance flattening or lowering of energy prices. And with the US going to midterm election this year you can bet the current administration wants to see lower prices at the pump.


So, with energy at such elevated prices and the outlook as bullish as it is you'd expect shares in energy exploration and production companies to be trading at extreme high valuations. In fact, we are seeing the opposite. Most of the constituents of the sector trade at record low multiples versus historical norms:

Now as if a WTI oil price at $110 wasn't enough, North American natural gas prices, at multi year highs (currently $7.66), are adding to North American E&P companies' revenues. We also now see why gas prices have been climbing so rapidly in the traditionally slower, shoulder season between the winter heating and summer cooling demand. Almost every bcf per day of gas is being exported via liquefied natural gas. The European Union is attracting almost every possible US LNG shipment. North American LNG netback to the EU is currently around $21.60/mmbtu versus $13.95 in Asia. What will this mean for summer natural gas prices if what usually goes into storage for the busier season goes elsewhere? Current storage levels in the US are already 16% lower than the 5-year average and 33% lower in Canada. Production will need to increase to meet demand.

I've been pounding the table on energy service companies for the reasons above. I just don't see how North American production won't be increasing and why I'm continuing to increase my exposure to the space. We are in the thick of Q1 reporting and many energy service companies we follow have been releasing strong financial results. Many seeing revenues jumping +50%. Yes, some have seen a good rise in share price, but I think we are at very early stages of a multi-year boom in energy, and many will need to climb many times higher to reach past levels.


Here's the 10 year chart on the sector ETF:

Here's the 10 year chart on one of my current favorites (BRY.T):

There's a number of players in the space and while I think you could throw a dart at the list and likely do well, I think the real leverage is in the smaller plays that are likely take-out candidates as the bigger players start piling up the cash and find it's cheaper to buy than build their business. Consider that many small energy service companies are trading for less than their book value. Enterprise Corp (E.T) just reported $0.04 per share in earnings in Q1 and trades at about 60% of book value. Not bad for a stock that closed at $0.365 on Friday.


Here's a list of Canadian listed companies serving the energy industry:

https://fknol.com/ca/stock/oil-and-gas-services.php


And finally, with all the recent news and turbulance in the world of crypto currencies and "stablecoins" I thought I'd post a picture of the only alternative currency that I have faith in.....

Our older Canadian audience hopefully gets a kick out of this.

To your wealth,


Paul

 

Buys and Sells This Week

-Bought Verde Agritech (NPK.T) @ avg of $8.49

-Bought Enterprise Corp. (E.T) @ $0.36

 

Smallcap Discoveries


Select Portfolio

Geodrill Limited (TSX: GEO) Price - $2.26 Market Cap - $103M


Revenues were up 9% and earnings were up 5.3% from the year ago period. Gross margins were a bit lower at 29% vs 31%. The outlook continues to be favorable for the company and the industry. Slightly lower gross margins are likely due to inflationary pressures. We continue to believe that GEO.T offers a very strong risk\/reward opportunity and gives investors a safer way of playing the gold/metals up cycle.


ImmunoPrecise Antibodies (TSX.V: IPA) Price - $5.79 Market Cap - $136M


iFabric (TSX: IFA) Price - $2.00 Market Cap - $59M


While revenues were nicely higher from the year ago period, we were a little disappointed in the revenue mix. Intelligent fabric division revenues were down 14% while their intimate apparel division saw a 299% increase. Intelligent fabric revenues were affected by "a major retail customer placing a shipping hold on products for a new program, as a result of other vendors of the retailer failing to meet their delivery timelines. The hold has since been lifted and these products have commenced shipping as at the date hereof."


Kidoz (TSX.V: KIDZ) Price - $0.43 Market Cap - $56.5M


RIWI Corp (TSX.V: RIWI) Price - $0.90 Market Cap - $16M


Bri-Chem Corp (TSX.V: BRY) Price - $0.49 Market Cap - $12M


This re-financing significantly de-risked the company and considerably lowers the company's interest expense. "The interest and principal savings for us will amount to approximately $1M per annum which will considerably strengthen our financial position and provide us additional free cash flow to take advantage of the increased drilling activity due to the recent surge in commodity prices."


We feel BRY.T is a strong buy at current levels and offers a very compelling risk/reward in a sector that is likely at the early stages of a multi year up cycle.


Spectra Products (TSX.V: SSA) Price - $0.035 Market Cap - $2.7M

 

Smallcap Discoveries


Select Watchlist

Gatekeeper Systems (TSX.V: GSI) Price - $0.345 Market Cap - $31.5M


Solution Financial (TSX.V: SFI) Price - $0.32 Market Cap - $29M


Ceapro (TSX.V: CZO) Price - $0.46 Market Cap - $36M


Cipher Pharmaceuticals (TSX.V: CPH) Price - $2.50 Market Cap - $65M


Crescita Therapeutics (TSX: CTX) Price - $070 Market Cap - $14.6M


DATA Communications Management (TSX: DCM) Price - $1.30 Market Cap - $57M


Divergent Energy Services (TSX.V: DVG) Price - $0.12 Market Cap - $4M


Microbix Biosystems (TSX: MBX) Price - $0.47 Market Cap - $64M


Synex Renewable Energy (TSX.V: SXI) Price - $2.75 Market Cap - $11M


Vitalhub (TSX: VHI) Price - $3.00 Market Cap - $131M


Enterprise Group (TSX: E) Price - $0.365 Market Cap - $17.5M

 

Company Interviews & Updates

Upcoming

Topic: BeWhere Holdings (TSX.V: BEW) Update with CEO Owen Moore

Time: May 16, 2022 01:15 PM Vancouver


Join Zoom Meeting

https://us02web.zoom.us/j/87494856333?pwd=d1pFKzl5RGpaTUM3dHpyOWFTeGRlZz09


Meeting ID: 874 9485 6333

Passcode: 045601


Topic: Flow Capital (TSX.V: FW) Update with CEO Alex Baluta

Time: May 17, 2022 01:15 PM Vancouver


Join Zoom Meeting

https://us02web.zoom.us/j/85175292679?pwd=Ny9LWDlqT1Nzc3ZNckFXMWpURE1YUT09


Meeting ID: 851 7529 2679

Passcode: 164097


Topic: EnWave Corporation (TSX.V: ENW) Interview with CEO Brent Charleton

Time: May 19, 2022 01:15 PM Vancouver


Join Zoom Meeting

https://us02web.zoom.us/j/83960194250?pwd=UGVTU3NZOUpBcHlmWktrUlhQckZzdz09


Meeting ID: 839 6019 4250

Passcode: 296947


Topic: Gatekeeper Systems (TSX.V: GSI) Update with CEO Doug Dyment

Time: May 20, 2022 01:15 PM Vancouver


Join Zoom Meeting

https://us02web.zoom.us/j/85315400872?pwd=VGtYWmJqK0U0WldLWlJNUlZBakN0UT09


Meeting ID: 853 1540 0872

Passcode: 751039

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    This is an online snapshot of a newsletter created by the owner of Small Cap Premium Service (DJ Dunkerley, 86 East 23rd Ave, v5v 1w9 Vancouver, Canada) and sent via GetResponse on 2022-05-15. Report abuse