Markets The US economy just refuses to recede as fast as the Fed wants it to. While there are a number of clear signs that the economy is slowing down, the US jobs data continues to produce stubbornly stronger than expected numbers. That said the market took their cues from Fed chairman Powell’s speech this week when he stated that there will likely be smaller rate hikes in December and that he still expects the US economy to see a “soft landing”. The Dow finished the week slightly higher by 0.2%. Nasdaq was up 2.1% and the TSX was up by 0.5%.
It might be surprising to know that the Dow is only down 0.43% from exactly one year ago while Nasdaq is down 24.02%. As I have been saying for many months, we’ve really been witnessing a changing of market leadership and the leaders of the last bull market, predominately big tech, are not fairing well and if history repeats, will underperform in the next bull market. | | Energy WTI oil had a decent week climbing and closing back above $80 for the first time in a couple of weeks. Word of potential further production cuts from OPEC outweighed the continued slow economic recovery in China and weakening global economic data. | | Energy stocks, in general, continue to show strength even with oil at near year low prices. The US energy producer ETF had a solid week and is still just a few dollars away from its 52-week high. | | According to the Baker Hughes drill rig data energy companies are maintaining their level of drilling activity in North America. One more rig was active this past week bringing the total to 979 rigs drilling, a solid and nicely higher amount than this time last year.
Commodities I continue to watch the US dollar very closely. On Friday the US dollar index jumped on the higher-than-expected US jobs data but reversed course and closed lower by the end of the trading session. | | On the back of the weakening dollar precious metals gained more strength. Gold closed the week above US$1800 per ounce for the first time in about 5 months. | | If the UD dollar continues to weaken, we can expect to see more upside for most commodities, especially precious metals.
Stocks Boring is beautiful….
Telephone poles are beautiful. At least they are for the shareholders of a company like Stella-Jones Inc. (SJ.T). Stella-Jones is North America's leading producer of pressure-treated wood products. It supplies the continent's major electrical utilities and telecommunication companies with wood utility poles and North America's Class 1, short line and commercial railway operators with railway ties and timbers. Shares of the company hit a new 52-week high on Friday and are now up 60% from the low they hit in June only 4/5 months ago. | | Stella-Jones is not the only company whose stock is performing like this.
I’ve been suggesting for many months that we are amid a rotation in stock market leadership. What was once “boring” is now beautiful. Those old-world businesses, the companies that make things that if you “dropped them on your foot it would hurt” type of businesses are leading the market. The DOW which is comprised of some of the biggest “industrial” companies in the world is far outperforming the tech heavy Nasdaq. One of the reasons these types of stocks have been performing well is that they had a better starting point. Most were ignored for years as investors sought out the higher torque of software, tech, and internet related businesses. Most of these old-world companies had lower valuations because they were so ignored and now, they are moving higher for 2 reasons. One is the low valuation but the other is the lack of new competition. And maybe a third reason is the demand to onshore so much critical manufacturing.
I know I’ve talked about this before, but I think it bares repeating. Too many investors continue to look to the last bull market leaders for leadership. History has shown us that this is not what happens and certainly not where the best opportunities reside. The place to look for opportunities is where others are not looking. No one is looking at nanocaps right now and even fewer are looking at “boring” nanocaps.
One of my largest holdings, Atlas Engineered Products (AEP.V)*, had a very good week. It’s moved higher by 33% since announcing Q3 results just 2 weeks ago. Atlas is almost the poster child for what I have been preaching the last 6 months. Atlas produces engineered wood products for the construction industry. It is almost the exact type of company that most investors have run away from. First off, it’s an industrial manufacturer, it’s small, a nanocap, and it’s in one of the most despised sectors by most financial talking heads, housing, and construction. Why has the stock just reached a new all-time high in share price? | | Perhaps because it started from a low valuation. At Friday’s closing price the stock is trading at a PE of 4.7 and a price to EBITDA of 2.67 times, still low in my opinion and much, much lower than many tech companies. When stocks are already trading at low valuations it’s not unusual to get surprises to the upside that can move a stock significantly.
One of my other current favorites is Inventronics Ltd. (IVX.V), the manufacturer of metal boxes to house telecom and electrical equipment. This boring little, old-world business has been another spectacular performer over the past 2 years, and I think continues to be an extremely compelling opportunity at current prices, while very few investors pay attention. | | Some investors will argue that these businesses deserve lower valuation because of the tendency to be cyclical. I agree. But what I think many of these investors miss is that using a broad brush to paint opportunities like this is a cop out, it’s lazy. You must challenge these concepts if you want to outperform as an investor. Yes, maybe these companies are cyclical but that has little to do with whether they are cheap or not. If everyone stays away from a sector because it’s cyclical doesn’t that increase the chance that the stock may be mispriced to the downside? The opposite holds true too. If everyone thinks that capital light businesses are THE place to invest does that not make it more likely that they are mispriced to the upside? How about the concept that big stocks are better than small stocks. Big stocks are more liquid, big stocks have more analyst coverage; big stocks are better known than small stocks. Could that make them more mispriced to the upside?
My point in all this continues to be that if you want to outperform, you can’t do what everyone else is doing and you must look where others refuse to.
We continue to find great looking opportunities where others are staying away from. Small nanocaps like IVX.V, IBT.V, BRY.T, CZO.V and ZDC.V rank high on our current watch/buy list. We’ll soon have our new list of stocks that we think offer strong opportunities now that the big Q3 reporting is over.
In my opinion small and boring is beautiful…..
Other Stuff HC Wainwright has started coverage on Immunoprecise Antibodies Ltd (IPA-Nasdaq) with a buy recommendation and a US$9 price target. The stock, which recently delisted from the TSXV, closed up 9% on the news. That’s 2 US based investment houses that have initiated coverage on the company. | | While I wasn’t a buyer (or seller) of anything this week the two stocks that stood out the most to me this week as buy candidates were Ceapro (CZO.V) and Inventronics (IVX.V).
CZO.V continues to look compelling to me at current levels. The stock has pulled back nicely from recent highs and likely stays a bit quiet going into the holiday season. | | IVX.V has pulled back very nicely after the issue of the $0.35 dividend and looks a bit extended to the downside. I’ve been a buyer at these levels over the past few weeks and will likely add some more if stays down here much longer.
There is likely a number of these little stocks that could see a little extra selling into Christmas as some investors may need to cash out a bit to pay for their Christmas presents. I always like to shop for microcaps during the slower holiday season. Let’s see what Santa brings us this year.
Check out the list of companies presenting at the Planet Microcap Virtual Conference December 6-8. You can even check in on the Stock Pitch World Cup and see what country wins. I was in charge of Team Canada. You can get more details on the conference and a list of presenting companies here: https://planetmicrocapshowcase.com/
*Disclosure: Paul Andreola is a director of Atlas Engineered Products, (AEP.V)
Canslim Contender Titan Machinery Inc. – (TITN-Nasdaq) December 2, Closing Price: $42.45
Titan Machinery Inc., founded in 1980 and headquartered in West Fargo, North Dakota, owns and operates a network of full service agricultural and construction equipment dealer locations in North America and Europe, servicing farmers, ranchers, and commercial applicators. The network consists of US locations in Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Washington, Wisconsin and Wyoming and its European stores are located in Bulgaria, Germany, Romania, and Ukraine. The Titan Machinery locations represent one or more of the CNH Industrial Brands, including Case IH, New Holland Agriculture, Case Construction, New Holland Construction, and CNH Industrial Capital. | | Company Website: https://www.titanmachinery.com/ Sector: Consumer Discretionary – Specialty Retailers Last quarter revenue growth: 47.3% TTM revenue growth: 23.7% Last quarter EPS growth: $1.82 vs $0.97 Ownership: 11.2% (per Yahoo Finance) Institutional Ownership: 84.5% (per Yahoo Finance)
To your wealth, Paul & Trevor |
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