Markets Equity markets had their strongest week in the past six weeks. Nasdaq led the way advancing higher by 5.2% while the DOW was higher by 4.9% and the TSX increased 2.9%. Earnings continue to surprise to the upside as some big tech and industrial companies show strength despite inflation pressures and US dollar strength. |
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Volatility continues to be the name of the game as stubborn inflationary pressure and higher interest rates battle against leading economic data showing global slowing in certain sectors of the economy. Investors continue to wait for a sign that the US Fed is prepared to take the foot off the interest rate gas pedal.
Energy WTI oil continues to struggle for direction. The battle between the Biden administration and OPEC+ continues with the US administration threatening to release more oil from the SPR and OPEC+ threatens production cuts in order to hold prices up. US midterms in November may be the timing target here. I’d expect a different tone once the election cycle ends next month. |
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WTI closed at $85.14. Interesting to note that we are now into the 8th month since the start of the Russian invasion of Ukraine and oil prices are trading below the price at the commencement of the invasion.
It’s the shoulder season for natural gas and prices in North America are doing what they usually do this time of year, head lower. Eyes have been on Europe as natural gas supply shortages due to Russian supply stoppages, but recent price moves suggest the European winter may not be as bad as predicted. Dutch natural gas prices have dropped substantially from their peaks earlier this year. |
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Storage levels continue to improve and have lessened the demand for North American LNG supply.
Energy services was one of the stronger sectors in the market this past week. Schlumberger popped after reporting strong Q3 results. The energy service ETF (XES) broke out of a trading range and appears back on the upswing. Demand for energy and drilling services continues to be strong as companies raise production to take advantage of higher energy prices. |
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Schlumberger (SLB) reported adjusted EPS of $0.63 versus the $0.55 estimated. Revenues of $7.48 beat estimates of $7.1 billion. The company increased capital spending by 10% indicating its confidence that high demand for their services will be around for some time. The CEO stated, “Energy industry fundamentals continue to be very constructive…”. Shares in SLB hit new 4-year highs. |
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Many Canadian energy service companies look interesting here as the bear market reduced the number of providers and now the ones left are able to reap strong pricing for their products and services.
Commodities Gold continues to trade mostly sideways at the lower end of its yearly levels. |
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Base metals continue to trade mostly flat and like gold, near year lows.
Stocks While we had a strong week in equity markets last week, we still see indexes barely off their year lows. Headline conditions continue to drive many investors to the sidelines for fear of further downside in their portfolios. Global fund manager cash levels continue to increase and are reaching levels last seen during the burst of the dot com bubble in 2001. |
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Global funds on average cash levels have reached 6.3%, levels last reached in April 2001. 49% of these funds have a net “underweighting” in equities. And 91% expect global profits to rise less than 10% next year, the highest level since the global financial crisis.
Margin levels have been greatly reduced as well, a sign that bullishness has disappeared. As a matter of fact, margin debt levels have reached levels that historically correlate to market bottoms.
S&P 500 Index vs Margin Debt |
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And the number of Net-Nets have reached the highest levels in over 20 years. First defined by Benjamin Graham, Net-Nets are companies whose market cap is lower than the net current assets on the company’s balance sheet. It is interesting to note that many of these Net-Nets can be found in the life science sector.
Net-Nets |
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Extreme bearishness isn’t just displayed by investors rush to the sidelines, we continue to see retail investors shorting the market as indicated by record put option buying. |
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It’s rare that the consensus, especially amongst retail investors, is right for extended periods of time. Conditions are ripe, based on history, for a trend change when the majority is on one side of the trade.
And while investors movement away from big caps more recently has accelerated, the smaller companies which were hit more significantly in the last 18 months, are beginning to show better relative strength while the indexes seem to continue to weaken. Small caps versus the Nasdaq 100 have been outperforming year to date. |
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And even small caps versus large cap value stocks appears to be starting to outperform over the past few months. |
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There are always plenty of reasons to sell but over the long-term extreme conditions like we are seeing today have a tendency to turn out to be great long term buying opportunities. |
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I’ve been asked a lot lately about my own personal portfolio so this week I thought I’d talk about my 3 largest holdings, IPA.V, URL.C and AEP.V. Note that I am the CEO and director of NameSilo Technologies (URL.C) and a director of Atlas Engineered Products (AEP.V) Shares in Immunoprecise Antibodies (IPA.V) had a good week. Shares are up 38% since our interview with CEO Dr. Jennifer Bath on September 30th. |
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During the interview we discussed the capabilities of the company’s Biostrand division and the opportunity for out licensing this AI platform on a per drug target basis. Management expects licensing or “biobuck” deals are likely to be in the +$50 million range per target, especially once they have demonstrated the service’s potential. To give you a sense of the addressable market in the monoclonal antibody (mAbs) market alone. Current commercialized mAbs, of which there are roughly 120, generated over $200 billion in revenue in 2021 and this market is expected to grow at a 10% CAGR reaching $300 billion per year by 2026. There are currently nearly 1900 mAbs drug programs in development, both pre-clinical and clinical. With this many mAbs targets alone, let alone other biologic drug candidates, it’s easy to see why the those at the company are excited about the potential for Biostrand. |
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I expect a significant re-rating in price if the company can validate Biostrand through a meaningful licensing agreement. I expect we will know before year end if the industry is willing to see what this service can do.
Atlas Engineered Products (AEP.V)* has accelerated the buy back of its shares recently. As of Friday, the company has bought back 2.247 million shares or roughly 3.9% of it’s outstanding shares. This week Canadian housing start data surprised to the upside. September housing starts came in at a robust 299.6k units versus 267.4K the previous year and well above the 265k estimate. |
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Based on Friday’s closing price ($0.56) (AEP.V) shares trade at 3.67 times trailing 12-month EPS. Many housing related stocks have been hit hard as higher interest rates dampen the outlook for the sector but an ongoing housing shortage in both Canada and the US will likely see demand stay firm over the coming years especially in Canada where the country has the largest housing unit deficit of any of the G7 nations.
The company I rarely discuss, and my second largest position is NameSilo Technologies, URL.C. NameSilo owns 81.5% of NameSilo LLC the 11th largest domain registrar in the world with over 4.6 million domains under management. Revenues grew by 33.7% last quarter, operating income grew by 264% and adjusted ebitda grew by 93%. The company also has a portfolio of private and public companies including 560,000 shares of Immunoprecise Antibodies (IPA.V) and 971,079 shares of Atlas Engineered Products (AEP.V). Shares in NameSilo closed on Friday at $0.165 and currently trades at roughly 7.3 times trailing 12-month operating earnings and 5.1 times trailing 12-month adjusted ebitda. |
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Like Atlas Engineered, the company has an NCIB in place and has been buying back its own shares.
Both AEP.V and URL.V are examples of companies that are growing revenues at double digits but trading at single digit PE ratios. Disclaimer *Paul Andreola is a director of Atlas Engineered Products Disclaimer **Paul Andreola is the CEO and director of NameSilo Technologies
Canslim Contender No new selection this week
To your wealth, Paul and Trevor |
