Markets North American equity markets were mixed this past week. The DOW was higher by 0.8%, Nasdaq was lower by 0.2%, and the TSX outpaced the others by gaining 1.1%. Markets continue to struggle to find direction as surprises from stronger inflation battle against weaker economic data from China. |
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The world now has two major outbreaks of hostilities and investors need to weigh possible outcomes and the potential for contagion in the region is starting to place a war premium on the price of oil.
Financials US consumer price index came in a little hotter than expected resulting in higher bond yields as well as more strength in the US dollar. The US dollar index (DXY) rose sharply on Thursday and is back testing 10 month highs. |
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Canadian bond yields have wekened slightly over the past week as some signs of a weakening Canadian economy are starting to show. |
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Commodities Oil prices are likely to be extremely volatile as the open war between Israel and Hamas stokes fears of contagion and potential for supply disruptions in one of the world’s largest oil producing regions. WTI oil was sharply higher on the week and closed back above $85 per barrel. |
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Natural Gas prices consolidated some of the recent gains and were slightly lower for the week. |
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Unleaded gasoline was only slightly higher for the week and seems to be consolidating it’s very strong move to the downside. |
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Baker Hughes reported stronger drilling rig activity. There were 3 more active rigs this past week in the US and 13 more active rigs in Canada.
Gold had a very sharp move higher on Friday as well as the week as a whole. Gold is solidly back above $1900 per ounce closing the week at roughly $1950 per ounce as it regains some of its safe-haven status. |
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Stocks Last week we mentioned the announcement of H2O Innovations receiving a takeover bid. “The shareholders of H2O Innovation will receive a price of $4.25 per share, payable entirely in cash, which represents a premium of approximately 68 per cent to the closing price of the shares on the Toronto Stock Exchange on Oct. 2, 2023, a premium of approximately 66 per cent to the 20-day volume-weighted average share price on the TSX for the period ending on Oct. 2, 2023, and a 26-per-cent premium to the 52-week high price on the TSX of $3.37 per share achieved on July 4, 2023.” |
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This week two other Canadian smallcap companies received similar offers.
Opsens Inc. (OPS.T) received a takeout offer from Haemonetics Corp. The company's offer of $2.90 per share in cash is a premium of 68 per cent to Opsens's 10-day volume-weighted average price and a premium of 50 per cent to the closing price of $1.93 on the Toronto Stock Exchange as of Oct. 6, 2023. The transaction values Opsens at approximately $345-million, on a fully diluted equity basis.
Spark Power Group (SPG.T) announced a going private transaction. Spark Power has entered into an arrangement agreement with Generator-Spark Canada Buyer Inc., an affiliate of American Pacific Group, LP, pursuant to which the Purchaser will acquire all of the issued and outstanding common shares of Spark Power for a price of $0.825 per Share in an all-cash transaction valued at approximately $140 million (including assumed debt). The Consideration represents a 68% premium to the closing price of the Shares on the Toronto Stock Exchange on October 13, 2023, being the last trading day prior to the announcement of the Transaction, and an 83% premium to the 30‐day volume weighted average trading price per Share on the TSX for the period ending October 12, 2023.
That’s three transactions, in the past two weeks, at significant premiums to the recent trading prices of these Canadian smallcaps. This is further evidence that a number of good quality companies are trading at levels cheap enough to warrant this type of activity. I’m sure there will be more.
Shares in Thermal Energy (TMG.V) traded to new 52 week highs. Thermal Energy announced that it had received a $1.9-million turnkey heat recovery order from a global nutrition company. "One of the reasons we target large multinational companies is their potential for significant repeat business," said William Crossland, Thermal Energy CEO. "This will be our sixth turn-key project with this customer and our third in the last 12 months. With this latest order, we have done over $8.1 million of business with this multinational company since 2019. Importantly, this customer has clear evidence that our solutions reduce carbon emissions while saving them money on their energy bills. They have many other sites that could benefit from our technologies and there are still significant opportunities for additional energy and carbon emission reduction projects at the sites we've already done business with.” |
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Total Telcom (TTZ.V) announced Fiscal year end and Q4 financial results. The company announced record fourth quarter and fiscal 2023 results. Fiscal 2023 revenues increased 45% and net income increased 99%. Q4 revenues increased by 52% while net income increased by 29%. The stock finished the week higher by 13%. |
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The contrarian in me is back looking at the life science space again. Life science stocks measured by the XBI ETF is back testing multi year lows. |
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Long gone are the halcyon days for life science during the heights of the pandemic and now many once high flying biotechs are trading at new lows, some at all time lows. Many biotech investors are not only despondent many seem near suicidal. Many of these companies not only trade at their lows, many are trading well below their net cash values. High burn rates and slow execution and drug trial results have many investors throwing in the towel. |
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Here's an article highlighting some of what we’ve seen in the biotech space.
Opnion: Is the Biotech Winter Beginning to Thaw?
https://www.biospace.com/article/opinion-is-the-biotech-winter-beginning-to-thaw-/#:~:text=In%202022%2C%20the%20already%20burned,cash%2C%20worth%20just%20%2411%20billion.
“In 2022, the already burned biotech market took another hit, when over 20% of the Nasdaq Biotech Index’s 370 companies were trading for less than cash, leaving these companies, which had a combined estimated $20 billion in cash, worth just $11 billion.”
Of course, we’ve witnessed our own biotech winter with ImmunoPrecise Antibodies (IPA). The stock is down roughly 93% from its highs. Does this present an opportunity? While the company continues to burn cash, it’s managed to dramatically slow that burn but will need to raise some more funds from investors if it doesn’t find a way to generate a profit or find a way to generate cash through operations.
We are not in a market where investors are willing to pay up for money losing companies. The stronger performing companies, as we have witnessed with a number of our stocks, have been those that are growing their revenues AND PROFITS. If a company has been losing money the past 2 years, it’s likely to get punished. But the question now is “have they been overly punished?”. I’m starting to think the answer is yes. But it’s not just IPA. I think this is the case for many of these companies.
IPA needs to fix and clean up some things, but I think the market knows that and has priced a lot of that in, maybe too much. I don’t remember the last time the stock was this dramatically oversold based on standard technical indicators. |
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Clearly, sentiment is pretty bad, probably as bad as it’s ever been, and therein may lay the opportunity. I’ll be watching it very closely this coming week for a possible entry point. But let me be very clear, this is not one of my table pounding fat pitch ideas, there still is a considerable amount of risk and this will start as a small trade. Tread very carefully, I will be.
Other Stuff This past week we held our third SmallCap Discoveries investor conference and I think it was a raging success. No major hiccups. Lots of great company presentations and lots of great meetings. Many first time presenting companies and many first time attendees. It was great to meet some old friends and so many people that we’ve only had the opportunity to see over Zoom and hear over phone calls.
And our keynote speaker, Ian Cassel, lived up to expectations giving another great presentation. So many of his notes were echoed throughout the day from both investors and presenting management teams.
Hopefully all you that attended enjoyed yourselves and learned something new. For those of you that missed all the presentations we will soon have all the videos available for replay. We can’t wait for next year where we think we’ll make it much better, and we want to see many more of you there.
And finally, as if last week wasn’t busy enough for us, we released our latest “Cheapies with a Chance” list. 9 tiny companies that we think are cheap and undiscovered enough to warrant our attention. I’ll spend some time in our upcoming weekly updates to discuss each of our selections. Lots of interesting new names and a few old favorites that made the list. To your wealth, Paul and Trevor |
