Smallcap Discoveries: Weekly Update: September 25 -29

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Subject: Smallcap Discoveries: Weekly Update: September 25 -29

September 25 -29

Market Commentary

Markets

Some reassuring news on the inflation front in both the US and Europe brought out the buyers late in the week but not enough to put the indexes in the green for the week. Core US PCE data for August was slightly weaker than expected and down to 3.9% from the 4.3% level in July. EU inflation data was also weak enough to increase risk appetite and the equity markets bounced off mid-week lows. The DOW finished the week down 1.6%, Nasdaq was lower by 0.1% and the TSX fell 1.2%

The bounce in equity markets relieved a bit of the oversold conditions. Markets will look for direction from interest rates and company earnings later this month.

Financials

“Reports of my death have been greatly exaggerated” Oscar Wilde.

It’s amazing how often I keep hearing about the impending death of the US dollar. The US dollar rallied again this week. The US dollar index (DXY) traded back over $106, a level it saw back in November 2022. The US dollar is the go-to currency when global investors get nervous and with economic weakness in China, Europe and other markets, the US greenback benefits.

As I like to say, the US dollar is a terrible currency, except for everything else.

The Canadian dollar saw significant volatility on the week, especially Friday, as it swung almost one full cent intra-day and closed at a 2 week low.

Weaker than expected PCE inflation data allowed treasury yields to drop slightly however the difference in 2 year and 10 year treasuries has been obvious the past few weeks and is a sign that the “higher for longer” expectations are sticking around with investors.

The Canada 5 year bond yield reached a new multi year high yet again which in turn pushed the major banks into raising their mortgage rates again. Mortgage rates in Canada are now at the highest rates in over 17 years.

Commodities

Oil tapped a new 52 week high this past week with WTI briefly tapping the $95 level before dropping to back to $90 on Friday and closing the week at $90.79 per barrel. September was 4^th consecutive month of increases in the price of oil and has risen over 30% in 3 months.

Natural gas is trading far off it’s 52 week highs but has been gaining strength as of late.

When looking at the price of natural gas on the six month chart we see that prices are up over 50% since reaching its year low and has been trending nicely higher over the past 6 months as we head into heating demand season.

A very interesting chart lately has been that of unleaded gasoline. Oil prices have been rocketing higher over the last 3 months but gasoline, which peaked for the year about 2 months ago has taken a nosedive and has dropped roughly 20% in less than 2 months. Is this an early sign of economic weakness? Some of the weakness may be seasonal as the busy summer driving season comes to an end but the rate of drop may be a signal of something more widespread.

Baker Hughes reported a drop of 7 active drilling rigs in the US and an increase of 1 rig in Canada.

Gold had one of its worst weeks in a long time with the price for the shiny metal dropping to its lowest level in over 6 months. Strength in treasury yields and the US dollar had gold closing on Friday at roughly $1860 per ounce

Stocks

The big stocks (the indexes) that I keep referring to have been on a down trend of late and while all three major indexes closed down on the week, they saw a decent bounce off their lows that took some pressure off and are now less oversold than they were mid week.

When markets see pressure or have sell offs it allows the bears to gain more attention. They get air time and help suck a bit more air out of the room. David Rosenberg, for example, has been everywhere the past few weeks and the message hasn’t changed in years….. a recession is coming, and markets will drop a lot.

“As for the economy, not only is the much-maligned inverted yield curve flagging elevated recession risk, understanding that the lags are always long and variable, but we have also endured a 24-month span where the S&P 500 cap-weighted index is completely flat… and back to 1970, this too has foreshadowed all recessions with 100% precision, with an average lead-time of six months. The problem is that valuations still do not reflect this heightened risk.”

The problem with these kinds of statements is most people take that to mean all stocks will go down, or that all stocks are overvalued. Another problem is that bearish forecasts always sound smarter than bullish forecasts. Think of Warren Buffett and his constant statement that "You shouldn’t bet against the United States.” Too simple…

Big stocks do appear to be expensive. The markets do appear to be overvalued as a whole. Risk does appear to be increased. Volatility does seem to be increasing….. in general. But that doesn’t mean that there are great opportunities in certain individual stocks. Remember the stock market is a market of individual stocks. And we are still finding fantastic investment opportunities with significant margin of safety. We’ll continue to ignore the overly bearish and overly bullish macro forecasts and concentrate on finding individual opportunities that stand out, regardless of what the media talking heads have to say.

This week we saw a handful of microcaps from our watch list hitting new 52 week highs. Here’s the list of new 52 week highs:

Enterprise Group (E.T)

McCoy Global (MCB.T)

Medicure (MPH.V)

VitalHub Corp (VHI.T)

Thermal Energy (TMG.V)

Thermal Energy are newest “fat pitch” high conviction pick rewarded us with outstanding Q4 and full year financial results this past week. The company announced an 84% increase in Q4 revenues and 476% increase in ebitda. The company produced its second consecutive profitable quarter with net income of $971,000 and grew its order backlog from 13 million as t May 31, 2023, to $21.4 million as at September 26, 2023. The second half of fiscal 2023 has been outstanding but the best may be yet to come.

"We continue to see strong interest from companies looking to save money while reducing their carbon emissions. Since the end of our fiscal year, we've received $8.4-million in new orders, including a $4-million order from a multinational pharmaceutical company -- our largest turnkey order since before the pandemic.” Stated CEO William Crossland.

I sold some shares in Immunoprecise Antibodies (IPA.Q) and Ceapro (CZO.V) and added aggressively to our positions in TMG.V on this news.

The other portfolio company with news that got us excited was Zedcor (ZDC.V). “Zedcor Inc. Announces Expansion into Retail Security with MobileyeZ Service Agreement for a Leading North American Home Improvement Retailer”. Turns out this retailer happens to be the largest home improvement company in North America, Home Depot. With more than 2300 Home Depot stores in North America it’s easy to see that the potential for this could be very big for Zedcor.

Shares in Zedcor barely budged on the week. I’ll be considering adding over the coming weeks.

Other Stuff

Here is a chart that really has me thinking.

The Bank of Canada has been raising rates in lock step with the US in hopes of tempering inflation and cooling the economy. The problem is that we are cooling much more rapidly that many believe. If you take into account the massive increase in population, we, individually, have been in a recession for the past 4 quarters. GDP on a per capita basis has been in decline since Q2 of last year. If not for the growth of the number of people working and spending their shrinking dollars we would have had a traditionally defined recession in Canada. Don’t be fooled by the headlines. If not for the massive increase in immigration things would be even more strained than they are right now. We are in a recession in Canada. The Bank of Canada does not have much room to move in my opinion.

This Week I’m Reading: Trading in the Zone – Mark Douglas - Douglas uncovers the underlying reasons for lack of consistency and helps traders overcome the ingrained mental habits that cost them money. He takes on the myths of the market and exposes them one by one teaching traders to look beyond random outcomes, to understand the true realities of risk, and to be comfortable with the "probabilities" of market movement that governs all market speculation.

To your wealth,

Paul and Trevor

Buys and Sells This Week

This Week’s Buys and Sells

Thermal Energy (TMG.V) @ $0.16 - $0.17

Sold Ceapro (CZO.V) @ $36 - $0.37

Sold Immunoprecise Antibodies (IPA.Q) @ $1.92 - $1.95

Smallcap Discoveries

Select SEDAR+ Weekly Highlights

Thermal Energy International (TSX.V: TMG) Price - $0.17 Market Cap - $28M

Thermal Energy International's Fourth Quarter Revenue Growth of 84% Caps Banner Year
Q4 Revenue of $8.2M
Q4 Gross profit of $3.83M
Q4 EBITDA of $1.17M
Q4 Net income of $971K
FY Revenue of $21.09M
FY Gross profit of $9.56M
FY EBITDA of $1.72M
FY Net income of $720K

Namsys (TSX.V: CTZ) Price - $0.95 Market Cap - $26M