The week in markets is ending with fears of an imminent recession, except in Canada.
This is because, unlike the U.S., Developed International and Emerging Markets, the TSX includes heavy allocations to financials, energy and basic materials, all of which are enjoying favorable economic conditions.
Financials, which represent about a third of the TSX, are benefitting from greater revenue from loans due to rising interest rates.
Energy and basic materials, which represent another third of the index, are reaping outsized gains due to high inflation affecting oil, metals, fertilizer and other essential components to run the global economy.
While the Bank of Canada, like many other central banks, is currently raising rates and lightening its balance sheet to cool down raging COVID-induced inflation – 6.8 per cent as of April 2022 – this has affected Canadian stocks far less compared to the rest of the world.
The TSX is down just 2.7 per cent year-to-date and primed for a sixth straight weekly gain.
The U.S. is down 14.72 per cent year-to-date – bouncing back this week from seven straight weeks of losses – with tech and retail giants suffering the largest drops.
Developed International is down 12.24 per cent year-to-date chiefly due to widespread fuel shortages.
Emerging Markets are down 13.55 per cent owing to losses in Russian stocks and ongoing Chinese COVID lockdowns.
Rosy as things are for Canadian investors, rather than extrapolating current conditions indefinitely into the future, it would be reasonable to assume that inflation will normalize over the next few years, bringing down commodity prices with it.
Once this occurs, the TSX will lose a considerable margin of safety, opening investors up to outsized losses in the absence of other diversified sources of return.
One such source comes in the form of small and micro cap stocks – an asset class Market Herald Canada readers are intimately familiar with – and their unique ability to offset beta exposure, especially during prolonged downturns such as the present one:
- Negative sentiment: Small and micro caps are an important space for astute, fundamentally oriented individual investors because they fall under the much maligned moniker of penny stocks. A persistent majority of sophisticated retail and institutional investors associate these companies with dishonest management and questionable business practices and ignore them altogether, creating an edge for those willing to be patient and conduct thorough due diligence to identify reliable sources of profitability. Research may even include actual conversations with management, which is far more likely with a C$50M market cap company compared to a billion-dollar one
- Lack of mainstream news flow: Another key benefit of small and micro cap stocks is their relative immunity to movements in the broader market they’re a part of. An index fund that tracks the TSX will move according to the sentiment of the day and hopefully reflect increased profits over the long term. Conversely, a micro issuer that trades, say, less than 100,000 shares per day will on average sidestep major news headlines, fortifying your portfolio with negative correlation on the way to eventually reflecting intrinsic value
- Small/micro value premium: Small and micro cap value stocks have historically provided greater returns compared to owning a global market cap-weighted portfolio. Fama and French showed this to be the case in their 1992 paper establishing size and lower prices relative to earnings and book value as risk factors independent from market beta. On average, investors have earned an annual low single-digit premium from a global small cap value portfolio over the past three decades
While nascent firms are by no means free from volatility – especially considering how their illiquidity can result in wild daily price swings – they can provide seasoned active investors with the diversification they need to soften downturns and come out ahead of the market upon recovery. The key is to build enough conviction in your positions to ignore short-term noise, take advantage of capitulation if valuation merits it, and allow the market to reward solid results in due time.
Let us now turn to the five small and micro cap companies commanding our readers’ attention over this short trading week.
RevoluGROUP (TSXV:REVO) provides corporate updates
Highlights include the granting of issuer approval from a top-tier credit card issuer, the granting of a UAE Payment Service Provider license and the upcoming launch of its white-label enhanced RevoluEX-powered platform for digital currency exchange partners.
CEO Steve Marshall sat down with Coreena Robertson to discuss the updates.
RevoluGROUP Canada (REVO) is up by 9.3 per cent over the past week trading at $0.24 per share as of 12:21 pm EST.
Tenet Fintech (CSE:PKK) introduces Business Hub to the Canadian market
Tenet is reporting positive feedback about its upcoming Canadian Business Hub.
This includes numerous hub pre-registrations and intelligence gathering from interested potential lenders at key Canadian trade shows.
The Business Hub concept aims to allow Canadian SMEs to pre-qualify for loans, advertise products and services, and connect and network, among other benefits.
The company will attend RCC Store 2022, Canada’s largest retail industry event, from May 31 to June 1, 2022.
Tenet Fintech stock price is down by 6.55 per cent over the past week trading at $2.71 per share as of 1:04 pm EST.
HIVE Blockchain (TSXV:HIVE) announces share consolidation
HIVE announced a 5:1 consolidation of its common shares.
Post-consolidation shares began trading on the TSXV at market open on May 24, 2022.
The move is intended to minimize penny stock stigma and increase appeal to institutional investors.
HIVE (HIVE) is down by 15.93 per cent over the past week trading at $4.96 per share as of 1:00 pm EST.
PyroGenesis (TSX:PYR) partners with leading furnace manufacturer
PyroGenesis will work with a leading furnace manufacturer to reduce its carbon footprint.
The client will evaluate the viability of PyroGenesis’ zero-emission plasma torches in its scrap remelting and holding furnaces for the aluminum industry.
PyroGenesis Canada (PYR) is up by 18.75 per cent over the past week trading at $3.04 per share as of 1:09 pm EST.
Nano One (TSX:NANO) to acquire Johnson Matthey Battery Materials Canada
Nano One will acquire all of the outstanding shares of Johnson Matthey Battery Materials (JMBM) for $10.25M.
JMBM’s expertise includes R&D, pilot-to-commercial scale cathode production and product qualification and quality assurance systems for tier 1 automotive lithium-ion cell manufacturers.
JMBM also owns a 2,400 tonne-per-annum lithium iron phosphate production facility located in Quebec.
The transaction is expected to close by year end.
Nano One Materials (NANO) is up by 31.68 per cent over the past week trading at $2.12 per share as of 1:09 pm EST.
Join us next Friday afternoon for a look at the week’s top trending companies on The Market Herald Canada.