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Buzz on the Bullboards: Reviewing 2018, Looking Ahead to 2019


Stockhouse Editorial
1 Comment| December 21, 2018


For small-cap investors, 2018 will not go into the books as a stellar year for investment returns. This is part of the reality of markets – and investing in markets. Few companies (or sectors) grow in a straight line.

This means ebbs and flows for sectors/companies. But investors should welcome this uneven progression. If companies did evolve in a straight line (in terms of share price), this implies companies that are generally fully valued at all times. And this provides little opportunity for profit in investing.

Prospering in markets is a function of a very simple tautology: buy low; sell high. If companies are generally always fully valued, there will never be the chance to “buy low”. It is pullbacks and weaknesses in valuations today that are the profit opportunities of tomorrow.

Framed in this context, 2018 has been a good year for setting up profit opportunities in 2019. Clearly, those “profit opportunities” are at least partially dependent on turbulent stock markets not suffering some major downturn next year.

However, as a recent Stockhouse article pointed out to investors, if you’re not investing your money in equities, what are you going to do generate a return on savings – with inflation relentlessly devouring those savings?

Investors need to ignore the phony “inflation” numbers from central bankers and Western governments who have a strong incentive to fudge the numbers. They bear no resemblance to the real world.

Anyone who eats and has a roof over their head knows that the banker-created inflation that is driving up food and housing costs is soaring higher at the fastest rate in our lifetime. If we don’t invest our savings, those savings will literally evaporate from inflation (except for what investors shelter in gold or silver).

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.

  • Alan Greenspan, 1966

Greenspan’s warning was an over-simplification. Gold and silver bullion are known shelters from inflation. While equities don’t provide the same absolute protection, they are a hedge against inflation.

As Stockhouse investors look ahead for profit opportunities in 2019, where were investors primarily focused in 2018?

Cannabis

All regular visitors to Stockhouse know that cannabis has been the dominant sector here in 2018, increasing its dominance even further from 2017. Bullboard visits for the leading cannabis stocks in 2018 at Stockhouse boast some staggering numbers.

Click to enlarge

That’s 5.7 million Bullboard reads for Aurora Cannabis Inc. (TSX: ACB, OTCQB: ACBFF, Forum). Another 3.7 million reads for the Aphria Inc. (TSX: APHA, OTCQB: APHQF, Forum) Bullboard. There were 2.6 million Bullboard reads for Canopy Growth Corp. (TSX: WEED, NYSE: CGC, Forum), 1.86 million for Namaste Technologies Inc. (TSX: V.N, OTCQB: NXTTF, Forum), 1.84 million for FSD Pharma Inc. (CSE: HUGE, OTCQB: FSDDF, Forum), and 1.66 million for Isodiol International Inc. (CSE: ISOL, OTCQB: ISOLF, Forum).

Generally speaking, 2018 started off in a downward slide for cannabis stocks as companies gave back ground following the blow-off rally in cannabis at the end of 2017. After these stocks slumbered for several months, there was an abbreviated cannabis rally starting in mid-summer, with cannabis stocks then tailing off over the past few months.

For value-hunters, this means 2019 begins with many opportunities to be found in cannabis. For the companies noted above, 2018 was a better year for some than others. However, investors visiting these large Stockhouse hubs don’t only congregate there to talk about these particular companies.

Regular visitors to these Bullboards will swap investment ideas with other interested investors. Meanwhile, newer investors will often visit these larger hubs just to gather general information about the sector – and upgrade their knowledge level. For new Stockhouse investors looking for cannabis investment ideas, these larger Bullboard hubs can be a great place to start learning.

Metals & mining

It was a general tough year across the board in the mining industry, even for companies focused on the hotter metals markets for “battery metals”. For mining companies whose operations are focused on traditional metals markets, it was perhaps even a more difficult year.

Despite this, discussions at Stockhouse about the most popular mining stocks were the 2nd largest contributor to overall Bullboard reads. The following companies were our largest metals & mining hubs in 2018.

Click to enlarge

It should not be a surprise to long-time members of the Stockhouse Community that interest in these resource stocks ranked only behind cannabis this year. Stockhouse’s (mostly Canadian) small-cap investors are traditionally resource-sector investors, including energy companies, which we will examine separately.

Resource investors understand the cyclical nature of these resource markets, and thus the cyclical valuations for the companies that find and produce these resources. These are true buy-and-hold investors who live and breathe the mantra buy low, sell high.

The bad news for 2018 is that valuations for most mining stocks are at extremely low levels. This meant that there were not many profit-taking opportunities for mining investors over the past year.

The flip-side to this is that as we approach the end of 2018, resource stock valuations represent an epic value opportunity for long-term investors. The due diligence and value-buying that investors do today may not pay off in immediate profits, but when these companies begin to move higher, the potential upside will dwarf most other industries.

Investors have gotten a taste of this already. The most popular metals & mining Bullboard at Stockhouse in 2018 was the Royal Nickel Corp. (TSX: RNX, OTCQB: RNKLF, Forum) Bullboard. It doesn’t take a rocket scientist to figure out why (in a down year) this was Stockhouse’s most popular mining stock.

BuzzDec2_RNX.jpg

(click to enlarge)

The message here for value investors is simple. On September 7, 2018, RNX opened at $0.09. On September 24, 2018, RNX closed at $1.15. Investors who were already in had the potential to reap as much as a 1,278% gain, in just over two weeks. Even though much of those initial gains have been given back, Royal Nickel is still trading well above levels from a year ago.

This is what happens with such compressed valuations (across the board) in the mining sector. When a mining company announces a major discovery, or perhaps closes on some company-making acquisition, there is the potential for enormous jumps in the valuations of these companies -- more-or-less overnight “ten baggers”.

For some investors, this may look like touting the winners of a lottery. How do you know when any particular mining company is about to strike it big? You don’t.

That’s why experienced mining (and resource) investors follow a Golden Rule: hold “a basket” of these companies. Look for solid management with a promising project(s). Make sure that these companies are sufficiently capitalized. See if there is strong institutional support, i.e. the “strong hands” who will generally hang in there even in adverse market conditions.

All it takes is for one of the companies in your basket to produce a discovery such as Royal Nickel’s Beta Hunt Gold Mine and its “Father’s Day Vein”, and your overall portfolio return for the year has been secured.

Healthcare

With both aging populations and greater expectations for quality-of-life, healthcare is a perennial growth sector. And that growth is almost certain to continue, even in more dire market/economic scenarios. Come what may, we still need to look after our health.

For this reason, it’s only logical that healthcare has one of the strongest followings at Stockhouse with respect to small-cap stocks. In 2018, healthcare was the third most popular destination for Bullboard visitors.

Click to enlarge

Yet valuations for small-cap healthcare companies are also extremely compressed as we end the year. Again, Stockhouse investors can see a major valuation disconnect – and thus the potential for above-average returns.

As with mining companies, many of these small-caps are pioneering “new discoveries” (in what are often multi-billion dollar markets). The difference is that these discoveries can save lives, or dramatically improve quality-of-life. But just as with a mining company, at such compressed levels even one major breakthrough can be a portfolio-maker.

Energy

Our modern global economy still runs on energy, not technology. While there is a Power Revolution taking place in the world that is reducing our dependency on traditional fossil fuels to power the global economy, this is a very long-term transition. It will occur not over a span of years, or even a few decades, but over many decades – perhaps even spanning a century.

As this transition occurs, the reality is that the world continues to have limited options to continue to generate (in particular) the oil that we need to not only fuel energy demand, but for literally millions of additional consumer and industrial applications. We will continue to need substantial quantities of oil for even the distant foreseeable future.

Canada is an Energy Economy. While energy is another sector where small-cap valuations remain extremely depressed, this implies the same sort of break-out potential when one of these companies achieves some major operational success.

At current valuations, even many strong-and-stable names in the energy sector are at extremely attractive valuation levels. A glance at our Energy Bullboard leaders shows that Stockhouse’s still strong contingent of energy investors has been gravitating to some of these larger names in 2018.

Click to enlarge

Industrials

The year 2018 was a dramatic year for Canadian industrials bellwether, Bombardier Inc. (TSX: BBD.A, OTCQB: BDRBF, Forum). More precisely, it was two separate “years” for Bombardier.

BuzzDec21_BBD-(1).jpg

(click to enlarge)

The first half of 2018 marked a strong upswing for Bombardier, with the Company nearly doubling its share price. In the second half of 2018, Bombardier not only gave back all those gains but is poised to close significantly lower on the year. This is where investor due diligence really comes into play.

Which Bombardier will we see in 2019? For investors who see BBD through the prism of the first half of 2018, Bombardier is a clear “buy”. For those who think its second-half performance will be more reflective of what is in store for 2019, they will probably want to look elsewhere for potential investments among the Industrials group.

Click to enlarge

Technology

If there is one thing that almost everyone can agree upon, it is that our world of the 21st century is more dependent on technology and technological innovation than ever before. So how is it possible that the small-cap technology companies who pioneer most true innovation in this space are wallowing at such abysmal valuation levels?

Click to enlarge

There are many excellent small-cap tech companies to be found in Canada, and/or in Canadian markets – both within and outside our Bullboard leaders for 2018. For investors who have a risk/reward tolerance for these speculative companies, there is a tremendous opportunity to acquire positions (or add to them) at very attractive entry points.

As with many of the other sectors that are of great interest to Stockhouse’s small-cap investors, an important breakthrough or discovery can trump even a bear market. Tech is another place where bargain-hungry investors have plenty of strong candidates from which to choose.

Blockchain

How many investors with a focus on tech would have predicted at the beginning of the year that Blockchain would be a laggard in 2018, in terms of both sector valuations and (by year-end) investor interest? Clearly, much of the damage in terms of sagging valuations and wavering sentiment among investors has been the spill-over effect from the meltdown in cryptocurrencies.

However, the scope of blockchain technology goes well beyond cryptocurrencies. Proponents of this technology have not changed their opinion that blockchain still has “revolutionary” potential in a number of commercial contexts. Again, investors need to do their own due diligence and form their own opinions.

Click to enlarge

Last on the agenda for this end-of-year edition of Buzz on the Bullboards is to report on our Investor Pulse Polls, located on the Stockhouse homepage. The previous question we posed to investors related to cannabis.

Click to enlarge

What those numbers say is that the focus of most Canadian cannabis investors remains North America. However, as new cannabis jurisdictions emerge and some of the jurisdictions above continue to evolve, we will likely see Stockhouse cannabis investors taking a more international perspective moving forward.

Now for our poll to end 2018 and look ahead to next year (which will appear shortly on the homepage). We've suggested that Stockhouse investors need to remain true to their small-cap investing roots. Now tell us, where are you looking as we head into 2019?

Where do you see the best profit opportunities in 2019?

  1. Cannabis
  2. Mining
  3. Healthcare
  4. Energy
  5. Technology
  6. None of the above

Small-cap investing is not for the faint of heart. That truism was hammered home this year. Next year might not be any better, but that doesn’t mean that investors should be turning their backs on small-cap stocks.

Investing has traditionally been a long-term proposition. With small-caps in virtually every sector in deep troughs, small-cap stocks have never been more undervalued versus large-cap stocks.

The increasing gap between large-cap and small-cap stock performance in recent years has not been because of large-cap earnings. Earnings for U.S. large caps flattened out in 2011. Since that time, these large caps were just getting more and more expensive.

The only place where investors can find value in most equities classes is at the small-cap and mid-cap levels. While markets remain very uncertain as we head into 2019, it’s very clear where investors need to look for value opportunities. And when investors want to research and discuss Canadian small-cap stocks, Stockhouse remains your best destination.

FULL DISCLOSURE: FSD Pharma Inc. is a paid client of Stockhouse Publishing.



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