By any measure, 2018 was a tough year for Canadian small-cap investors. Not a single sector provided solid returns over the course of the year. With weakness and volatility in U.S. markets in Q4 spilling over into other markets, the final quarter was especially challenging with respect to investor ROI.
At the same time, even in those challenging conditions there were individual winners in 2018. For our first edition of Buzz on the Bullboards for 2019, we thought we would set two objectives:
- Identify some of the (small) pool of winners from last year.
- Report on where Stockhouse investors see the best prospects for gains in 2019.
Cannabis
Cannabis remains the sector of greatest interest for Stockhouse investors at present. Our end of the year edition for 2018 provided some of the spectacular numbers regarding Stockhouse’s most-popular cannabis stocks. Improbably, valuations for Canadian cannabis companies tailed off badly toward the end of the year, immediately after Canada’s new, national market for recreational cannabis became a reality.
One contributing factor to this poor performance (in addition to spillover from U.S. markets) is the dramatic resurgence in anti-cannabis propaganda from the Corporate media. Old anti-cannabis pseudo-science that never qualified as legitimate research is being recirculated. New anti-cannabis scare tactics are being rolled out.
The opposite perspective in addressing the poor performance of cannabis (and other) stocks in 2018 is that many of these companies are currently extraordinarily cheap. Rarely have investors had such a selection of incredible value propositions. That said, one cannabis company did provide investors with a very strong return last year – although admittedly in a frustratingly circuitous manner.
FSD Pharma Inc. (CSE: HUGE, OTCQB: FSDDF, Forum) produced a one-year return for investors of 133%, opening at $0.09 and closing the year at $0.21. Making this gain more impressive is that HUGE didn’t commence public trading until May 29, 2019, at which time the Company promptly set a new trading record on the CSE. However, as was generally the case with 2018’s winners, FSD Pharma’s path to generating this return was anything but a straight line.
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Generally, investors would be very happy reaping a one-year return of 133% on one of their holdings, and even more so in generating that gain in a mere six months. But given HUGE’s 52-week high of $0.94 (briefly a ten-bagger), most holders of this stock will be disappointed with the current valuation – especially those who bought in after part of that big move higher.
For investors seeing this “glass” as half-full, FSD Pharma may look especially attractive at its current price, and those who bought in higher may see now as an opportune time to average down.
Healthcare
If investors were asked to pick a sector that yielded several small-cap winners in 2018, healthcare would probably not have been at the top of the list – given the weak sentiment (and poor performance) among these stocks. However, healthcare arguably should be much higher on investor radar.
With aging populations and greater health expectations, healthcare is not merely a perennial growth sector, it represents growth that is largely independent from the economic cycle. Expenditures on our health are generally one of the last areas to see cuts in our personal budgets – and many health expenses are essentially non-discretionary.
Healthcare provides the closest thing to a guaranteed CAGR among any sector, meaning plenty of potential opportunities for investors to harvest strong returns. In 2018, the following three companies were among the strongest small-cap healthcare stocks.
Antibe Therapeutics Inc. (TSX: V.ATE, OTCQB: ATBPF, Forum) is another example of why – especially with returns hard to come by – investors need to be in early. ATE provided more than a double for investors over the course of 2018, opening at $0.15 and ending the year at $0.31 (up 107%).
Most of those gains came early in the year, based upon ATE’s big news of a successful Phase II clinical trial. Investors who waited until after this successful announcement to make their entry had no opportunity for profit – at least not in 2018.
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Theralase Technologies Inc. (TSX: V.TLT, OTCQB: TLTFF, Forum) has had a strong following at Stockhouse for a considerable period of time, as enthusiasm builds concerning its innovative anti-cancer research. As with Antibe, this is another technology story where investors who have been able to generate positive returns over the past year have generally needed to be holding their shares ahead of the Company’s most important news releases for the year. Buy on rumor; sell on news.
TLT’s overall return for the year was a relatively modest 26% (opening at $0.25 and closing 2018 at $0.315). But with a 52-week low of $0.19 and a 52-week high of $0.455, there was the scope for larger gains. And as its research advances, the potential pay-offs for success continue to increase.
Theratechnologies Inc. (TSX: TH, OTCQB: THERF, Forum) generated an overall return of 12% in 2018 (from $7.43 to $8.32). But again, this misses the mark with respect to this established, TSX-listed healthcare company. TH’s 52-week high of $14.75 was built off of important news in late-Spring, with (like many companies) Theratechnologies giving back most of those gains toward the end of the year.
Metals & mining
Last, but certainly not least is the biggest small-cap winner from 2018: Royal Nickel Corp (RNC Minerals) (TSX: RNX, OTCQB: RNKLF, Forum). Stockhouse investors are no strangers to big success stories from the world of small-cap mining. Tough times in most mining sectors (despite a number of strong resource markets) has meant that there has been less of these stories in recent years.
Royal Nickel was up 182% in 2018, rising from $0.17 to $0.48. But this was another one of the rare opportunities for a ten-bagger in 2018, with a 52-week low of $0.07 and a 52-week high of $1.18. Support for RNX at Stockhouse remains strong, and (at less than half of its 52-week high) some mining investors may see its current valuation as an attractive entry point. Do your own due diligence.
These are the companies who did achieve the most success last year. Almost certainly different companies will top the list this year. The interesting question for investors is in which sector(s) are this year’s gains most likely to come?
This was the question that we asked Stockhouse investors in our Investor Pulse Poll to end 2018. And here are the results of that poll.
Cannabis leads the way among Stockhouse investors in terms of expectations for 2019, by a significant margin (31% support). Given the tremendous real-world growth potential in this sector and some of the big deals being done in the cannabis space, clearly investors are seeing 2019 as a chance for sector valuations to catch up to these realities.
Mining is the second-favorite pick among investors. As already noted, valuations are extremely compressed across most sectors and (as we saw with RNX) investors positioned in these companies can make spectacular gains, virtually overnight, on any important discoveries.
As resource investors, Stockhouse investors also remain loyal to the Energy sector, with 1/6th of Stockhouse respondents seeing this as the best place for 2019 opportunities. As with Mining, the story here is compressed valuations and companies that are overdue for a sustained rally.
Healthcare and Technology drew the least support among the five groups we specifically identified to our audience. But as already discussed, healthcare is a reliable long-term investment opportunity – that produced a significant share of 2018 winners. Small-cap technology companies remain a place for investors to capture outsized returns on the back of any significant innovation or commercial success.
A significant minority of investors (11%) chose “none of the above”. Here the terms of reference aren’t specific enough to know whether respondents have a different preference, or whether these are Bears who simply don’t see any good opportunities for 2019.
What can be said with certainty is that no investors possess their own crystal ball. Current market conditions are uncertain (at best), but market experts are fairly evenly divided on where we go from here.
Coming up is January’s VRIC conference, so mining is on our minds and hopefully the minds of most Stockhouse investors. This year’s event is on January 21 and 22 (Vancouver Convention Center West). Investors should watch early next week for a Stockhouse feature on VRIC – that includes a special early-registration code for investors.
In this week’s Investor Pulse Poll, we’re asking you this.
As always, readers can locate this Poll (and cast your own vote) on the Stockhouse homepage. With many metals markets currently depressed, predicting where the strongest markets will materialize can be an important determinant of success.
FULL DISCLOSURE: FSD Pharma Inc. and Theralase Technologies Inc are clients of Stockhouse Publishing.