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Buzz on the Bullboards: the BIG Picture on Small-Caps

Stockhouse Editorial
0 Comments| February 1, 2019

Stockhouse is Canada’s largest financial portal for Canadian small-cap investors. Our Bullboards – your Bullboards – are the leading forum to discuss these Canadian-listed small-cap corporations. That means the trends of the Stockhouse Community have real relevance to investors. You represent the pulse of Canadian markets.

So in this edition of Buzz on the Bullboards, we’ve compiled some Big Picture data on you. We’ll show you what companies you’ve been focusing on, in a sector-by-sector breakdown for both 2017 and 2018. Then we’ll compare that data with a general sector-by-sector breakdown on where Stockhouse’s users and members have been spending most of their time over these past two years.

For 2017; here are the Top 100 Companies (as measured by total traffic to their Stockhouse Bullboards).

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In 2017, Metals & Mining led the way, as it often does with the Stockhouse Community – and Canadian small-cap investors. Thirty-two of the companies (32%) in our Top-100 were from this industry grouping, virtually 1/3rd. Twenty-five of the Top-100 (25%) were cannabis companies. Also not surprising.

However, Stockhouse is much more than a mining & cannabis website. Fifteen of the Top-100 companies were represented by the Healthcare sector, more than one out of seven. Thirteen were tech companies, a hair below one out of seven. Eight of the Top-100 were Energy companies and another seven fell under Industrials.

Now let’s compare this with how the Top-100 breaks down for 2018.

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Obviously, there is a big year-over-year difference here. In our Top-100, cannabis companies went from ¼ representation in 2017 to nearly ½ of our Top-100 (46%). Metals & mining dropped, from 32% to 18%. Healthcare dropped, from 15% to 9%. Tech companies went from 13% (2017) to 8% (2018). Energy stayed the same: 8% in both years. Industrials dipped slightly (7% to 6%). And we added a new sector category: blockchain, accounting for 5% of our Top-100 companies in 2018.

Now let’s look at the sector data. Here we see the same shift in sentiment, except magnified to an even greater degree.

Click to enlarge
Click to enlarge

In 2017; 36% of the total reads on Stockhouse Bullboards occurred with cannabis stocks. Last year, that number soared to an incredible 64%, closing in on 2/3rds of total reads.

This partially reflects the fact that there was an enormous amount of news, regulatory changes, and sector volatility in cannabis in 2018. Investors wanting to remain on top of their cannabis investing needed to spend extra time networking on the Bullboards. Otherwise, the trend we saw with companies is very similar in relative terms.

The question: what does this data really mean to investors? Here we can help.

First of all, part of this shift isn’t simply a matter of the tide going out in other sectors at Stockhouse. Rather, total traffic in 2018 was significantly higher at Stockhouse last year, and (as we see) the vast majority of all this additional traffic went to cannabis companies (cannabis Bullboards), but also a not-insignificant level of interest in Blockchain.

At the same time, there has been some migration of investor dollars out of other, traditional sectors – and into cannabis (and blockchain). So when investors in mining or tech or healthcare or energy companies feel frustration at the extremely low valuations, even for top-notch companies, part of this is due to there being less capital flowing into these sectors, at the moment.

As we move into 2019, it’s important for investors to be aware of this trend, but also important to put it into context. For the most part, this migration of capital is over.

The cannabis sector has now been maturing for several years. Legalized recreational cannabis (in Canada) is now a reality. Cannabis normalization continues in the U.S. and across much of the world, but at a somewhat measured pace. There may still be some increase in the total number of cannabis companies (and investor dollars flowing into this sector), but certainly not the sort of dramatic shift we’ve seen in recent years.

On the other hand, consolidation is becoming a significant trend within the cannabis industry. We saw such activity accelerating through 2018 and there is every reason to expect either a continuation or further acceleration in this activity. It’s what normally takes place in the evolution of new sectors.

This consolidation also concentrates investor capital, and that could translate into a net outflow of dollars from the cannabis sector as 2019 progresses. Reinforcing this possibility are two perennial investor strategies: diversification and sector rebalancing.

Experienced investors know the perils of being overly concentrated with their investments: a sharp increase in overall portfolio risk because success or failure is derived from a much smaller number of companies and/or sectors. For several reasons, significant numbers of investors may currently be “overweight” in cannabis, including:

  • Positioning yourselves for important regulatory changes in Canada, the U.S., and (increasingly) Europe and the Rest of the World
  • The increase in value in cannabis stocks

Investors diversify and engage in sector rebalancing for two parallel and important reasons: risk mitigation and maximizing (long-term) returns. The more that investors are “spread out” with their holdings (including some counter-cyclical investing) the less overall risk they are exposed to due to market volatility and the economic/business cycle.

No one at Stockhouse is saying “get out of cannabis.” As an informed voice on the cannabis sector, we remain very bullish on the short- and long-term growth potential of this new, exciting industry. What we are suggesting is that for investors who think that now is the time for some diversification/rebalancing, there are extraordinary value opportunities in mining, tech, healthcare, energy, and blockchain.

Cannabis is strong, cannabis has amazing growth potential. But, relative to these other sectors, cannabis stocks are closer to being fully valued. Want to capitalize on the Electric Vehicle Revolution? Battery Metals stocks are on sale. Want to hedge against market volatility by increasing your exposure to gold (or silver)? Precious metals mining stocks are on sale.

Click to enlarge

Want to capitalize on emerging opportunities in technology, in a world where the pace of technological change continues to accelerate? Tech stocks are on sale. Want to capitalize on the perennial opportunities in healthcare, as our aging populations and rising health expectations make this a perma-growth sector? Healthcare stocks are on sale.

The same with Energy stocks. The same with Industrials. The same with Blockchain. After a spectacular rise, the blockchain sector took a large, collective hit as cryptocurrencies suffered a market meltdown. But blockchain technology and blockchain opportunities extend far beyond the application of this technology in cryptocurrency markets.

Profiting in investing is a function of successfully managing several, simultaneous strategies.

  • Identifying which sectors/niches have the greatest current and future growth potential
  • Identifying which companies offer the most robust growth potential
  • Identifying which sectors/companies currently represent the best relative value

We need to keep our fingers on the pulse of the global economy and remain cognizant of what’s hot and what’s not. We need to do our due diligence on individual companies, to identify the best candidates within these various sectors. And we need to remain aware of where the best value opportunities currently exist.

Buy low; sell high.

Canada boast lots of great publicly listed small-cap corporations. These companies discover and develop natural resources. They pioneer innovations in a multitude of different settings. They are the first to identify new opportunities, the most-nimble entities when it comes to exploiting these opportunities, and in many cases these companies are creating new opportunities on their own.

The cannabis sector will be a growth story for decades to come. While it’s important to “get in early”, investors need feel no pressure that this is some limited-time event. And with several important sectors sporting low-tide valuations, virtually across the board, opportunity knocks elsewhere.

Continue to prosper with your cannabis investing. But everyone likes a sale. While cannabis will remain an opportunity for many years to come, the ultra-low valuations that exist for hundreds of quality companies across these other sectors could disappear at any time.

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