New Investment Coming and winners in a down market
Published 02-SEP-2023 11:00 A.M.
11 minute read
Our New Portfolio Addition will be Announced on Monday (4th Sept) ~10AM AEST
On Monday, we will be announcing our new Investment.
We believe there are plenty of oversold small caps out there at the moment, with many still suffering the hangover from the selling in May and the tax loss selling in June...
Not to mention the general purge we saw across small caps during August.
We have spent most of this bear market year looking for new Investments.
For a lot of companies that have been on our watchlist for a while, share prices have come off a LOT in the last 12 to 18 months.
Even during the depths of rough market conditions over recent months, we have found high quality companies that we thought were trading at attractive valuations.
Three of our most recent Investments delivered substantial share price re-rates after we announced our Investment in them.
In the last four months, we have made three new portfolio additions:
- Our May Portfolio addition SLM went from 16.5c to 38c, touching a high of $1.34.
- Our June Portfolio addition REZ went from 1.2c to 1.9c, touching a high of 3.7c.
- Our July Portfolio addition HVY went from 11c to 13c touching a high of 39c.
This is during pretty rough small cap market conditions and we are looking forward to what these companies deliver over the coming few years.
Our new Portfolio addition will be announced Monday morning (4th September) at around 10AM AEST.
Remember that the past performance of our recent portfolio additions does not mean future portfolio additions will perform in a similar way. Small cap stocks are risky investments. There is no guarantee of a successful investment. Only invest what you can afford to lose, and always seek professional financial advice before investing.
Small cap market commentary: Some stocks are still delivering in the current market
Even though the small cap market feels rough right now, select companies with strong projects, management teams and macro themes are still performing relatively well.
Some are even going for share price runs of late.
Most other small cap stocks appear to be oversold.
The market is all about supply and demand - when sentiment is low, small cap stocks have little to no buy bids on screen.
As people try to free up cash for life expenses, they sell into small buy depths and share prices get smashed.
Most small caps are currently taking a beating... and have been for many months now.
In past rough market conditions we’ve observed an interesting phenomenon...
Investors sitting on cash seem to flock to any small cap with a bit of volume and some consistent upwards share price momentum.
The reasoning might be “if everything is going down, but this company is going up - there must be something to it”.
In a bad market, any stock that shows a bit of positivity seems to attract traders and volume seeking bull market style returns in a bear market.
And with very few other alternatives, stocks that can perform in a bad market seem to get outsized attention.
Here are a few of our stocks that are still going strong in the current market conditions:
Our Brazilian lithium Investment Latin Resources (ASX: LRS) is standing strong and delivered a nice run on Friday - closing close to its all time highs, at 38c per share.
Our oil & gas exploration Investment Invictus Energy (ASX:IVZ) has gone on a run of late churning through multiple 12c raises to hit a high of 19c.
IVZ is drilling its Mukuyu-2 well in Zimbabwe this month - here is the latest video from the company showing the rig mast being erected:
Our helium exploration Investment Noble Helium (ASX:NHE) has run from 13c to 21c since March, hitting a high of 29c a few weeks ago.
NHE is drilling its first well at its helium project in Tanzania this month, earlier this week NHE said the rig was only a few days away from arriving in Tanzania.
Our biotech Investment Arovella Therapeutics (ASX:ALA) also went on a run over the last two weeks and is now trading at 6.2c per share. ALA’s share price is up ~50% over the last two weeks.
And of course our healthcare Investment Oneview Healthcare (ASX:ONE) is still trading almost 400% above its low price in March earlier this year.
All this re-affirms to us that there is still capital out there ready to invest.
We think that people who are sitting on cash are being more selective about their investments and will only start buying if a company is delivering genuine fundamental progress.
This makes the current environment a stockpicker's market - one where investors need to be more selective and make sure the companies they are investing in have the potential to deliver progress that the market is willing to reward.
There are also many companies that are trading at comparatively low valuations, likely due to many holders exiting over the last six months as personal expenses start biting.
We have been predicting that the green shoots of the small cap market turnaround could start soon... but we just don’t know. Nobody does.
We predicted the small cap market might start turning back around in July, after the usual May and June selling...
...we were wrong.
It was OK for a bit in July but the last few weeks have been pretty bad in small cap land.
So we will continue to use the current small cap bear market conditions to add Investments that we hope will deliver for us over the next few years.
Our most successful Investments were made during the early 2020 bear market, and held into the subsequent market run that followed.
We are trying to do the same in 2023 small cap bear market:
Keep an eye out for our email in your inbox with our New Investment on Monday morning.
A comment on where we think the small cap market is right now:
We think the next 3-6 months could potentially offer some of the best long-term risk reward opportunities we have seen in a while.
The image below shows the general small cap market cycle that repeats every few years. It's pretty obvious that the bull market of 2021-2022 is at the high point or “mania phase”.
Currently we think the market is in the “blow off phase” - but it could be weeks, months or even a year before we start recovering again - we just don’t know:
The thing with markets is that it's almost impossible to pick the bottom (or the top) in a market.
Putting to work large amounts of capital never happens at the bottom because companies refuse to dilute with large raises.
Instead, we try to start Investing as close to the absolute bottom as possible.
As long as we get “close” to that bottom, then things should work out in the long run.
Keeping in mind of course that it’s almost impossible to pick the bottom, so we are ready to patiently wait for the market to turn again, which could take way longer than we expect AND this is the high risk small cap market, where all sorts of non-macro related things can also go wrong.
Most of the long term Investments we made in the depths of the 2020 bear market had a great run in the 2021-22 bull market.
Here is a table of the Investments we made during the 2020 bear market (from 2020 March to around August/September):
(NOTE: these are NOT all our Initial Entry Prices, for the purpose of this table we are showing specific Investments we made during the March 2020 to September 2020 window, which includes further placements, SPP’s and rights issues in stocks that we were already Invested in prior to March 2020):
Not all of these have panned out (yet) over the long run, however from each company’s “high point” there were strong returns delivered.
We still hold positions in all these companies (our hold period is generally 3 to 7 years), but we think it's always important to try and “Top Slice” (sell a little bit of) a position during good times, especially to attempt to achieve Free Carry.
(You can view all our current holdings here under "our holdings")
As per our overall investment strategy we hope that a few stocks in the portfolio will make outsized returns to cover the losses from the rest.
The 2020 bear market post-COVID crash was our first “planting season” with the likes of EXR, GAL, VUL, IVZ, MNB and EMN setting up our Portfolio for success.
The timing of our Investments meant that we generally had more winners from this era.
We did find good Investments throughout the bull market of 2021/22 but they were much harder to identify, because share prices were high across the board.
With the current market sentiment and expectations so low, we are hoping that when the market turns it will be the “2023 Investment crop” that has been planted that will show the biggest upside.
Keep an eye out for our email in your inbox with our new Investment on Monday morning.
What we wrote about this week 🧬 🦉 🏹
This week SGA cracked the graphite code and produced a sample with purity levels of 99.99%.
This is the purity level needed for lithium-ion batteries.
The drill rig has arrived on site and we are now just weeks away from IVZ starting its next shot at making a multi billion dollar oil & gas discovery.
HVY is putting the pieces together to build a globally significant garnet mine in WA by 2026, announcing this week the appointment of experienced garnet expert Aaron Williams to the board.
Nine months ago LCL acquired a project with a “nickel boulder” assaying up to 45.8% nickel.... this week LCL acquired the last uncontrolled parcel of land surrounding its project - protecting its interest in this valuable region.
In this educational article we define a “share price catalyst” and reveal our own Investment strategy for companies with catalysts on the horizon.
Quick Takes 🗣️
Macro News - What we are reading 📰
Push to amp up Australia’s critical minerals list (AFR)
Biden’s Bill: Looking back on Year One of the Great Green Energy Surge (White Noise Communications)
⏲️ Upcoming potential share price catalysts
Updates this week:
- IVZ: Drilling oil & gas target in Zimbabwe, Mukuyu-2 (Q3, 2023)
- IVZ completed its rig mobilisation and re-affirmed the September drill date for its Mukuyu-2 well. See our note on the news here.
- NHE: Scheduled to drill two targets at its helium project in Tanzania (Q3 2023).
- NHE put out a rig update earlier in the week. The rig is now only a few days away from Tanzania. We are tracking the rig move via the following link here.
- LNR: >10,000m drill program at rare earth’s project in WA
- LNR put out the first batch of assays from its drill program. The assay results from the deeper carbonatite targets are still pending. See our Quick Take on the results here.
- EXR: Daydream-2 appraisal well, QLD
- EXR raised $7M at 7c per share to fund its upcoming Daydream-2 well. See the ASX announcement here.
- 88E: Flow test well, Alaska (Q4, 2023)
- 88E raised $8M cash via a rights issue + shortfall placement at 0.6c per share. See our Quick Take on the news here.
- GAL: Drilling at the company’s PGE project in the Norseman region, WA.
- GAL kicked off its drill program chasing new discoveries across three key target areas. See our Quick Take on the news here.
No material news this week:
- BOD: Phase III clinical trial for CBD insomnia treatment (end of August)
- DXB: Interim Analysis of Phase III Clinical Trial on FSGS (March 2024)
- LYN: Drilling its Bow River nickel-copper-PGE project in WA
- TMR: Maiden JORC resource estimate for its Canadian gold project
- TG1: Drilling at its NSW gold project.
- SLM: Maiden drill program at its Brazilian lithium project
- LCL: Drilling at its primary PNG copper-gold target
- GGE: Drilling for helium in the US (Q4 2023)
Have a great weekend,
General Information Only
S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.
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