Thursday, October 30, 2014
VC Commodity Comment : Oil Prices and Oil Stocks (OIH, CFW.T, TCW.T, PD.T) : Gold and Gold Stocks (GDXJ, NES.V, 1051.H) : Gold Stock Hedging
The Oil Market
Good article on Bloomberg today that sums up the current forces driving the price of oil. Please have a read here:
The premise of the article is that OPEC is to blame for the current rout in oil prices. This is a tad misleading, as we would argue that cheating by OPEC members is only one factor driving the selloff in prices. Our view has been explained in prior notes, but in a nutshell, oil prices are selling off as risk assets correct and global economic fears reverberate through the economy. More importantly, oil prices were arguably too high north of $100/bbl. given a shaky Chinese economy and a surge in global oil supplies on the back of the US shale boom.
We don’t know definitely if oil holds here. People a lot smarter than us are saying oil may go to $70/bbl. before it finds a floor. This could very well be true as the pinch point for oil production in the US is around that level, and OPEC may come out with stronger measures to shore up global prices.
As we have said previously, we welcome the current sell off in oil prices. It is a sector that has amongst the best earnings visibility out there as demand is inelastic and supply will ultimately be crimped if prices fall far enough. We have wanted to own various oil names, but have been hesitant to chase the complex higher when the strength in oil prices did not make complete sense to us.
In concert with buying low and selling high, we would argue that you don’t want to become more bearish on oil as it is going to new lows. Unlike some other high flying sectors in the market, oil does have defensive qualities if its sell off becomes too precipitous. The relationship of the WTI oil price to the S&P 500 is at 10 year lows. This is a good indication that oil has discounted a large chunk of the current risk off trade and is pricing in the potential for slower global economic growth.
WTI Oil vs. S&P 500 – 10 Years
We may not be at the bottom for prices, but we feel a lot better owning quality oil plays that have corrected substantially when the broad equity market is still close to all-time highs. We like the oil service companies (OIH:$44.12), the drillers (CFW.T:C$13.48, TCW.T:C$10.25, PD.T:C$9.34). It is worth noting, that if we have a full on collapse in the markets, these names will get punished as well. But under such a scenario, they should do better on a relative basis given what has already been a sizeable correction.
Gold and Gold Stocks
We have waxed on a great length about the gold complex in the past. We have maintained a cautious stance towards precious metal plays. Attempting to play the large swings where possible, with the view that longer term trend is to the downside.
From a fundamental standpoint, all of the variables that drive gold and silver are working against them at the present time: the rate of change in central bank stimulus measures, real rates, inflation expectations, broad market strength and the US dollar. Maintaining a bullish view on gold and silver over the past couple of years has been based on dogma, or alternatively, underpinned by the belief that the equivalent to a financial system boogeyman will jump out at any time and drive gold up $2,000 in a day.
We completely understand all of the arguments that support the bullish position as it relates to gold. They are well-known. We will be there again, with both feet, when the trend changes. Hopefully anyway.
For the time being, we are seeing more of the same, which hasn’t worked for gold. Most importantly, real rates in the US are due to move higher as inflation remains tame and interest rates normalize from historically low levels. This feeds into US dollar strength, which continues to surprise to the upside. You don’t have to like US dollar strength, or believe it is fundamentally sound, but you have to respect it none-the-less. It is what it is - until it isn’t.
Gold Bullion vs. US Real Rate – 20 Years (Monthly)
Over the short term, from a trading standpoint, recent strength in gold has been encouraging. Gold has managed to hold the critical $1,200/oz level. This despite the fact that other commodities have broken their long term trends and going to new lows. This relative strength is worth taking note of.
Gold Bullion – 5 Years
Note how silver, platinum and oil have all had a big wash-out and broken their well-established trends.
Silver – 5 Years
Platinum – 5 Years
WTI Oil – 5 Years
So, gold has held up pretty well in light of US dollar strength and a significant correction in other key commodities. This is a bullish signal from a trading standpoint, if you are looking to trade a bounce. That said, we think the risk / reward of playing a bounce in-here is poor. If gold doesn’t hold, you could see a large sell-off in the metal as a technical break would open it up to another wave of selling.
Ideally, we would like to see the US dollar make an interim top and other headline commodities stabilize before taking another swing at gold and related stocks. If the US dollar moves to new highs, this will certainly push gold over the edge. US dollar strength has caught the market largely by surprise and there is no reason to suggest it can’t continue to do so. It is technically overbought over the short term, so if it fails to definitively break to new highs, we will be sniffing around the gold complex for trading ideas.
US Dollar – 5 Years
As a group, we do have select names in the precious metals complex that we like from a bottom up standpoint. Names where you have solid assets and identifiable catalysts in the pipeline. These include G-Resources Group (1051.H:HKD$0.192) and Newstrike Capital Inc. (NES.V:C$1.01). Given that we have been nervous about the strength of the overall gold market, we have complemented these ideas by going short a basket of junior mining gold stocks via the Market Vectors Jr Gold Miner Index (GDXJ:$27.08). This essentially removes gold market risk, which helps us sleep at night given the heightened risk in the complex.
The short call has worked out quite well, but we have to admit, we are getting nervous about being short a market that is as oversold as it is. So, we will be looking to remove this short over the next couple of weeks if we see US dollar strength moderate, gold bullion definitely hold $1,200/oz or some dovish comments from the Fed.
GDXJ – 3 Years
As always, please call your Verdmont Representative for more detail on our current commodity view and themes we see playing out in the complex. We can also provide trade ideas if you are looking to exploit any of these themes.
Tuesday, October 28, 2014
Slyce Inc. (SLC.V:C$0.78) - Partnering with Neiman Marcus to Provide Visual Search Technology - "Snap.Find.Shop."
Slyce has partnered with Neiman Marcus to provide visual search technology, enabling Neiman Marcus customers to snap pictures of items with their smartphone and instantly shop for these items on the company’s website. An overview of the transaction and the new relationship can be found in the following news release:
We do not want to make a habit of inundating our clients with company specific news releases - we know intimately how annoying this can be. Rather, we are forwarding today’s news about Slyce because we believe it is a transformative development for the company as it is a “rubber hitting the road” moment.
Some key takeaways from todays announcement as we see it:
- For a company like Neiman Marcus, its brand is the lifeblood of its high end retail model. Neiman Marcus would not enter into a business relationship with a company like Slyce if it thought it would cheapen its customers shopping experience in any way. This is a huge vote of confidence in the SLC.V business model.
- We would imagine the Neiman Marcus relationship has been in development for months. There is a long lead time in getting retailers up and running on the Slyce platform. The process involves a hefty amount of due diligence on SLC.V as a company and the rigidity of its underlying value proposition given that both are completely new. Once a retailer is interested, the onboarding process is lengthy as each individual product a company wishes to sell needs to be digitally stored and various elements of its technology merged into the Slyce platform.
- When an industry leader like Neiman Marcus offers its clients an enhanced shopping experience, you can bet that its competitors are pouring over todays announcement and asking themselves, “who the hell is Slyce?”
- Given the length of time in setting up a relationship, we would assume that there are numerous companies in the onboarding process at the present time. This suggests that there will be multiple announcements about new partnerships into the foreseeable future.
- New partnerships will enable the market to extrapolate the potential profitability of Slyce moving forward. It is still early days, and hard numbers are scant, but Slyce’s revenue model is highly attractive. Each new relationship entails a licensing fee and generally represents a contractual agreement which can span a few years. A company typically pays to have each individual item digitized and pays Slyce each time a customer clicks on a given item, regardless if they purchase it or not. Finally, if a shopper ultimately chooses to purchase a select item, SLC.V is paid on the transaction. Slyce essentially draws 4 different revenue lines from 1 underlying relationship, which should prove very profitable with time.
Please have a look at some of the links in the news release to get a better idea about the transaction and Slyce in general. As an aside, a girl in our office noticed the words “handbags and shoes” in the release – surprise, surprise. She immediately downloaded the Neiman Marcus App from the App Store on her iPhone. She then took a picture of her Michael Kors handbag, which is like sooooo to die for by the way, and within a few seconds was able to view options to buy on the Neiman Marcus website. Cool stuff.
We are owners of SLC.V. As we have said, Slyce could fundamentally change the way in which consumers shop and how retailers interact with customers. This is of course a lofty goal, and by extension, investing in Slyce is fraught with risk. That said, we continue to believe that the Slyce story is just getting going and todays announcement serves to bolster that view.
Please call your Verdmont Representative for more information on Slyce.
Friday, October 24, 2014
Verdmont Capital has been actively shopping for small cap companies with disruptive technologies that could potentially change the way in which existing industries operate.
We believe that Slyce Inc. is a company that fits the bill as they are on the cusp of drastically altering the way consumers shop for and purchase goods. In addition to a standout technology platform, the company has amongst the best management we have seen.
Verdmont Capital and select clients invested in Slyce prior to the company going public on July 21, 2014 at a price C$0.60/sh. After chewing through a substantial amount of stock since it began trading, we believe the stock is now poised to move higher.
SLC.V – Since Go-Public Transaction July 21, 2014
The company’s ultimate goal is to bridge the gap between the real and online world for consumers. The platform they have created allows consumers to scan items with their smart phones and immediately find the retailer that is offering the best price and availability for a given product. We believe that Slyce is well positioned to insert itself into the lucrative space between the consumer and online retailer.
Since the Go-Public transaction, Slyce has acquired two companies in order to improve the technology of its platform. Drivetrain Agency was acquired by $3.5 million and the company paid $5 million for BuyCode. These acquisitions should serve to improve the user experience by increasing the amount of goods that can be recognized using Slyce’s image-recognition app.
For a snapshot of Slyce’s technology and the value proposition it provides both consumers and retailers alike, please view the attached company presentation by clicking here.
We believe the stock will outperform the market over the short term for the following reasons:
- Slyce has a truly unique platform that legitimately can reshape the relationship between consumers and retailers into the foreseeable future. As confidence in their model grows, this will create exponential buying interest in the stock.
- SLC.V is reaching new highs after bouncing along since its go-public transaction. This suggests to us that the market has absorbed much of the stock overhang that existed at the commencement of trading.
- The company will in all-likelihood obtain additional analyst coverage, which will expose the story to a broader audience.
- Slyce is due to begin generating revenue over the next few months. This will lend a huge degree of credibility to the company’s business model and wake the market up to the stocks embedded earnings power. In other words, the company will become less of a dream and more of a reality.
- SLC.V continues to sign up top tier retailers to its platform. It is extremely rare to find a startup technology company with a pedigree roster of clients like Slyce. We do not believe that the company will be trading at an enterprise value of ~C$60Mil as it continues to expand its already impressive list of clients.
- From what we can ascertain, the company’s only competitor with a similar product is Amazon. We are of the mindset that if you trade at an EV ~C$60Mil, and your only competitor has a market cap off $132Bil, you have already won. We also believe that AMZN’s product is far inferior to that of Slyce’s platform for a multitude of reasons. Most importantly, AMZN’s product restricts its users to AMZN’s offerings and price points . Slyce employs an open architecture model, meaning its users can scan-and-purchase from a number of underlying retailers.
- We believe that Slyce could benefit greatly from a US listing as the appetite for technology companies of this caliber is that much greater there. Were the stock to trade in the US, we would argue that it would quickly obtain a significant rerating in the market as it would enjoy a multiple more in line with its US peers.
Those looking at buying Slyce need to understand that all of the risks associated with investing in an early stage technology company apply. This is a high risk investment and only for those investors willing to shoulder that risk.
That said, we think Slyce goes higher and are pumped about the company’s prospects. We have been enjoying following the company as it continues to deliver on key milestones.
Please call your Verdmont Representative for more information on Slyce.
LUNDIN GOLD - New Gold Company Being Set Up by Lucas Lundin - Doing a Raise - Verdmont Capital has Capacity
Verdmont Capital has capacity in the Lundin Gold raise through one of our corresponding brokers in Canada.
Great team, interesting story and some very compelling assets. Please view the corporate presentation for a detailed overview of the company.
The new entity is Lundin Gold and the company is Lucus Lundin’s aggressive bid to get back into the gold sector. His group has found and developed solid assets in the past which include, Alumbrera (bought by Goldcorp), Veladero (bought by Barrick), Tenke and Tasiast (Red Back originally, bought by Kinross).
If you like the gold space, this appears to have as good a shot as any.
We particularly like the fact that we are coming in at the same terms as Lundin’s group, who have contributed C$100Mil to the event. The value of company is compelling as well, based on a pro forma EV/oz basis.
Please call your VC representative to voice any interest and to request the terms of the raise. Please note that early orders have a better chance of receiving a full allocation.
Thursday, October 23, 2014
Verdmont Capital and select clients were early stage investors in Graphene 3D Lab Inc. (GGG).
When investing in the small cap space, we try to find those companies exposed to powerful underlying themes and run by management teams that are smarter than we will ever be.
By powerful themes, we mean those companies that have a new technology or a highly competitive position in a growing industry that is ripe for disruptive technologies or processes. This pointed us in the direction of GGG. The work they are doing on the materials used in 3D printing could drastically change the playing field in the additive manufacturing industry.
Peeling back the layers of GGG it became evident, rather quickly, that the company was run by people that were… how do we say this tactfully… far more intelligent than us? Dr. Daniel Stolyarov and Dr. Elena Polyakova are the husband and wife team behind GGG. We had a lengthy call with the two of them recently, in preparation of more formal coverage of Graphene 3D Labs, and were blown away at their ambitions for the 3D printing space. Best of all, they were ultra conservative with their views and comments. They are the opposite of promotional, which is exactly what you look for in people of their skillset.
GGG is focused on the development and manufacturing of graphene-enhanced materials for 3D printing or additive manufacturing. The company is refining proprietary technologies aimed at augmenting the properties of materials used in 3D printers. The company’s ultimate mission is to establish technologies that would offer next generation functional materials for 3D printing and to establish a technology enabling the printing of entire operational devices in a streamlined process.
Most recently, the company has been in the news as it has a provisional patent on a 3D printed battery that utilizes graphene filaments. To get an overview of the technology behind their 3D printed battery, and the potential of such a component, can be found in this video: http://player.vimeo.com/video/109764973 .
The stock is up handsomely on these developments, along with a growing general appreciation in the market about the company’s potential.
GGG.V – 1 Year
It is still early days for this company and its technology. Accordingly, one needs to be very cautious about over extrapolating small scale achievements into full blown successes. There is no guarantee that GGG’s technologies will ultimately be accepted by the 3D printing market, or, that their materials will be as disruptive to the additive manufacturing process as we hope.
The risks of investing in an early stage company like this are all there. First and foremost, the stock is currently employing a market cap of close to C$100Mil, which is a number that it is hard to back into if you use traditional valuation metrics.
There is nothing traditional about GGG.V however, which is ultimately why we like it.
We will be keeping you abreast with company developments as they unfold and are due to provide a more detailed overview on the company.
Thank you to those Verdmont clients who have shown an interest in Graphene 3D Labs.
Two Bellwether Stocks Up Big Today - Caterpillar (CAT:$99.28) and 3M (MMM:$146.89) - Oil Services (OIH:$45.69)
Both CAT and MMM are up big today. These are champion stocks for the market, meaning they often have telling properties for the state of the global economy and certain sectors.
MMM, a diversified industrial stock by both geography and product offering, is up big today. The stock has jumped the most in 3 years after profits top estimates. The market will make a big deal about the MMM results, because the company’s performance is a clean barometer of global growth.
MMM – 3 Years
Caterpillar, the machinery company, is also up big today on an earnings beat and boosted guidance moving forward. CAT has been a pretty good leading indicator for the state of the commodity market, given its exposure to mining, oil and gas and construction.
CAT- 3 Years
We have been buying energy services stocks, via OIH:$45.57, and CAT stock performance is suggesting OIH goes higher.
CAT vs. OIH – 1 Year
These results are incongruent with the wave of negativity currently sweeping the market. Lots of earnings power embedded in these names that appears to be under appreciated by the market.
Tuesday, October 21, 2014
VC Commodity Comment : Thoughts on the Oil Selloff : Some Investment Ideas in the Energy Complex : OIH, EMLP, CFW.T, TCW.T, PD.T
Commodity prices have taken it on the chin as global growth concerns reverberate through the market and the US dollar holds significant gains.
We last provided an update on our commodity view on September 26th. At that time, we indicated that under normal conditions, we would look to buy some segments of the commodity market that were beaten up. Various commodities were failing long term support and we were seeing prices that were beginning to shock the market.
Fortunately, we held off from buying anything under the premise that the shakeout had further to run. As things stand now, the selloff has been relatively pronounced, with many key commodities dropping significantly over the past few months.
Oil, Precious Metals, Base Metals and Agriculture – 3 Years
The selloff in oil has been especially concerning. Both WTI and Brent have broken their upward trending trading channels, which were established coming out of the 2009 lows.
WTI and Brent Oil – 5 Years
When the oil price collapses, it always pays to listen, as oil price action often provides insight into the prospects of other segments of the market. Oil has telling properties when it comes to the health of global economy, the equity market, inflation dynamics, the US Dollar and the commodity complex in general.
Oil is a relatively clean barometer when it comes to the health of the global economy. By “clean”, we mean the price of oil is arguably less manipulated than various economic data points that get stomped on by various government agencies. We lead-in with the word “relatively”, because it is by no means perfect, in that large investment banks can play a role in moving prices in their favor and OPEC policy functions as a key factor in the market. That said, the recent collapse in oil is a bad omen for the state of the global economy, and by extension, it creates uncertainty about the ability of the equity market to hold onto its massive gains.
WTI Oil vs. Global Equities – 5 Years
Sticking with the commodity theme, the oil price is critical for the overall commodity market as it is the most actively traded. Where oil prices go, more often than not, other commodities tend to follow. There is a fundamental reason for this as well, given that energy prices represent a key cost component in the production of all commodities. So, when you have a wash out in the oil price, it lowers the price floor in other commodities as their marginal cost of production falls. A good example of this is the gold price, where analysts are currently assuming a floor of roughly $1,200/oz based on the marginal cost of additional gold supply. As oil falls, all else being equal, so too does the floor in the gold market. Given that various individual commodities are currently attempting a bottoming process close to their perceived underlying marginal cost of production (gold, silver, copper, nickel, iron ore, coking coal, etc.) the ability of oil to stabilize is as timely as it is important.
As a group, we had been surprised at the strength the oil market had exhibited up until the recent breakdown. We hadn’t been overly bearish, as we recognized that we were in a stimulus driven market and there was an ongoing push by policy makers to drive investors into riskier asset classes. With the cost of money next to zero, and a corresponding flight out of bonds in a search for return, there was no reason to suggest that the oil market would not see some of the action.
From a fundamental standpoint however, we were skeptical of oil strength in light of a Chinese market that could not gain any traction, when the developed equity markets were on a stimulus induced tear. The commodity market conveniently switched from a view that the Chinese miracle was the linchpin to the oil trade, to one where the outlook for the Chinese economy was of only secondary importance. We found it analytically dishonest to employ an overly bullish view towards oil, when the principal secular argument for elevated prices was losing steam. It just did not add up.
WTI Oil vs. Chinese Equities – 10 Years
Further tempering our view was the fact that the US was undergoing an energy resurgence that was unimaginable less than a decade ago. Due to the shale boom, the US has emerged as the world’s largest energy producer and has begun exporting petroleum products for the first time in decades. This is nothing short of a sea change for global supply dynamics and contributed to our view that a WTI oil price north of $100/bbl was lofty.
US Oil Production – 25 Years
Given what has been a tempered view towards the oil complex, we view the recent sell off as a welcome development. It is too difficult to call a snapback rally with any sort of certainty, but if you employ a 6 month view, the risk/reward of owning energy plays has improved considerably.
In terms of underlying oil fundamentals, they remain amongst the best in the commodity complex.
Demand for oil is relatively static, meaning that it doesn’t gyrate significantly with cyclical forces. For example, looking at China, although its economy has been growing at sub trend levels, oil demand growth has remained steady. A high degree of demand visibility suggests that an outright collapse in prices is not in the cards.
China Crude Oil Consumption for GDP YOY% - 20 Years
On the supply side, the selloff in both Brent and WTI Oil has prices at levels that could impact supply moving forward. This is a pivotal characteristic of a commodity going through a bottoming process. Falling prices make it less economic to explore for and produce oil. This crimps supply over time and assists in the clearing process.
In the US, WTI oil prices are currently trading at $82.75/bbl. There are varying estimates on the marginal cost of shale oil production and what the corresponding oil price needs to be to dampen future supply in the US. A generally accepted number is that an oil price near $70/bbl would make it uneconomic for the majority of producers to bring new supply on line. Some color supporting that price point is discussed in a recent Bloomberg article that can be viewed here: http://www.bloomberg.com/news/2014-10-21/oil-at-80-a-barrel-muffles-forecasts-for-u-s-shale-boom.html .
OPEC of course plays a integral role in global energy prices and often steps in to support the oil market by cutting production during sizeable selloffs. By adjusting production numbers, they are able to maintain order in the market which serves their interests over the long term. Over the short term, OPEC Members are incentivized to keep oil prices at levels that support their domestic budgets. The fact that oil prices are now significantly below levels required by the individual member countries to breakeven on their budget plans, indicates that an OPEC response could play out in short order.
We are also encouraged by the fact that the oil price is no longer expensive relative to the equity market. One of our chief concerns was that oil prices were piggybacking the liquidly trade, as investors flocked to risk assets in order to chase returns. Oil is now trading at a steep discount to equities and is trading at a point that has traditionally marked a good time to buy.
WTI Oil vs. the S&P 500 Index – 10 Years
Oil prices are also oversold based on various technicals we look at, which should generate some buying interest in light of the sectors strong underlying fundamentals.
WTI Oil – 5 Years
This is especially true for energy focused equities, which have been hit hard in the recent sell off.
Global Energy Stocks – 5 Years
Given that the oil complex is oversold and supported by solid long term fundamentals, we would use recent weakness to begin chipping away at names you have wanted to own – as they are now on sale.
We particularly like the energy services area, as it is a key benefactor of the secular themes underpinning the oil market. Oil exploration and production is as expensive and as complex as it has ever been. A theme that should continue to play out into the foreseeable future to the benefit of the energy services sector. A good instrument to play this trend is the Market Vectors Oil Service ETF (OIH : $45.18).
OIH – 3 Years
We also like North American energy infrastructure plays. The US energy miracle is for real and arguably not fully appreciated by the market. There is a staggering degree of capex required in order to bring North America’s energy infrastructure up to speed with the jump in natural gas and oil production. This will benefit the pipeline companies, refiners, utilities and natural gas related infrastructure plays. A good catchall to play these high growth areas is the First Trust North American Energy Infrastructure ETF (EMLP : $27.13).
EMLP – Since Inception
For those looking to take an aggressive stance on an oil bounce, we like the drillers. Fracking related service companies should enjoy a solid operating environment for a considerable period of time. There are a limited number of quality companies operating a segment of the market that has massive tailwinds. We like names like Calfrac Well Services (CFW.T : C$14.42), Precision Drilling (PD.T : C$10.17) and Trican Well Service Ltd. (TCW.T : C$10.93).
The Drillers – 3 Years
As always, please call your Verdmont representative if you have any questions about our view on the energy sector and commodities in general.