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.
Tuesday, October 14, 2014
To view Verdmont Capital’s monthly fixed income offerings please click here .
Verdmont has extensive reach in the fixed income space. With yields at basement levels, it is tough to get overly excited about fixed income opportunities. That said, we can still put up a good fight by offering various currencies, credit and industry exposure.
If you have any questions about the various fixed income offerings available through Verdmont, please do not hesitate to contact your Verdmont representative.
Thursday, October 9, 2014
Our recommended mutual fund list for October 2014 is now out and can be viewed here.
Remember that we don’t have an affiliation with any one mutual fund family and the funds we recommend are only chosen because we believe they offer the best opportunity to produce above market returns with a reasonable amount of risk.
Please note that we are able to provide recommendations in various segments of the market. We would also welcome the opportunity to provide a free consultation regarding existing mutual fund portfolios that you may have, to determine if they are structured in line with your objectives.
If you have any questions about the extensive list of global mutual funds available through Verdmont Capital, please do not hesitate to contact your Verdmont representative.
Friday, September 26, 2014
Interesting report today from the Bank Credit Analyst, or, “BCA.” We subscribe to BCA to help generate investment ideas and assist us in following various macro and sector related themes.
Their report was interesting because BCA recommended going long tech stocks and short material companies. Given that we follow both rather intimately, we thought this was a bold call.
Our thought process being, that tech stocks have been rocking and getting a lot of positive news flow, whereas material stocks have been in the gutter. We would have thought that the long tech, short materials trade would be fraught with risk based on the perception that this trade would be played out. Looks like we could be wrong with that view, and if we were wrong, there is a good chance there is misconception in the overall market. This is because we are brilliant of course.
The crux of BCA’s argument is that global CAPEX, or the aggregate investment companies make in physical assets such as property, buildings or equipment, has been tame relative to past cycles and due to move higher. Their call is predicated on the belief that diminishing policy related uncertainty and increasing business confidence will drive management teams to invest in their businesses to boost growth. Furthermore, financial engineering, via debt issuance and buybacks, can only prop up growth for so long. These arguments certainly fall squarely in the bullish camp, but not completely whacky in our opinion.
Here is a chart that shows their CAPEX indicator vs. Tech Business Investment, which has had a very tight relationship.
What was most surprising about the BCA piece however, was the relative valuation between Tech and Materials companies. Tech companies are still very cheap, which caught caught us by surprise. This is important from Verdmont’s standpoint, as we invest in both sectors rather heavily, and it dispels the view we had, rather naively in hindsight, that tech was expensive and material stocks were bombed out.
From a momentum standpoint, it is hard to argue that technology stocks are not leading the charge. Lots of high profile IPOs and a barrage of good news associated with the sector. The opposite can be said for material stocks. Price performance of the sectors illustrates this point.
Global Tech (White) vs. Global Materials (Green) – 3 Years
What we draw from the above comments is that those trading tech stocks should not be as worried about an over speculative crash as perhaps they are. On the flipside, those playing material stocks as a deep value play, or for some sort of defensive, anti-trend call, my find themselves in a value trap.
Please call your Verdmont Representatives with any questions you may have regarding our view on the sectors.
Thursday, September 25, 2014
Commodities Comment : The Grains are Cheap, US Dollar Strength and Chinese Growth Concerns Pinching the Sector, Too Early to Buy
Interesting article in Bloomberg on corn, highlighting how it is trading at a significant discount in relation to gold.
We recently got stopped out of a wheat trade, trying to be cute and play a bounce off of what we thought could be an interim low. Our rationale at the time ties into the sentiment expressed in the aforementioned Bloomberg article. News in the agriculture space is as bad as it gets, as record inventories dominate the headlines in the US. We started to see grain prices rally off of negative news, which we took as a cue that sentiment was turning. We were wrong as wheat broke down anew, failing to hold its trend of higher lows.
Wheat – 1 Year
We would agree with the overall conclusion embedded in the article, that now is not the time to go short the grains. On the other hand, we would argue that we are setting up for a tradable bounce in the near future. The risk of course, is that we get sucked into another false bottom, or in other words, timing remains everything.
That said, relative value between the commodities has always been a good indicator on finding the big swings in certain commodities. With the grains, their relative value vs. gold is a good indication of how grain prices are valued relative to liquidity in the system. The thought process being that the gold price reflects some key macro variables, like the prospects for the US dollar, interest rates, inflation and overall liquidity in the system. Relative to gold, as illustrated in the article, corn is super cheap.
Corn (top panel), Corn vs. Gold (bottom panel) – 30 Years
It is worth noting that corn is also at historical lows relative to oil prices. There are a couple of things to infer from this. Firstly, oil is a good growth barometer for the global economy. When grain prices are cheap relative to oil, one can make the assumption they are trading at a discount to global growth prospects. Secondly, oil prices are a key input in grain cultivation. When the grains are trading at a steep discount to oil, it suggests that they are beginning to trade close to their underlying cost curve. When a commodity begins to encroach upon its marginal cost of production, it is characteristic of a bottoming process.
Corn (top panel), Corn vs. Oil (bottom panel) – 30 Years
With grain prices, particularly wheat and corn, offering excellent relative value in the commodity complex, complemented by depressed sentiment and oversold technicals, we would be inclined to jump in here and buy. We are hesitant to do so however, because we are currently witnessing a sizable shakeout in the overall commodity sector.
The US dollar is breaking to new multi-year highs, which has caught the market largely by surprise. Dollar strength has been driven by a jump in relative yields in the US, in concert with US economic growth outpacing that of other economies.
Trade Weighted USD – 5 Years
Commodity currencies have also been taking it on the chin, trading at levels that most commodity bulls would have thought unimaginable a couple of years ago.
Canadian Dollar (top panel) and the Australian Dollar (bottom panel) – 5 Years
In terms of the underlying commodity prices themselves, gold has failed to gain traction and we believe there are many stale longs under the “gold as an asset class” view. Bullion prices are hovering dangerously close to the lows established last year, and there is a risk that there will be a renewed wave of selling if a portion of these legacy holders choose to throw in the towel on a break through $1,200/oz.
Gold Bullion – 5 Years
Oil prices have also taken a sizable hit over the last month, on US dollar strength and Chinese economic growth concerns. Chinese industrial production recently surprised on the downside and growth in the generation of electricity was negative for the first time since 2009. Both WTI and Brent are off 15% from recent highs and are testing multi-year trends on the downside. Should the sell-off in oil continue, it would be a bad signal for the overall commodity complex, as oil has been a key supporting factor underpinning the commodity trade.
West Texas Intermediate (top panel) and Brent Oil (bottom panel) – 3 Years
Dollar strength and Chinese growth concerns are setting up the commodity complex for a nice trade. When we see signs that the US dollar rally is losing momentum, or that Chinese growth concerns are abating, we will look to play a bounce. The agricultural commodities are especially beat up and represent excellent value relative to other commodities. This despite the fact that the grains have amongst the best long term fundamentals in the commodity complex, given steady demand and relatively depressed supply side dynamics.
Given the technical breakdown as of late, we would wait for key commodities like gold and oil to begin making higher lows and sentiment to begin to move positive before becoming more aggressive. Corn and wheat would represent a great trade at that time, along with various agribusiness focused equities. We continue to own agribusiness companies in our managed accounts and have exposure to select juniors in the space, which include Aguia Resources (AGR.AX:$0.04), which is an attractive fertilizer company based in Brazil.
Please call your Verdmont Representative for our view on the commodity market and various asset classes in general.