Wednesday, September 17, 2014
We were recently quoted in Bloomberg news regarding our outlook for gold. Please click here to view the story.
These quotes offer little value as they are often taken out of context and are very brief. We have to admit though, rather shamelessly, that it is always good for our company to be quoted in Bloomberg. Given that marketing is a key component in growing an investment company, we forward these on when we get the chance!
Those who follow our dealings know that gold and related investments are only a small component of what we do. As a firm, we try to steer our clients, and allocate our own funds, to areas and companies that have a good shot of making money - imagine that! Gold and related equities are a segment of the market that we have been largely staying clear of. We have traded in and out of some names to play the large swings, but we still don’t see the foundation of a prolonged rally.
We recently indicated that we were “warming” to gold stocks. The thought process behind that statement was predicated on the belief that equities have discounted much of the bad news that is out there, and even if gold bullion remains range bound, gold stocks should fare reasonably well. Our “warming” view also incorporated a relative call to the overall market. With growing concerns about a broad equity market correction, the attractiveness of gold stocks, and all beaten up sectors for that matter, become increasingly attractive from a relative value standpoint (sell high, buy low).
We are still not at the point where one can become overly excited about the gold complex. The conditions that were prevalent in 2012, when bullion began its selloff after a 10 year run, are arguably still in place. The broad equity market continues to move higher, sluggish global growth is standing on the neck of inflation, questions remain about the Chinese economic miracle, yields in the US are due to normalize to the upside, the US dollar is relatively strong, and real rates are poised to move higher. These variables will all continue to cap any upside movement for gold, until, they don’t. Hopefully we can be there with our clients at the turn.
In terms of our “warming view” on gold stocks, it remains relevant. Gold bullion has held its range bound pattern for the time being, which will support beaten up gold companies. It is worth noting however, that bullion is trading dangerously close to the low end of this range, and if broken, it will be a long time before a new floor is established - in our opinion.
Summing things up, it is still difficult to envision a turn in the gold sector. Although we are warming to gold stocks, you don’t allocate funds to an incredibly volatile sector when you are only lukewarm. So, we remain on the sidelines and continue to see better value elsewhere. If gold breaks $1,200, and subsequently has a steep selloff, we would feel more confident on gold stocks for a trade.
Thursday, September 11, 2014
Verdmont Capital and select clients invested in the C$3Mil placement mentioned in the following article. The piece provides a brief overview of the company and outlines a recent acquisition of Aastra:
It is good to see that Martello management is wasting no time putting our money to work with the aforementioned acquisition of Aastra.
The article also mentions that revenues are meant to double this year, increasing to C$2Mil. Given that the financing was valued at C$5.5Mil pre-money, we continue to see a solid value proposition. To find a company like Martello, with a well-known anchor client, great management and reoccurring revenues, valued at ~2.5X forward revenue estimates, is a rarity.
Thank you to those Verdmont clients who supported the transaction. We will keep you abreast with company developments as they come due.
Wednesday, September 3, 2014
Our recommended fixed income offerings list for September 2014 is now out and can be viewed 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.
Friday, August 29, 2014
We believe that wheat is a good trade in here.
Record harvests and increasingly bloated inventories have led to collapse in grain prices. We believe the sell off has overshot over the short term.
Sentiment in the space is depressed, open interest has collapsed and grain prices are making higher lows, despite horrible news flow. It may be early to call an end to the rout, but prices should trend higher over the short term.
We would buy three month wheat futures for a trade. We recommend using a stop at $5.30. A break below these levels would indicate that the recent trend of higher lows is a false bottom.
Please call your Verdmont representative to discuss the best way to play wheat to the upside.
Wednesday, August 27, 2014
Organigram has been trading nicely since going public on Monday of this week.
The stock opened at $2.40/sh when it commenced trading and we are encouraged by price performance thus far. The stock is currently trading at $2.25/sh, relative to the pre-IPO value of the company, which was $0.85/sh.
OGI.V – 3 Day Price Performance
Organigram's CEO, Denis Arsenault, was recently interviewed on CBC. The interview provides a quick summary on Organigram, some insight on how end demand is tracking and a brief overview of the company's competitive advantages. To view the interview, please click here.
The Organigram story continues to be very well received and has been getting a disproportionate amount of interest in the market. This is not a huge surprise given the company's unique competitive advantages, tight share structure and a heightened degree of interest in Canada's rapidly unfolding medical marijuana sector.
Congratulations to the Organigram Team on their IPO, which thus far has been a great success.
For those Verdmont clients who participated in the Pre-IPO financing, please contact your Verdmont representative to get our current investment view on Organigram.
Friday, August 22, 2014
Organigram will begin trading this coming Monday August 25, 2014. The symbol will be OGI and it will trade on the Venture Exchange in Canada. A news release associated with the go-public transaction can be found here.
Verdmont Capital participated in the company's recent pre-IPO financing and Organigram is one of our preferred investments in the Medical Marijuana sector. A detailed overview as to why we like Organigram can be found in a previous posting to Verdmont Capital's news site, which can be viewed here .
Please keep in mind, our view on Organigram is relatively long term in nature. We are by no means instructing investors to pile into the stock on Monday. As with all speculative investments, make your own decision and evaluate the risks prior to investment.
Thursday, August 21, 2014
Verdmont Capital was featured in the Globe and Mail this past weekend. To view the article, please click here.
We thought the piece was well done by the Globe and Mail. We would imagine there have been a few internal discussions as to how the paper should present the rapidly unfolding medical marijuana industry. The topic is quite dynamic and how it plays out has social, political, economic and public health related ramifications. Accordingly, we thought the Globe nicely hedged its bets by updating the public about the industry’s potential from an investment standpoint, while also indicating the need for caution when evaluating various opportunities.
The article sums up our view quite nicely, but we should clarify that we do not see many similarities between the technology sector of the late 90’s and the current medical marijuana industry. The only argument we were making was in response to the notion that the technology “bubble” was a great example of how investors should stay clear of an industry in the early stages of development. Quite the opposite really, as there was a lot of wealth generated during that episode and it also left us with some amazing companies that are still thriving today.
Sure, as with all emerging industries, there are many optimistic projections being made that are backed by assumptions on assumptions. That’s really just part of the gig and not a tell-tale sign of intentional misguidance. The marijuana complex is no different than any other early stage segment of the market that investors are positioning themselves in. Look at the “alternative energy” complex for example. The name of the sector itself implies one big assumption. Is something an alternative energy source if it isn’t economic? If it isn’t, how can it be billed as an alternative? Investors jump into wind and solar based on questionable environmental “science” and often invest in companies that won’t be profitable into the foreseeable future. There is no push back about these types of companies going public because these areas are socially acceptable and endorsed by various politicians. We tend avoid these areas because we don’t see near term cash flow or a solid value proposition in most of the names. We could be missing out, but that’s our call.
The marijuana sector in Canada is unique in the sense that it literally catapulted onto the scene. The revised MMPR guidelines instituted in April of last year, essentially gave birth to an industry over night. This is an industry that will be cash flow positive next year. The magnitude of these cash flows is certainly in question, but one can deduce with reasonable certainty that there will be cash flow none-the-less. Given that there is currently only 1 publicly traded medical marijuana producer in Canada, we don’t see how this is anything but a great investment opportunity. If you have invested in a junior resource stock in the Congo, you should be more than comfortable allocating some capital to medical marijuana companies, which are highly regulated and should be cash flow positive in the near term.
There will come a time when the medical marijuana sector becomes frothy and some of the companies we have invested in become overvalued. At that time, we will probably look to sell. For the time being, we are more than comfortable positioning ourselves with some quality producers in the space. We will reevaluate our view when:
- We see signs that industry projections for the potential number of users in the system begins to overshoot.
- The aggregate industry supply response shows signs of outpacing our expectations on end demand.
- We witness any indication that the medicinal benefits of marijuana are not as powerful as currently anticipated.
- The regulatory landscape shifts in such a way that our overall thesis on the sector is negatively impacted.
- The aggregate market cap of listed companies begins to overshoot aggregate forward earnings.
- Company P/E multiples become out of whack (they are currently around 9X 2015 earnings by our estimates).
- Bay Street begins shifting analyst teams to the sector.
- Traditional mutual fund managers start allocating money to the space.
The variables listed above are factors that would suggest to us that our investment thesis is wrong and/or the sector is beginning to overheat. As of now, the risk/reward of investing in the complex is very favorable in our opinion.
Please call your Verdmont Representative if you have questions about the medical marijuana sector and some of Verdmont Capital’s preferred investments.
If you would like to follow what is going on at Verdmont Capital, please sign up to receive updates from our news site, www.verdmontlive.com.pa .