Newsletter V - Microcap Week
Recapping a Week in the Markets: Aug. 14-18
Buying Opportunities Galore!
Blood is starting to flow in the streets, friends. How do I know? I follow some very accurate and highly obscure indicators to get a sense of this:
Analysts are talking about fleeing back to the safety of gold
My aunt called me to ask whether she should be moving her assets to GICs
And that’s how you know fear has spread to the wider public. Like and subscribe for more detailed insights like these.
In all seriousness though, there is good reason to be fearful, as it was revealed this week that Michael Burry (of ‘The Big Short’ fame) took a short bet to the tune of $1.6bn on the S&P 500 and Nasdaq 100 indices. Reportedly, this is 90% of his fund’s portfolio, signaling some serious conviction from Burry that there will be a major downturn, likely in the next 6-12 months (I’m guessing 6-12 months simply based off the cost structure of his bet - any longer than that and his shorts would start to incur some serious fees). So maybe, for the short-term investor, things may look a little scary. But for the long-term investor, red days are a good opportunity to buy, and I would be ecstatic (for the purposes of my own portfolio and greed) if the market were to take another major downswing here. As good as it is to see big green beside some of the names in our portfolio, I’ve got cash to deploy!
Recession Fears Loom Large… Again.
Add David Rosenberg, a famed macro-economist, to the list of figures who don’t think we’re coming out of the topsy-turvy economy of the last year without a recession. Rosenberg cited data on the lagging nature of recessions, which he says tend to take effect two years after initial rate hikes - the first major rate hike by the U.S. feds was in March of 2022, meaning we are not very far off if so. He also predicts broad defaults in auto, home, and credit card loans, which is backed up by Michael Burry, who on top of shorting the markets, also sold off all his bank stocks. This is all particularly unsettling given this week’s news that credit card debts across the U.S. just hit $1 trillion.
Rosenberg also warned that things were not likely to look good for Canada especially, given the slowdown in China’s economy. China accounts for more than half of the demand in Canada’s commodities, a sector that makes up the vast majority of Canada’s economy. If true, and there’s not much reason to doubt him, then the Canadian dollar will suffer as a result. So, if you’re up here in the Great White North with me (Great Smoky North this year) and investing in lots of U.S. stocks, it may not be a bad time to think about converting to some USD. **not financial advice**
Tesla Cuts Prices
Well, go figure. As Musk stated in the last conference call, more price slashes came to Tesla’s products, this time in their China segment. The company has seen a 31% reduction in shipments from their China plant, likely as a result of a broader economic slowdown in the country, as well as stiffer competition from Chinese EV makers.
This has always been my primary fear with Tesla. While I was briefly a shareholder, and realized some very decent returns on my shares, I ultimately exited the stock because I didn’t feel comfortable with the company’s moat. While their technology is certainly stellar and their head start in the EV space was significant, I’m not sure it will be enough to really distinguish them as other EV manufacturers slowly catch up with cheaper (and still passable) products. I could very well be wrong about this, and am happy to admit it if things go the other way, but I couldn’t sleep with my Tesla investment as a result. I couldn’t shake the fear that competition would continue to drive Tesla’s margins down in the long-run, and that the company would enter the ‘race to zero’ that many manufacturers end up facing. While good for consumers, Tesla shares are far too richly valued for continued margin slides, and yet that seems to be exactly what they’re facing after multiple price cuts in the last year.
Tesla bulls, please don’t @ me. I hope you’re right, sincerely. I’m just stating why I’m not invested in Tesla anymore.
How to Change Your Mind
By Michael Pollan
“Habits are undeniably useful tools, relieving us of the need to run a complex mental operation every time we’re confronted with a new task or situation. Yet they also relieve us of the need to stay awake to the world: to attend, feel, think, and then act in a deliberate manner. (That is, from freedom rather than compulsion.) If you need to be reminded how completely mental habit blinds us to experience, just take a trip to an unfamiliar country. Suddenly you wake up!”
I was a little hesitant to share this particular read, given the nature of the content, but decided it’s too good a book to pass up recommending. How to Change Your Mind by Michael Pollan dives into the realm of psychedelics - the history, science, and Pollan’s own personal experiences with using a range of psychedelics for medicinal purposes.
Through his own experiences and interviews with industry experts, Pollan dives deep into the neuroscience of psychedelics: their effects on the brain and the potential therapeutic benefits of using them (responsibly!), including fostering a greater sense of connection in relationships and everyday life, and granting perspective on consciousness and spirituality.
There is a great deal that investors can glean from How to Change Your Mind - as demonstrated in the above quote, the book sheds light on human psychology and fundamental ways of thinking. Insights like these can be immensely beneficial for investors to understand their own decision-making processes and the broader ebbs and flows of the market as a whole. This is also an investable space - there are a number of publicly traded companies developing commercially available psychedelic products for therapeutics (though admittedly, I wouldn’t touch any of them with a ten foot pole).
Whether you’re interested for personal improvement or for investing reasons, or are simply looking to read more on the therapeutic benefits of psychedelics, I can’t recommend Michael Pollan’s How to Change Your Mind enough.
“Margin of Safety Investing” - Simon Handrahan
“If you are a small individual investor, fish where the fish are and where there aren’t a ton of amazing fishermen.”
Simon Handrahan produces some of the highest-quality investing content I’ve found on Substack - Margin of Safety Investing is a free/paid substack that takes a look at a very unique blend of businesses, always with a focus on the best businesses and hidden gems in the market.
Margin of Safety Investing produces content on specific companies, general investment topics and research methods, and Simon’s own investing criteria. He’s also a very transparent investor - something I deeply respect in content creators within the investment space. He has regular portfolio updates that cover his recent buys & sells, current holdings and allocations, and his performance against the benchmark S&P 500.
Simon’s “Quality Investor’s Manifesto” is a must-read for any beginner investor and has a lot to teach experienced investors as well, while his company reports cover some of my favourites in the markets, including Brookfield Corporation and XPEL. He’s also opened my eyes to a number of under-the-radar stocks that were instant adds to my watchlist after reading his content. His next article certainly falls under that category - AirIQ (IQ 0.00%↑), a very intriguing microcap with some strong fundamentals, so stay tuned for that article.
If you’re looking for great fundamental research on businesses that, like AirIQ, aren’t typically covered by other investment articles or the wider market (and as Simon rightfully points out, this is exactly where you should be looking!) then following Margin of Safety Investing should be at the top of your priorities. You can find regular updates from Simon Handrahan on Twitter or you can (should) follow Margin of Safety Investing on Substack down below!
This Week’s Watchlist
We’re looking at a tiny fella this week! I first heard about Greystone Logistics from an excellent (one of many) episode of the Planet Microcap Podcast - and a quick plug for the amazing Bobby Kraft here, if you’re not following Planet Microcap on the podcasting platform of your choice, get on it! Bobby is an amazing interviewer and the results is one of the best podcasts in the game - it’s 100% guaranteed to both entertain and introduce you to some companies you’ve never heard about. Check it out here.
Back to Greystone - this company is dead simple to understand, so I’ll keep the watchlist segment brief this week! Greystone manufactures shipping pallets made with 100% recycled plastics. Their products are used in “food and beverage, automotive, chemical, and pharmaceutical and consumer product industries”, and they have some major customer wins with Molson Coors and Walmart.
The company boasts some strong fundamentals at extremely attractive valuations:
Market cap of $25m is well-exceeded by fiscal 2022 revenues of $74m
Assets of $46m also surpass market value
Has been free cash flow positive for a few years (though negative so far on TTM figures)
Very enticing return on equity figures, showing that the company is extracting a lot of value from their assets
Greystone has also pulled what I believe to be a very savvy move by catering to an adjacent market of supplying their recycled plastic resin to the North American market.
For those of you that have been following my early writings, you’ll know I’m a sucker for companies that a) provide value through savings for their customers and b) are able to do some good in the world. I like Greystone because they’re doing both of these things - they’re helping to reprocess plastics into a useful state, reducing consumption of timber products for wood pallets, and also providing savings for their customers with their plastic pallets, which have a far longer life-span than wood.
The company has some pretty thin margins, as with many manufacturers, but their current market valuation would suggest that Greystone is being unfairly penalized for this. I think it’s a fairly strong play in the microcap space, and I’ll definitely be looking at it more closely as chance allows. I only managed a quick 10-minute glance at the fundamentals, so let me know what you think of this company and if there’s anything I missed!
What’s New at Hourglass
Not much! I’ve taken this week off producing the Hourglass podcast - I’ve so far not been super stoked on the format, so I’m working hard on switching things up so I can deliver more valuable content for the audio segment of Hourglass. I want to produce something with higher quality, so that’s been the focus of this week; I’ll be coming back with a revamped (and hopefully better) podcast on Wednesday next week, so stay tuned!
I also am pushing back the release of my article for Schrodinger Inc. - SDGR 0.00%↑, with a similar thesis of focusing on quality over quantity. It’s a complicated company and I want to do it justice. It was originally set for this coming Monday, but will instead be released later in the week or early the week after.
Finally, I’m working on producing an article on my portfolio - I want to be fully transparent with my investing for you all. While I’m never recommending buys, sells, or any investment decisions (my articles are exclusively research material for your own decisions), I still feel it would be good for readers to get a sense of my own investment style and decision process. I’ll update this portfolio as moves are made, and these articles will include my holdings, allocations, investment theses, and my running watchlist.
So, exciting things coming up soon! Keep an eye out, and thanks for your patience - I always want to produce to the best of my abilities, and the extra time will ensure that only high-quality content is delivered to your inbox.
Cheers! Have a good weekend, and happy investing folks!
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