Two prime examples of what has been happening to Juniors.  The good being thrown out with the bad. 

 

Risk-Off…Change is in the air in Vancouver

It is Sunday, December 9th, 2012 and it's beginning to feel a lot like Christmas here in Vancouver. However, the city is feeling a bit different this year. Reality is starting to set in for all the executives, promoters and brokers that have been thriving the last several years by floating junior "companies" on the TSX Venture Exchange during a very strong bull market in resource stocks. With the NDP voted out of BC provincial politics right around the same time that the VSE was seeking to pivot to a new growth sector this set the stage for the mining and resource stocks to surge under the more capitalist-friendly Liberal party. Federally, our junior stock market also benefited from favourable government that supported strong mining and energy policies. Combine all this with easy to attain and prevalent credit and developing nation's growth and you had the stage set for the mother of all bull markets in commodities. Everything was in demand and in seemingly short supply…copper, iron ore, uranium, zinc, nickel, lithium, potash, moly, gold, silver, oil and gas…and Asia was buying all of it.

After 2008's global economic collapse and proceeding snap-back rally, all boats rose in that rising tide including those of the TSX Venture Exchange. However, since early 2011, Canada's junior exchange has been in a brutal bear market. The venture index is down by more than 50% since 2011. After starting our slide in early 2011, we saw a very short surge in early 2012 that increased the TSXV by more than 20%. Then we hit the annual mining and exploration conference; PDAC in March and watched the music stop in our game of musical chairs and we experienced another brutal slide into this past August. We're again sitting near multi-year lows not seen since 2009 with treasuries and time is running out for the gluttony of junior resource stocks that don't yet have an asset or even a credible management team. The stage is now set for a flurry of M&A, rollbacks and new beginnings.

To have been an investor in TSX Venture stocks has required strong mental fortitude. Resource stocks now make up close to 70% of the total number of companies listed on the TSX Venture Exchange. Does this seem overweighted to you? I think we're seeing a case of supply and demand starting to play out. The industry has created too much paper in too many similar companies and there aren't enough investors with enough demand for these underperforming shares. All these junior companies can't be bought out by "majors" or find the capital required to ever produce anything of value. I'm not saying the commodity bull market is over, not by any stretch of the means but I am saying that there are too many companies all seeking to raise capital for the same general sector. Another systemic problem is that as resource stocks have become mainstream over the last decade, investors have all become armchair geologists who are looking for the problem in every drill hole or well completion. Many seem jaded. Where's the speculation anymore?

What's the solution?

In my humble opinion, executives, promoters and brokers need to provide better risk/reward propositions and diversify business sectors. Running an umbrella of companies with little or no focus is tough to do in this market environment. I for one am actually encouraged by the low share prices and the difficulty in obtaining financing. Howe and Bay Street are an adaptive bunch and when something stops working, we change.

More Non-Resource Stocks

A sector that I've written about recently is the tech sector. Tech companies currently represent about 5% of all the listed companies on the TSX Venture and even less on the big board TSX. Maybe it's time to get with the times and try to back companies that offer a realistic opportunity for growth, revenues and profits? Wouldn't that be novel? Global M&A is down by over 20% this year across all sectors aside from one, and tech will have another strong year seeing growth. By diversifying the TSX Venture Exchange and relying less upon resource stocks we'll bring back into balance the supply and demand curves for the resource sector and will see better companies achieving better valuations once the commodity bull decides to charge ahead again. We've seen this play out since the washout of uranium stocks in 2007. Anyone left exploring or developing uranium typically have expert management teams and tremendous projects that the offer the visibility of a buyout or production.

What am I doing in this market?

I smell a serious buying opportunity. Companies with focused and stellar management teams that are executing on clear business plans will make hay in markets like these. I'm doing something similar to what I did back in 2008, launching an investment club for investors with an interest in Canadian-listed stocks. I see many 10-bagger opportunities and diamonds in the rough, we just have to let the supply side of our business finish constricting back to demand levels. I challenge each of you to go out and find a couple new non-resource stocks and a couple new resource stocks that offer real production or buyout potential to add to your watch list. I expect this December to be not unlike previous year-end's in that they usually offer some tremendous buying opportunities.