After 18 months of pain & suffering, speculators have something to look forward to
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
I. Outlook for penny stock speculation improves dramatically
II. Revisiting cash-rich Canaco
In my report the weekend of August 24, I noted that a recovery in the penny stocks (junior gold exploration in particular) was finally emerging.
That theory was solidified September 6, with news from the European Union Central Bank.
We have known that PIIGS (Portugal, Italy, Ireland, Greece, and Spain) have been in serious financial trouble since the economic collapse in Q4 2008. However, the European Central Bank was not stepping up to the podium and making a firm commitment to help. That all changed on Thursday.
Mario Draghi announced that the Central Bank will begin unlimited bond buying in an effort to drive down borrowing costs for struggling countries.
Micro caps (penny stocks) have been heavily burdened by this risk from Europe, as any economic disasters would be contagious. Financing has been extremely difficult to find and investors both big and small have been afraid to assume excess risk - and small stocks (junior exploration in particular) are obviously high risk.
As the DJIA powered ahead to set record highs the past two years, the resource-heavy TSX Venture Exchange lost half its value.
This doesn’t mean that junior exploration stocks will roar ahead overnight but at least now the outlook is quite positive versus the doom and gloom that has been hanging over our heads for the past 18 months.
Fear of a slowdown in China has also weighed on these stocks (although to a much lesser extent) but you could build a wall around that country and without letting anyone in or out, their economy would flourish in one fashion or another.
China’s middle class is enormous – estimates range from 100 to 250 million people. That is a lot of economic activity to drive natural resource consumption.
China is also sitting on an incredible $3 Trillion in foreign exchange reserves. A decade ago you rarely heard of a trillion unless people were discussing mathematics or astronomy. Now it is the size of the U.S. debt or China’s war chest – I don’t think it is China we should be so worried about.
China also just announced plans for up to one Trillion Yuan in infrastructure projects to help provide further economic stimulus.
Going forward I suspect we will now start to see the risk trade improve significantly and with so much money on the sidelines and blue chips sitting near record highs (versus junior exploration near record lows), we should continue to see more money moving into junior equities (gold stocks in particular).
II. Canaco Resources (TSX: V.CAN, Stock Forum; 35.5 cents)
Shares outstanding: 200 million
Net cash: $95 million/47 cents per share
For those who want to dip their toe in the junior exploration game, but unsure where to start, Canaco in the mid-30-cent range is manageable risk.
My negative opinion of its management team has not changed but it is difficult to ignore the numbers when they are sitting on so much cash and a gold resource in Tanzania that carries no value by the market.
I am not sure what will change investor sentiment with this company but so long as they don’t burn through their hoard of cash like drunken sailors or sit on the money and try to turn this into an investment fund, then this is worth a closer look.
My previous report from August 10, is still very relevant
For the company’s overview (and not my angry version) visit this link:
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.
Disclosure: Danny Deadlock owns 40,000 shares of Canaco Resources (TSX: V.CAN).