Daniel Balakov
By Mike Larson
Larson: Hello and welcome to our latest MoneyShow MoneyMasters Podcast segment. I’m Mike Larson, editor in chief of Money Show, and today we’re mixing things up. I’m bringing together three of MoneyShow’s expert contributors for a “Stock Roundtable.” It’s going to be an episode where they talk about what they’re seeing happening in the markets that they track, and their favorite stocks to play those trends.
Joining me are Ryan Irvine, President and CEO of Keystone Financial, Tom Bruni, Head of Market Research at Stocktwits, and Sean Brodrick, Senior Editor at Weiss Ratings. Gentlemen, how are you all doing?
Brodrick et al: Doing great.
Larson: Thanks for joining. It’s a fantastic opportunity. I know we’re going to get a chance to hear from some of you guys live at a couple of our events. So, I figured this would be a great opportunity to introduce you to our audience, let them know a little bit about what you’re going to be saying.
But why don’t we start by going around the table, for some people who may not be familiar with each of you? Brian, explain a little bit about your background and what it is Keystone Financial does. Then we’ll go around the table.
Irvine: I’m with Keystone Financial. We’re an independent research firm. We’ve been doing it for about 25 years. We specialize in independent research, where we look at every stock in Canada – there’s over 3,500 – and there’s 5,000 we look at in the US every year from a fundamental, growth and balance sheet perspective to help our clients.
And our clients are just individual investors and institutional clients. There are a lot of IAs that use our service as well. We help them build simple 15 to 25-stock portfolios. So, kind of concentrated portfolios, and they consist of quality growth stocks and dividend growth stocks. Twenty-five years ago we started looking at small caps. But when I say small caps, I’m not talking about penny stocks. I’m talking about companies with good, solid growth, earnings and revenue.
And today we recommend and own the Alphabets and the Microsofts of the world, right down to a company with, say, a $20 million market cap and it happens to be a profitable business that we’re looking to find the next Alphabets of the world.
Clients use a discount brokerage to save on fees. They subscribe to our research on an annual basis, and we help them build that simple portfolio. So hopefully that gives you a good summary of what we do.
Larson: Thanks Ryan. So, Tom, let’s move on to you and talk a little bit about Stocktwits and some of the research you guys do, specifically on the social media and sentiment side.
Bruni: So, Stocktwits is the largest online community of investors and traders, with over 8 million users and hundreds of thousands of people tuning into our platform every day to kind of participate in the real-time experience of what’s happening in markets. And my job as head of market research and editor-in-chief of our content business is to write our Daily Rip newsletter, which is our flagship that goes out to a million people a day, sums up what happened in the markets in a fun, witty way.
And yeah, I’m working to build out our broader content initiatives to create discoverability on the platform, help investors and traders find their next big idea, whether that be through a newsletter or video content like this. We’re all about helping people find their community in the markets, and the next idea.
Larson: Right. Awesome. You know, I love the newsletter. I’m a big fan of the memes and some other things. I always get to chuckle out of a lot of what you guys have to say about what’s going on out there. So, thanks for keeping it interesting.
Bruni: Appreciate it. Yeah, absolutely.
Larson: Sean, obviously in the past I’ve worked with you for a number of years. But if people aren’t familiar with your background, why don’t you talk a little bit about what you do and what Weiss Ratings does.
Brodrick: Right. Well, let’s start with Weiss Ratings. It’s been around a while. It started originally rating insurance companies and said that a lot of them had feet of clay when everyone else thought they were great. And it turned out a lot of them were really in trouble. So, that made the Weiss name. We’ve since moved on to rating pretty much everything.
We have the Weiss Ratings for safety, and also for performance, and I use those in my work. I’ve been a natural resource analyst for decades now, though I am a cycles analyst as well. Right now, there’s an upcycle in tech led by AI. So, we’ve been riding that wave pretty successfully. And there’s a whole bunch of areas of the market I like.
I have multiple newsletters, starting with my monthly newsletter, Wealth Megatrends. That has the next edition going out Friday. And we’re sending out a new gold report because I’m really bullish on gold. That goes out soon as well. And then I have two premium service newsletters. One is Resource Trader, which, as you might expect, trades stocks that are leveraged to resources. And then I have Supercycle Investor, which is more focused on the whole cycle thing.
So, that’s pretty much what I do. And in pursuit of that, I’ve traveled from one pole to the other and lots of places in between. I love mining stocks. They don’t seem to love me very much now, though. But things are changing.
So, it’s an exciting time to be in the market. Let me just say that.
Larson: Awesome. You know, since we’re on you at this moment and you mentioned gold, I guess I’m going to start with you talking a little bit about the markets. Then maybe we’ll get to picks later in the conversation.
What do you think’s going on here with this rotation we’ve seen and with gold breaking out? What’s your big-picture view of this market here?
Brodrick: It all depends if you wanted to talk about what’s happening this year or else what’s just happened in the past month. Because in the past month, we’ve had a decade worth of action, right? A lot of people thought things were really going to heck in a handcart… but there were a whole bunch of things that came into that to really make people feel that the market was overvalued.
When we had news that really wasn’t that bad about jobs and the market sold off a lot, that was a warning sign. Then we had the Bank of Japan tweaking the carry trade, which made it harder, or I should say not as rewarding to actually borrow in yen and then buy stuff all around the world.
That’s a market no one really knows, but it’s worth somewhere between $1.1 trillion and $2.8 trillion. And that really affected a lot of things on the margin, which was driving prices crazy. So, we had like a mini flash crash. That was actually kind of the second one we’ve had this year, too, but this one was the biggest.
So, a lot of people are feeling spooked about the market. Now, the Bank of Japan blinked and so that problem went away. But there are other underlying issues which are making people feel nervous. We do have some weakening economic data. Some people think we’re in a recession. I believe they’re wrong. We could maybe get into that later.
We have inflation that was stubborn, though the latest data seems to be showing that the inflation beast is kind of hitting the snooze button again. And we have political uncertainty. Boy, don’t we have that here in the US? I mean, if you talk to your friends over in Europe, they think we’re just insane.
But an important thing is that forecasts for next quarter’s earnings look like they’re going to be more disappointing than the stellar earnings that we’re having this quarter. And I think a lot of that is not discussed as much. But it’s really weighing on the market, because even though earnings growth is expected next quarter, it’s not nearly as good or as bullish as what we’re seeing this quarter. So, that’s making people take a step back and say: “You know, do we really want to be in this?”
Especially with the AI stocks, or else stocks of companies that are using AI… they’ve been investing a lot of money in it, and they don’t seem to really be getting as much out as quickly as investors were hoping. So, that’s taking some of the shine off of AI. Now, I’m still bullish on certain AI stocks, but I can see why there is that nervousness in the market.
So, I’d call it a nervous market. Just remember, the market climbs a wall of worry. And so that’s probably the situation we’re in.
Larson: Thanks, Sean. Ryan, I want to go to you because obviously Canadian and US markets are kind of inextricably linked and you follow both of them. What are you seeing from your vantage point as far as the market environment, before we get into the bottom-up analysis that you do as well?
Irvine: Yeah. I’m glad you pointed out the bottom-up work that we do, because I love listening to the macro about the markets. But we don’t concern ourselves as much with the macro as much as we look at the micro – we look at the individual companies and the stories behind those businesses. Sometimes the most boring businesses out there provide the best results.
Now, if you want to look at one macro theme that we’ve been playing into over the past year that we still think can continue, it would be the valuation gap – the relative valuation gap between small- and large-cap companies. I’ll give you an example. This past fall, the divergence between large- and small-cap companies, or even micro-caps, reached its highest level in a quarter century. So the S&P 500, the large cap index, was trading above its historical P/E ratio, while the S&P Small Cap 600 index traded below. There were some excellent opportunities in higher-quality earnings-based micro- and mid-cap companies at that stage.
The valuation gap today has narrowed slightly. The forward P/E on the S&P 500 is about 20.1 versus the small-caps, where it’s 14.3. But if we put this in perspective, over the last 25 years, small-caps due to their higher growth profile have traded at a premium for much of this century to their large-cap brethren. Now, the continued inversion of this ratio continues to be an opportunity for us. If this multiple were to reverse in favor of small-caps once again, as it had for the first 20 years of this century, there would be significant upside in small-caps.
Now, not all small-caps are created equal. We would stress to focus on very high-quality, earnings-based small-caps. And we think that is where the opportunity is. It doesn’t have to be in the sexiest names out there or the AI companies that everybody’s falling today. You can play into those names, but it’s often the most boring businesses that service those industries that we’ve found the best results. And we can talk about some specific names today, but that is one theme that we continue to play into – the relative valuation gap between large- and small-caps.
Now, large-caps have been driven by that mega-cap eight that is pulling up the valuation there. So, there’s that at play. You’ve got to be wary of that influencing the overall metric in terms of price-to-earnings, price-to-cash flow on the S&P 500. But you know, there is still a valuation gap. We’re seeing some names that you can buy at reasonable prices still.
Larson: Yeah, we’ll definitely have the chance to talk about some of those picks and some of those ideas later on the conversation. I do want to pivot to you, Tom. What are you seeing in this market, and what are some of your, again, your sentiment indicators showing? The people that are speaking up on Stocktwits, what are some of the messages that are coming out of that?
Bruni: For sure. So, speaking to the macro, obviously there’s a lot of potential headwinds in the next couple of months: political elections, Fed decisions, wondering if the economy is going to pull off its soft landing or not. But we’re seeing a lot of users look for what I’m calling diamonds in the rough. Looking for opportunities that have such strong tailwinds behind them that regardless of what happens with the macro or big picture, index-level performance, these stocks will still perform.
And it’s a great environment for that. If you look at the sector performance year to date, I think a lot of people would be surprised to know that utilities are at the top of that list, followed by communication services. Then we’ve got, you know, financials right behind them. And so there are pockets of strength, in each of these broader sectors that investors are focused on.
Within industrials, you know, airlines are not performing well, but defense stocks are performing. In financials, you’ve got Goldman (GS) breaking out. Any capital markets-related stocks. Insurance. Or JPMorgan Chase (JPM), a best-in-class bank. So that’s working. In the utilities sector, some utilities, water utilities, electric utilities, some of these kinds of renewable energy related or linked ones, like NextEra Energy (NEE).
And then, lastly, I think the big conversation around tech is just kind of the underperformance of every other industry group behind semis. If you look at a lot of the popular industry ETFs that iShares and other companies put out to track these sectors or sub-industry groups, semiconductors are the only one above their pandemic-era highs.
You’ve got software lagging. You’ve got social media stocks lagging. You’ve got even communication services not quite breaking out yet. And so, the question now is like, do we see those start to catch up with semiconductors and see that be the next leg of technology? Or, are semiconductors the one that’s going to catch down to the rest of them?
So, that’s the big divergence I see a lot of people talking about now. But yeah, individual stock and industry selection is huge in this environment. And we’re seeing a lot of people just focus on the biggest winners and losers.
Larson: I’m definitely going to dive into individual names. But one last question while you’ve got the microphone here. With your sentiment gauge, I mean, once you have the big leaders like Nvidia (NVDA) that have months where they’re down, whatever it is, 19% or something in a month, things like that. And some of the other big tech names get hit.
Do you sense that with the retail investor, that has really kind of made them pull in their horns? Or do you think people are just viewing it as more of just corrective?
Bruni: Yeah. So again, it depends on the broader theme. But right now, given the broader performance of the market is still positive on the year, we’re starting to see rotation into small-caps and other areas of the market that are performing well. It’s still generally pretty bullish from a longer-term perspective.
Day-to-day, obviously you’re going to see sentiment all over the place in terms of people reacting to more tactical news and tactical moves in the market. But overall, I think people are still looking to buy the dip. They’re just being a bit more selective given valuations and some of the uncertainties in the macro environment.
Larson: All right, great. Sean, I guess we’ll pivot to you. I’d love for you to maybe throw out a name or two. And again, it can be a stock ETF, it can be a sector, or whatever you’re comfortable with. But what are you looking at? You mentioned AI and how that is still interesting longer term. You also talked about commodities, uranium, gold, things like that. So, I wonder if there are a couple of particular names you’re really looking at.
Brodrick: Actually, we, sold out of most of our AI names in mid-July. That happened to work out quite well. May have been more luck than skill, but you can start to see that things were weakening and names in the group were not performing well, even when they seemed to have decent news. So, I just thought it was time to exit.
What I have been buying recently is, smaller-cap – not small-cap, but smaller-cap – gold miners. We believe rate cuts are coming, a series of rate cuts starting in September. That is, in turn, what is weighing on the U.S. dollar. And while there are many other things, that’s one of the things pushing gold higher because gold is priced in dollars.
So, for some gold miners – the ones that can control their costs – I mean, it’s actually a very good time to be in them. The one we added, was it the last issue of Wealth Megatrends or the issue before? I can’t remember. Anyway, it’s Alamos Gold (AGI). It’s working out quite well for us. I mean, that’s a company that’s growing production and keeping costs in line. That’s basically what I look for in a gold miner.
I was very pleasantly surprised what Barrick Gold (GOLD) did when it just reported its earnings, too. And it’s kind of the big kahuna in this space. Great revenue. Great earnings. Not so good on production and stuff, but I guess you don’t have to be when you’re that big. And they do have enough cash to buy more production, more reserves, that kind of thing. So, they still should do well.
I don’t have any problem with the larger-cap names, but like Ryan said, I’m looking at the smaller-cap names. I’m looking at a rotation into those names. And so, especially if I think that the interest rates are going lower, that’s what I believe helps a lot of smaller companies that don’t have big cash piles.
One thing that has been really helping the earnings of these huge companies is they have so much cash, they’re earning money on that cash. Smaller companies don’t have that advantage. But as interest rates come down, they’ll start to look better next to the larger companies. So, that’s just one of many things that makes me like smaller-cap companies like Alamos Gold.
Larson: Perfect. Thanks. Ryan, when you go out there and sort of look at your universe of stocks, whether it’s in the US, Canada, or both, are there groups that are sort of surfacing more often just given the backdrop? Or is it still just kind of a hodgepodge of names in different sectors? And after you answer that, I’d love to hear about one or two of your best ideas right here.
Irvine: Yeah, I think that as Tom and Sean were alluding to, it is a stock picker’s market right now. Some of the areas that we’ve played into over the past year have been cash-rich, smaller companies. So, as Sean said, a lot of larger companies have been earning cash on their cash hoard. Smaller companies that did have cash over the past year have been benefiting from that as well. So, you can pair those two together.
And the environment becomes better for smaller companies in a shrinking rate environment, and you could see that. Now, those companies that you could buy a year ago that had a cash-rich balance sheet, smaller, growth, profitable, have done tremendously well. Quality earnings companies in the smaller sector over the last year. I think it continues to favor those companies going forward.
That is the mix that we’re looking for. A good balance sheet in a smaller company that may be ignored for whatever reason during this market cycle, but can continue to get more attention right now. And there’s some names that we’re looking at specifically.
Gold was mentioned. We’re a bit of a “chicken-bleep” investor in the gold sector because it has been so volatile. There is one name that we’ve looked at and invested in for about six years now. Do you want us to mention names now? Do you want to go through that?
Larson: Yeah, that’d be great if there’s one or two to share. Sure.
Irvine: For sure. It’s a company called Dynacor Group (OTCPK:DNGDF) – DNG:CA on the TSX. Now, it sounds like a gold mining company, but really what they are is an industrial ore processing company. So they mill for small-scale miners in Latin America. They process the ore and sell the gold. They take a spread between what they process it for and what they sell it.
Now it’s been profitable for 12 straight years. You look at gold companies and you see this over time. Well, this company has sustained that model of profitability over the 12-year period and in an area of the world where it’s hard to operate, which is admirable. Five years of increasing their dividend, 20% of their market cap is cash. So, it’s one of these cash-rich smaller companies as well. No debt.
They’re also ready to expand that model – take that mill, build another mill in the country they’re in, buy another mill in another country. And look at expanding that to have four of these mills over the next four to five years.
One of the things we love investing in is a company that can have a proven, profitable model in one market and replicate that in another market. And you can gain that success by doing that. Some boring businesses, like the Boyd Group (OTCPK:BYDGF, BYD:CA), which fixes cars, they buy automobile repair shops in one market, go to the next market, and just create more and more value, economies of scale over time. Dynacor is a smaller stage of this, but we think it can continue to do that.
And you’re paying nine to ten times earnings right now. So, you’re paying a discount to the market. It’s profitable. It increases its dividend every year. We’ve owned it since $1.80 and it trades around $5 today. Again, you’re only paying nine to ten times earnings. Expect 20%-plus growth. Plus, it has that cash in the bank to go out and buy another mill or build another mill in another country.
And you then have a kicker to earnings. That’s what you need in a business like this, trading at low valuations, cash in the bank, doesn’t have to dilute. Those are the type of businesses that we look at. Unique situations where the market may be trading at 20 times, you buy this at nine or ten times, and it can grow beyond the market rate. That’s what we’re looking for.
Larson: Perfect. I appreciate the explanation on methodology and the name itself. Tom, may I ask you: You mentioned a couple of the bigger-cap names, the financials, JPMorgan, Goldman Sachs, and so on. And then you talked a little bit about sectors within utilities, water and so on. Are there any names – again, it could be ETFs, could be a stock or two – beyond those that look particularly attractive or that your members are pretty bullish on?
Bruni: Yeah, for sure. Before I share the biggest theme that we’re seeing right now, or one of the biggest themes, I just want to touch on what Sean and Ryan had said. A lot of these underfollowed, smaller microcap stocks have these very hardcore communities on our platform because there are not a lot of other places to discuss these types of stocks. They’re not getting mainstream media coverage until they’re bought out by a bigger player or something major happens.
And so our members or our users are finding a lot of opportunities in these sectors as well, particularly in the healthcare space right now. You’re seeing Eli Lilly (LLY) and all these GLP-1 type companies – as competition heats up and their valuations are still very high, they need to find other growth drivers for their pipelines. So, they’re looking down the cap scale at some of these small micro- and mid-cap stocks that could be acquisition targets. That’s kind of one area that our community is focused in on in the small and microcap side.
But then, bigger picture, you know, it’s funny. I was preparing notes for this yesterday and then the Starbucks news came out. But the biggest theme is basically finding or trying to find value in some of the beaten-down name brands, whether that be Nike (NKE), Lululemon (LULU), Disney (DIS), Intel (INTC), Walgreens (WBA), Pfizer (PFE), or Celsius (CELH). These are all companies that are very well-known. They have high social followings and huge followings on Wall Street as well.
But for whatever reason – maybe there was a misstep with their execution when they took their eye off the ball – but these are all brands that people agree generally will be around for a very long time and just kind of need to figure out which dials to turn to get back on the right track. So, we’re seeing a lot of conversation around those names and what’s going to be the potential catalyst, what levels to get involved in, where the risk-reward makes sense.
So, I think there are a lot of opportunities across sectors to identify some of those left-for-dead type companies that haven’t participated in the massive 18-month rally you’ve had and people are starting to look at now.
Larson: All right. Great.
Irvine: Yeah. Can I follow up on that?
Larson: Please do.
Irvine: I agree. I think there are some M&A opportunities in the health tech and biotech segments. I mean, there are some companies that have been beaten down because of these Ozempic-like drugs in the durable medical equipment sector, where they think you’re no longer going to need a CPAP, you’re no longer going to need some of this equipment.
But they’re actually seeing that, if you look at the numbers of these companies, they’re continuing to see… people are going to visit a doctor to talk about Ozempic, for example, they still need the CPAP. There are many of these equipment manufacturers that you still need that have been cut in half and are trading at half the valuations that they did, say, a year ago. Where you see that fear trade initially, and then the company doesn’t really experience a drop in earnings or cash flow, and you can pick them up. They were trading at ten, 15 times EBITDA – now they’re five. And their historic is 11, 12.
So, there are some opportunities there that we’re seeing as well in some names. And we’re trying to inch into those right now. Find the quality names that have taken a beating. It’s a great point that was made there by Tom, for sure.
Larson: Perfect…
Okay. Well listen, Tom, Sean, Ryan, I really do appreciate you sharing some insights here and taking some time out to chat.
Originally published on MoneyShow.com
