Over the last year, you’ve heard a lot about marijuana and cryptocurrencies, with both driving “tremendous performance in the small-cap area” and leading to “outsized returns,” says David Picton.
But don’t expect a replay in 2018, he says, as both assets “are running their course a little bit. We believe in bitcoin and blockchain […], for example, but it’s tough to find real businesses that generate real profitability there. There’s a lot of hype surrounding [both] spaces,” so it will be best to watch the small–cap space and “pick a few horses,” he suggests.
As of mid-December, the marijuana sector was “a very strong driver of performance,” says Picton, president and portfolio manager for Canadian equities at Picton Mahoney Asset Management in Toronto. His firm is one of three that manages the Renaissance Canadian Growth Fund.
Still, “there’s a chance to buy real companies with improving cash flow and earnings trends,” he says, so long as you weigh all the risks.
Potential small-cap picks
Picton is looking across the whole “recreational fun” space, rather than only focusing on cannabis and other hot trends.
One company he’s bullish on is Ontario-based Brick Brewing. It obtained the rights to Seagram Coolers, LandShark and Margaritaville between 2011 and 2015, and, on Jan. 10 it announced plans to invest $3.5 million in its facilities to double canning capacity. Since 2015, its stock has steadily climbed.
Historically, he says, the company has “done a good job of growing its market share. It just finished a rationalization of some assets, and they have a plant that has excess capacity, [through which] they can bring new brands through. We think this company is poised for a nice performance in 2018.”
For 2018 so far, Picton’s prediction is on point: the stock opened at $4 on Jan. 29, which is a 10-year high.
He’s also watching later-in-the-cycle resource stocks. Says Picton: “Many of them are unwanted and unloved, depending on which specific sectors you’re looking at. A couple of new emerging trends have to be monitored.”
In the uranium-related space, for instance, there’s a “dynamic where some of the major players in the world are shutting down capacity to balance out supply-and-demand metrics,” he says. “The big companies have decided to go about rationalizing the space, so this opens up some really nice opportunities in smaller players.”
One such company is NexGen Energy. “It’s a little bit more long term in nature, but tends to be buffeted by trends in the uranium price below it,” says Picton. He’s also considering making direct plays on uranium, especially “as it improves and goes to a level that’s much more characteristic of generating proper returns.”
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