06/08/2023

This week witnessed another interest rate rise to 5.25%. The Bank of England who delivered this has been widely criticised, and it is interesting how few people now wish to make the connection between raising interest rates and cooling inflation. This is opposed to before the Global Financial Crisis in 2009. Somehow then interest rates were lowered and inflation remained low for the following 14 years. We also now have the example of Spain, where inflation is back to 2%, through direct price controls on key aspects such as rent, energy and public transport. Of course, none of this would be tried here, even, or perhaps especially if the strategy worked. In the meantime, we shall see how homeowners cope with massive mortgage rate hikes, and of course whether the BoE’s presumed strategy to change the course of the next General Election works.

Valuation

As far as the small cap space is concerned, this week the Investors Chronicle bemoaned the way that the mooted rally which many were looking for at the beginning of the year. Instead, the esteemed publication is, via Aberforth, still suggesting that valuations have already baked in the worst. This may be true, but it remains the case that while many in the market are aware small caps are as cheap as chips, they do not have the cash to back their view.

Having written about the stock market for more that 20 years, it was my view that one should always look at the market in the most positive way, if possible. This is firstly because people have put their hard earned cash into shares, and second, there are enough bad actors and shorters happy to distort the narrative in their favour. We were reminded of such distortion with a couple of small cap stocks this week.

Canadian Overseas Petroleum

Canadian Overseas (COPL) was up nearly 100% , the announcement of convertible bond issues on Thursday saw the stock continue a sharp rebound. Rather satisfyingly, the shares followed on a rally which began on July 24 when the company announced a JV over its Wyoming operations. This was one occasion when the fundamentals and the technicals matched. COPL has delivered a bear trap gap reversal over the past couple of weeks, one of the more reliable charting formations. Above Friday’s gap floor at 3.5p we could see as high 5.5p over the next couple of weeks. One would presume that the rally here has been powered not only by the merits of the latest news, but also massive short covering. It is interesting to note that over the past couple of years this company and its management have been subjected to every negative mud slinging that one could in the small cap space. If only for long suffering shareholders one would hope that at least the corner has been turned, and panicked bears will cause the move higher to overshoot.

Tern

Another stock which has been through the ringer over recent years, both in terms of its strategy and its management has been internet of things specialist Tern (TERN). Once again nearly every RNS has been received with a jibe of one kind or another. Indeed, this week the stock once again approached year lows near 3.5p. The situation though, was transformed by the announcement at Friday lunchtime that investee company, Wyld Networks has signed an agreement with Elon Musk’s SpaceX. It is difficult to think of a deal or a rabbit that Tern could have pulled out of the hat that could have been better to get its share price moving. While some will undoubtedly be at hand to throw cold water on the announcement, SpaceX / Elon Musk is pretty hard to knock. As in the case of COPL one would expect further follow through on the 100% rise in the shares, if only on the basis that many perennial bears of the stock will be having to panic out of their positions by covering the stock, just in case it is a long awaited company maker. On a technical view above the 200 day moving average at 6.5p the shares could hit the top of a September 2022 broadening triangle at 14p. This is even if the whole affair is a flash in the pan.

Sovereign Metals / Aterian

I have covered the head scratching stock market reaction to Rio Tinto (RIO) taking a stake in Sovereign Metals (SVML), something which in a normal market would have seen the shares soaring. As if to prove this was not a one off, we saw with Aterian (ATN) the shares deliver a blink and you missed it rally on Rio joint venture news on Tuesday. However, following the company making announcement we have seen the stock end the week 10% below the news was announced. Perhaps some of this was due to the way the shares did rally ahead of Tuesday? However, a better explanation is that investors in small caps are still very keen to liquidate their shares on spikes, hungry for cash, even if the news is top notch.

CleanTech

We saw the sell into strength on good news phenomenon a few weeks ago with CleanTech Lithium (CTL) on the announcement of a Laguna Verde resource estimate hike. Here the shares rallied from 40p to 66p before falling to 48p this week. However, it may be the case that now the weak hands have exited the shares can resume their recovery, driven by being in the run up to an ASX listing in the autumn.

Caracal Gold

Those who are familiar with Caracal Gold (GCAT) will certainly know what a tough journey the company has had. But it does appear that the latest update from the company could be one to clear the air. Given that production is always going to be the biggest driver for a mining company, news that it had grown four fold over the second quarter at the Kilimapesa project may be seen to be an inflection point for the company. The fact that the company has confirmed it will announce a financing deal for expansion, suggests GCAT could be a stock to be filed under turnaround.

Tirupati Graphite

Shares of TirupatI Graphite (TGR) have broadly been in a range between 30p -40p as the market has been looking for an indication on production, in particular how long it will take to get up to the 30,000 tonnes a year which the graphite producer has flagged. Here the promise to get to profitability at a corporate level should be enough to get the shares moving from the bottom of the recent range, given all the heavy lifting which has been done by TGR to date.

StreaksAI / WeShop

Finally, one of the notable features of the London market as compared to the USA is the dearth of tech companies. There may be a good enough reason for this, we on this side of the Atlantic just do not get the new economy. However, it could be that AI is something which is too big even for investor on this side of the pond. An interesting development this week was the announcement of a partnership between conversational gaming platform StreaksAI and social commerce group WeShop. The latter which is an investee company of Iamfire (AQSE: FIRE) is to bolster its platform using StreaksAI’s AI technology. One would assume that if these were US companies, the stocks would be soaring.