Markets and Metals Navigator (September 13, 2020)

Tech Melts Down, Commodities Hang Tough

Technology stocks endured a rough week in the market with the Nasdaq selling off -3.5%, dragging down the broader market along with it, the S&P 500 was down -2.6%.

Commodities have continued to hang tough in the face of very choppy markets, gold finished the week up +0.5%, silver was down -0.6% and copper was off by -1%.

Typically in these types of ‘risk-off’ markets commodities would fall in excess of the market, the market internals are certainly pointing to underlying strong commodity demand by institutional investors.

Telsa – Has the Bubble Popped?

Telsa has been the poster child for the COVID-19 technology bubble. The stock was off -11% last week bringing it’s total loss from the peak ($498/share) to -25%.

Tesla’s parabolic rise was driven by valuation multiple re-rating alone, at the start of the year the stock was trading at 2.5x sales and now trades at 11x sales.

One would assume there was a step change in the growth trajectory of the company this year to warrant such a multiple expansion, in fact their operating results suggest the exact opposite – last quarter sales were down -5% year-over-year.

One of the main trading drivers of the epic run in Telsa stock was call option buying by both retail traders and large institutions (specifically SoftBank).  This large call option buying has a leveraged impact on the underlying stock, in some cases $1 of call buying can lead to $150 of stock buying by brokerages to hedge their positions on their calls they underwrote. When the stock begins to fall the unwinding of the options hedges have the same velocity going down.

Value Stocks Experiencing the Worst Ever Returns vs. Growth Stocks

It’s no secret that value investing has been a deeply out of favour strategy for nearly a decade, what the chart below highlights is the degree to which COVID has accelerated the underperformance of this group – it’s the worst relative returns ever.

Many of the companies that are categorized as value have simply been disrupted by technology (ie. JC Penny/Sears vs. Amazon), the spiral from “value” to “bankrupt” is swift in these cases.

Mined Commodities are the Mean Reversion Trade in Value Stocks

Mined Commodities are the most interesting opportunity in the value bucket as a mean reversion trade, in many instances the commodities are prerequisites for the technology (think lithium for EVs).

Additionally all the central bank money printing has increased the tail risk of runaway inflation, metals (gold, silver & copper) have historically been a strong portfolio hedge in inflationary markets.

We highlighted the opportunity in copper as the catch-up inflation trade on August 7th, highlighting Lundin Mining (TSX:LUN), Freeport (NYSE:FCX), First Quantum (TSX:FM) and Sierra Metals (NYSE:SMTS; TSX:SMT).


Silver: Eric Sprott Bets Big on First Majestic

After market close on September 10th First Majestic Silver (NYSE:AG, TSX:FR) announced a $78 million dollar bought deal at a price of CDN $15.60 with a sole investor – billionaire Eric Sprott.

Capital 10X correctly identified First Majestic as an attractive investment opportunity in our  Silver Insights Series on July 20th. At that time we identified that First Majestic screened well vs. its peer group, the company had a higher proportion of its revenue coming from silver (60%) with a price-to-cashflow multiple inline with it’s silver peers.


Aurora Cannabis Announces New CEO and More Write Offs

On Tuesday September 8th Aurora Cannabis (TSX:ACB) announced the appointment of new CEO Miguel Martin and  $1.8 billion worth of goodwill impairment charges.

The stock has been very challenged proposition, the share price has been down over 90% in the last year.

Even with the stock down significantly, Aurora’s forward price-to-sales ratio is higher than Aphria (TSX:APHA) and Organigram (TSX:OGI), two companies that have been far better run on a relative basis.


Sierra Metals is a market awareness client of Capital 10X.

Capital 10X gets down to the real money business, actionable financial insights for traders and investors. We analyze company earnings, interview management teams and help teach the fundamentals of financial analysis and options trading. Our mission is to hunt for genuine 10 baggers.


Please enter your comment!
Please enter your name here