Wednesday, 12 June 2024

By Callum Newman Editor, Small-Cap Systems and Australian Small-Cap Investigator

[3 min read]

Dear Reader,

The ASX was a sea of red yesterday. There’s no hiding the fact the market is under some pressure in the short term.

Is it inflation? Rates? The economy? We can go mad trying to divine the short-term swings.

Indeed….

We can rationalise any move in the market. But who really knows? Maybe two planets in outer space are getting closer…or further apart.

It might be better to say that what is… just…is.

That said, I’m looking back fondly at January. The market was ripping higher at that point.

Stocks were on the move!

Today, most stocks on the market are back into a grind.

Take heart!

Most shares might be going sideways. But some are still ripping higher.

There’s no clearer standout than one of my small cap recommendations – DroneShield [ASX:DRO].

Look at how DroneShield has skyrocketed since the start of the year. 

Check out this beauty…

The ASX200 is up 2% since January 2.

Droneshield is up 254%. My subscribers have had the opportunity to ride – so far – about half that move since I put out this presentation.

We could call the first phase of the current DroneShield rally ‘reversion to the mean’.

Let’s put this in some perspective…

The small cap sector got hammered for two years – late 2021 to late 2023.

Like all bear markets, it took down the good, the bad and the indifferent.

DroneShield was no exception.

And yet, with a bit of historical perspective, anyone could see that, by the end of 2023, DroneShield was ten years old.

A lot of blood, sweat and tears – and investor money - was poured into the company at that point. The price didn’t show it…but the products and distribution were in place.

At the end of 2023, investors – those paying attention, anyway – knew this.

And what did Mr Market do? He discounted all that…and threw DRO into the bargain bin!

This is when it can be timely to channel the wisdom of Warren Buffett…

‘Mr. Market is your servant, not your guide.’

If you did nothing but watch the price action, you’d assume over 2022 and 2023 that DRO was a basket case.

After all, why else would investors dump it?

It’s not that they didn’t like DroneShield. It’s just the 2021-2023 bear market scared them even more.

High inflation, high rates – you know the factors hitting the market at the time.  

These are not kind to companies, like DroneShield, that are not yet profitable and rely on investor support.

In a bear market, investor support gives away like a French resistance line.

And so it came to pass that DroneShield’s shares fell to 25 cents each at the depth of the gloom late last year.

Today they’re $1.30 each, within the space of 12 months.

What exactly has happened to turn this dynamic around so fast?

First, we had the ‘reversion to the mean’ move earlier in the year.

DroneShield went from being undervalued…to fairly valued.

Investors were happy to give it another $100 million earlier in the year to fulfill its ambition – no small sum. 

Why?

DroneShield looks like it’s on the march to much, much higher revenue growth. The market can sniff big contracts up ahead.

After all, DRO sells to the “defence” industry – where government usually picks up the tab.

Government budgets are not like consumers. They are not under pressure. They don’t worry about swapping steak for mincemeat.

Most bureaucrats would be shocked if they were ever fired.

A precondition would mean someone held them accountable on a cost versus benefit basis. That’s not a feature of any Western government – at least, as far I know.

DroneShield can potentially sell worldwide. It has every chance of not just cashing in on the Aussie taxpayer…but the US and UK one as well.

Why do we care?

From DroneShield alone we can divine that the market WILL chase certain stocks, regardless of action in the wider market.

These stocks must be growing revenue. They must not rely on the Aussie domestic economy.

Is there another one that springs to mind?

As it so happens – yes.

GQG Partners [ASX:GQG] is a recommendation I made last year. It’s up about 80% since.

You can see it marching up here lately…

GQG is a fund manager. Back in November it had US$112 billion under management.

This month it said that figure is now US$150 billion.

That means its asset base is up 33% in about 6 months. That’s a tidy rate of growth in anyone’s book.

GQG charges half a percentage point for every dollar under management.

The more dollars it can aggregate, the more it earns. That’s a dynamic the market can go along with.

Right now, GQG is trading on a Price to Earnings ratio of 11 for its 2025 earnings.

In other words, even after the big rally, the share price can keep going…because the business can keep going.

Here’s something else I noted yesterday….

While most stocks were down yesterday, both GQG and DRO were up.

Not by much, admittedly, but green nonetheless.

What does this tell us?

Well, to me, it says that buyers are happy to step in and support the stock even when the wider market is getting a drubbing.

That tells me you can act with a certain amount of confidence…as long as you can find the right business.

There are no guarantees in this world. Perhaps the market nosedives tomorrow.

Perhaps DRO can’t fulfill the high expectations now built into its share price. Perhaps GQG stops growing funds under management.

All I will point out today is that it’s a mistake to think that all stocks are having a dud year if you tee off the general market.

Remember this wisdom…

"Mr. Market is your servant, not your guide."

Now…are you prepared to actively hunt down the next potential bargain left lying, unloved, in some dusty corner of the market?

I know I am. My latest issue is going to tell my subscribers all about it. If you’re keen to find out more, get started here. It will be out after the market closes today.

Best,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

Callum Newman is a real student of the markets. He’s been studying, writing about, and investing for more than 15 years. Between 2014 and 2016, he was mentored by the preeminent economist and author Phillip J Anderson. In 2015, he createdThe Newman Show Podcast, tapping into his network of contacts, including investing legend Jim Rogers, plus best-selling authors Jim Rickards, George Friedman, and Richard Maybury. He also launchedMoney Morning Trader, the popular service profiling the hottest stocks on the ASX each trading day.

Today, he helms the ultra-fast-paced stock trading service Small-Cap Systems and small-cap advisory Australian Small-Cap Investigator.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Dear Reader,

The subject is nothing. Zero. The thing that isn’t a thing.

If you have a little of it, you accept it for what it is. Like an empty wallet, you know it won’t take you very far.

But what if you have a lot of it? Fifty trillion dollars’ worth, for example. Then, you must feel a little like Donald Trump when he was down on his luck in the early ‘90s.

He was reportedly in the hole by $100 million. But he was proud of it. The banks would never lend so much to a poor guy. Only a very rich man could be that poor.

America’s great wealth is a source of pride too. But as we discovered, much of its proud tower is rickety, hollow or simply missing. Often, there is nothing where there should be something. And since a third of Americans live ‘hand to mouth’, we’re going to see what happens when the mouth realises that the hand is empty.

We have stocks that are not worth a fraction of their prices.

We have ‘meme’ and ‘zombie’ companies that are not worth anything at all. They may have negative value, in fact, since they take valuable resources and waste them.

Money good goes poof

We have a mountain of debt... nearly $100 trillion of it... every penny of which is counted as an ‘asset’ on the creditors’ balance sheets. Probably only about half of it is ‘money good’. The rest may go ‘poof’ in the credit cycle’s downturn.

The safest part of this pile is US Treasury bonds. And yet, in gold terms, we’ve seen that they lost 30% of their value in the last four years... and 75% since 1999.

And we have a GDP that is largely fraudulent... with as much as half of it directed, controlled or be-muddled by government, rendering it unfit for human consumption.

Today, we’re going to look at more ‘wealth’ that isn’t there — including $3 trillion of ‘ghost money,’ the strangest kind of nothing.

But we’ll begin with something simpler...

It’s not just Treasury bonds that pretend to have value they don’t actually have. All across the fixed-return world, there are unrecognised losses and make-believe wealth.

Here’s the FDIC notice:

‘Unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.’ 

Banks were required to hold US Treasury bonds as ‘reserves.’ That, they were told, would make them more antifragile. But it did just the opposite. Treasury bonds proved to be a terrible form of ‘reserve.’ They went down, in nominal terms, by about 20% since 2020. In gold terms, they lost half again as much.

The banks also had plenty of private debt that went bad. They lent heavily to real estate developers and speculators, for example. But now, commercial real estate is not worth what it was a few years ago. People don’t go to the office as much. Employers need less space. And many speculators in commercial property deals are unable to repay.

In addition to the loan losses, there are the losses on the collateral itself. Green Street reports that the ‘all-property commercial index’ is down more than 20% since 2021.

And here’s yet another big category of fake money — crypto. The total market value of crypto is now approaching its all-time high, at about $3 trillion. That is $3 trillion worth of ‘money,’ about the same value as Nvidia.

But Nvidia makes something... and earns a profit. What does crypto produce? It boasts $3 trillion worth of new purchasing power... but where does it come from? How can you discount a stream of earnings when there are no earnings at all?

‘It’s hard to wrap your head around,’ say the English. Crypto may be valuable. Or not. In a few years, it could even be more valuable than it is now.

But where is the ‘there’ that should be there? Or is crypto just a ‘ghost’ of real wealth?

It is illegal to counterfeit dollars. But not to create your own crypto currency. Nobody knows who really started Bitcoin. But now, the theory and the algorithmic formula are freely available. And as far as we can tell it costs little or nothing to create a billion new units of an entirely new crypto.

Then, what will you have? Another ‘asset’ with no corresponding real-world wealth? Fiction...fraud...or fantasy?

Who knows? Crypto brought no new real wealth to the party with it. So, every dollar’s worth of it can only be valuable if it can take a dollar’s worth of something away from other assets.

Or, to put it another way, the more ‘real’ the crypto wealth becomes, the more of an illusion other forms of wealth must be; if there is $3 trillion of crypto wealth, $3 trillion of other wealth must vanish.

Everywhere we look — stocks, bonds, property, crypto — much of the wealth we see is a chimera.

Stay tuned...

Regards,

Bill Bonner,
For Fat Tail Daily