It finally happened. The TSX Venture has fallen below the 500 level as investors sell into a collapsing commodity market. From oil to gold, silver and natural gas, commodity prices are hitting multi-year lows.
We have been chronicling the niche market of the TSX Venture for many years, but as the Venture trades to new all-time lows almost every day, an important silver lining exists for those who can outlast the weak markets.
TSX Venture stocks: only the strong survive
This is a mantra TSX Venture stocks who operate in this market have to live by or they don’t last very long. The prolonged commodity bear market is making weak participants go extinct, which will do two things when the markets turn:
- the Venture will consist of less companies in the next bull market
- the Venture will consist of more resilient, stronger companies
While this does little to help the discouraged investor today, it will prove to be a boon to well-positioned investors when the overall market does turn.
TSX Venture stocks delist at increasing rate
A whopping 73 companies delisted from the TSX Venture in September and October combined. What valuations these companies contributed to the overall exchange no longer exists. This is another reason the years of the TSX Venture at 3,000 are over; hundreds of companies have left the exchange in the past 10 years, which means more capital will be concentrated in fewer issuers.
12 companies were delisted in November, while only 4 have been delisted thus far in December. So, with 89 companies delisted thus far in Q4, for one reason or another, the exchange is the smallest its been in years. A few of these companies graduated to the TSX Venture, some amalgamated, some opted for the CNSX and some dropped to the little known NEX board.
Since the end of September only 9 companies have recently listed on the exchange, according to TMX Money. This is unsustainable and is reflected in the declining valuation of the TSX Venture and the concentrated liquidity in a few dozen issuers.
TSX Venture Market Stocks: 3 Investor Hints
For most TSX Venture stocks, raising capital has become next to impossible, if not for the most well positioned issuers on the exchange.
That is hint number 1. If a company is raising money (and not at a 52-week low) in this market it is worth finding out why. Is the company operating in an outperforming sector? Are the new investors strategic (will they add value or are they just looking to make a quick buck?). Is management participating in the financing? This is a big one that shows a depth of confidence rarely displayed in many weak juniors.
Finally, is the financing being done at a premium? While this is exceptionally rare in today’s market it does happen and usually means a larger, long term group of investors see significant value in something the company is developing.
Hint number 2: follow the management. This is the most important lesson I have learned in my career researching TSX Venture stocks.
Proven and connected management teams usually have deep pockets themselves and have access to even deeper pockets. The structure of the deal is more often sound and a team with a history of success can usually raise money in any market. By no means does past success guarantee future success, but by investing alongside a management team which has been previously bought out ensures the company will be taken seriously if and when it develops a world class asset.
Aaron and I spent hundreds of hours compiling data for our latest Ebook which evaluates 50 past buyouts in the small-cap space and the leaders who pulled it off.
The companies these leaders run today are also described in this one of a kind rolodex of some of the top entrepreneurs and business minds, in the small-cap mining, tech and energy sectors, operating in North America’s small cap public markets.
Hint number 3 is an obvious one: find the right trend. Investors who have been holding gold stocks for the past 5 years have lost money. The reasons are never as important as the results. Getting ahead of trends, being patient and finding favorable sectors is key.
In today’s TSX Venture market graphite, lithium, tech and the healthcare-related issuers have outperformed in 2014 and 2015. The capital markets are still open to these sectors. New capital results in development, which in turn results in investor interest and increasing liquidity. These are all important things for a small-cap TSX Venture stock to have as it advances towards its goals. The vast majority of Venture stocks have no revenue, so raising capital is paramount to success. Without this ability a company’s time on the TSX Venture will be limited. I wrote about the NEX Board and the growing number of issuers joining its ranks in an article titled Some Struggling Junior Resource Stocks opt for NEX Board. Check out the below facts:
“NEX charges a single quarterly listing maintenance fee of $1,250, payable on the first business day of each quarter. By contrast, TSX Venture charges an annual sustaining fee and filing fees, ranging from $5,200 to $90,000, with each reviewable filing made during the year. NEX fees are designed on a competitive basis with other evolving and emerging markets, and with consideration of TSX Venture’s pricing structure.”
Click here to read the entire story on the NEX Board.
The TSX Venture is not for the faint of heart as anyone who invests in this arena knows. Investors have to be as nimble and strong as the companies they invest in. With the commodity bear no at its bottom and the Fed preparing to raise rates on Wednesday, conditions on the TSX Venture will likely get worse before they get better. One thing I do know, is that bad bear markets set up huge bull markets. Savvy investors are doing the research now, positioning themselves over months and years, not weeks; these investors are quietly reading the data and following the top performers as they wait patiently for the markets to turn.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.