The January Bounce

The plummeting of the markets late last year has left many investors overly pessimistic about what is to come and has kept many on the sidelines. Although we have not yet seen a full recovery from broad market losses since late September, this has been one of the biggest January bounces we have seen in almost four decades. Of course, forces outside the financial markets may be giving the markets a boost. The Fed seems to be more cautious about raising rates while acknowledging slowing global growth, which has been positive for investor sentiment. On the fundamentals side, companies are for the most part beating earnings expectations this earnings season, with a lot fewer disappointments than many have feared. To us, this is a sign that the drawdown was overblown, and perhaps so were the warnings of those who cried “recession”. The way the market has recovered tells us there is still plenty of room for gains in the markets for investors. The market ‘panic’ has certainly passed for now. While many sit on the sidelines out of fear of another market decline, other investors can take advantage of good bargains while valuations are low.

 

In a recent Financial Post article by Peter Hodson, he mentioned a list of companies that had surged more than 40% this year already. We wanted to look a bit deeper at this. We found 37 Canadian companies that have over $100 Million in market capitalization and that have seen an increase of 40% or more so far in 2019. You can see the list below:

 

 

About The List

You might notice that the top three gainers are from Venture TSX stocks, which tend to be more volatile and smaller in size, but those are only 14 of the 37 companies, the rest are listed on the more familiar TSX composite exchange. Although micro-cap or ‘penny stocks’ can be subject to large swings from pure speculation, this list shows only companies over $100 Million in market cap. We think is a good threshold to wean out most companies in that speculative category.  Even during a recession, one can find a handful of stocks that see gains, but 37 companies at over 40% year-to-date is not just a handful of companies. Part of what might explain these large gains is investors taking advantage of tax-loss selling at the end of the year, then getting back into those same companies they see long-term potential in. This could partially explain the large gains in some of these companies. 

 

Opportunity Cost

These larger gains give us an idea of the return potential that still exists in the markets, making sitting on the sidelines more of an opportunity cost. Another market decline like we saw last year may occur later this year, who knows. It could also occur in the next two years or maybe three years from now. In the meantime, the opportunities to make a few extra bucks are still alive and well!

 

 

 

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