Peter Hodson: There is always a bull market in something
Lithium evaporation ponds in Nevada. A strong lithium sector is fuelling small-cap stock Patriot Battery Metals Inc. Photo by Carlos Barria/Reuters The markets had a decent rally early this week, but let’s face it, it has still been a horrible year for equity investors and bond investors haven’t had any fun, either.
Advertisement 2 This advertisement has not loaded yet, but your article continues below.
Frankly, it’s getting a bit depressing. And with the days getting shorter as winter approaches, it’s no wonder some investors are feeling the doom and gloom. But we’re here to stop that.
FP Investor By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300
There is always a bull market in something, so let’s look at five companies, exchange-traded funds or other investments that have truly hit it out of the park this year. We present — trumpets please — five winners of 2022.
The trends that made these winners might still be intact, so there could be more upside ahead for them. Note that we did find one over-the-counter company that is up 37,000 per cent this year, but we are not going to mention that one. It rarely trades, and even with a market cap of $1.5 billion, it is pure speculation and not an investment.
Advertisement 3 This advertisement has not loaded yet, but your article continues below.
Lantheus Holdings Inc. Type of investment: Stock
Market cap: US$5 billion
Year-to-date return: 151.6 per cent; one-year return: 214 per cent
Reason for outperformance: Earnings growth and valuation. Even with its big 2022 return, Lantheus still only trades at 19x earnings. The company makes and sells diagnostic medical imaging agents and products, and its recently introduced products are performing very well. Sales rose 120 per cent last quarter and earnings increased 50 per cent. A classic momentum stock in a weak market, sales were 10 per cent better than expected last quarter, and analysts keep ratcheting up their price targets (now averaging US$103.57).
Outlook: Decent. Earnings growth is expected to slow in 2023, and this may cause the stock to pause after its recent gains. The company has other products in the pipeline and cash is building. The valuation here is quite decent, but investors still might be quick to take profits on any sign of weakness in growth.
Advertisement 4 This advertisement has not loaded yet, but your article continues below.
Simplify Interest Rate Hedge ETF Type of investment: Exchange-traded fund
Assets: US$386 million
Year-to-date return: 93.6 per cent; one-year return: 80.2 per cent; expense ratio: 0.5 per cent
Reason for outperformance: This ETF’s goal is to “provide a hedge against a sharp increase in long-term interest rates.” With interest rates seemingly rising every day, the fund has been perfectly positioned to benefit. Higher interest rates have been about the only sure thing in 2022. (Note: For this exercise, we eliminated all leveraged ETFs, those that offer double or triple exposure to different asset classes. Obviously, leverage returns can be huge, but so can losses.)
Outlook: The fund has not been around for long, so how it may perform when interest rates peak and/or decline is very unclear. But it is in a sweet spot for now and attracting lots of attention from investors worried about higher rates.
Advertisement 5 This advertisement has not loaded yet, but your article continues below.
Scorpio Tankers Inc. Type of investment: Common stock
Market cap: US$2.9 billion
Year-to-date return: 284.5 per cent; one-year return: 175.7 per cent
Reason for outperformance: Valuation and sector. As an oil-shipping company, Scorpio has benefited from the rise in oil prices as well as the increase in demand for shipping as Russian oil gets largely embargoed. The company has a leveraged balance sheet, but its rapid earnings growth means investors do not care so much about risk. The stock, even with its big gains, is very cheap at only 4x on a price-to-earnings basis. It also offers a small dividend.
Outlook: Hard to say. The shipping sector is exceptionally cyclical, and day rates can quickly swing. The stock hit a new high this week, but the company has lost money in five of the past nine years. This one has to be considered very high risk, despite the low valuation.
Advertisement 6 This advertisement has not loaded yet, but your article continues below.
United States 12 Month Natural Gas Fund LP Type of investment: Limited partnership
Assets: US$37 million
Year-to-date return: 80.2 per cent; one-year return 54.5 per cent; expense ratio: 0.9 per cent
Reason for outperformance: High natural gas prices. This fund invests in gas futures with the goal of replicating the performance of natural gas deliveries to Henry Hub in Louisiana. Along with oil, natural gas prices have done very well this year. Not as strong as in Europe, of course, given the deliverability issues there, but futures prices have done well.
Outlook: Mixed. Most analysts expect gas to do well, but it is already well off its year high, and much is going to depend on how cold the winter of 2022/2023 is. There is also some recession sensitivity here. We certainly would not expect the same type of returns from this fund going forward.
Advertisement 7 This advertisement has not loaded yet, but your article continues below.
Recommended from Editorial Five reasons bad news is not always bad news for investors Attendance was high, but spirits were not: Five takeaways from the MoneyShow Five strategies to help set up your investments for when the market rebounds Five investing principles that should always apply no matter the season Patriot Battery Metals Inc. Type of investment: Small-cap stock
Market capitalization: $552 million
Year-to-date return: 1,130 per cent; one-year return: 1,608 per cent
Reason for outperformance: Pure speculation, drill results and a hot lithium sector driven by the strong demand for electric vehicles. Patriot has a lithium project (Corvette) in Quebec and has reported some strong drilling results. The company has also signed senior executives with good experience, and it has been heavily touted on investor chat boards and in newsletters. It recently raised money, but has no revenue to date, negative cash flow and losses every year for the past decade. Investors don’t seem to care. The stock is off its high reached in early September, but it’s still one of the best-performing stocks worldwide this year.
This advertisement has not loaded yet, but your article continues below.
Article content Outlook: For Patriot to keep doing well, it needs the lithium sector to stay strong and for positive developments to continue at its properties. Its financing will certainly help the news flow, but this one must be considered highly speculative. Investors buying now with dollar signs in their eyes might end up disappointed.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)