Having sat through a cannabis gold rush before, and the ensuing fallout, we have some thoughts on the sequel to 2017-18.

The level of “loud voices” is growing louder. And lord, some of the loudest and most bombastic could not find an MDA if their life depended on it. (And that isn’t a euphemism, that happened yesterday with an argumentative and opinionated loud voice on social media).

“Buy this”… because I own it. “Here are the reasons (the company) says I should invest in (the company) ….”

“Don’t buy that”… because I don’t own it. “Here are the hot takes that I have decided to parrot from others in social media”.

Molly laid out a warning yesterday about the level of noise and bullshit investors are being bombarded with on our subReddit yesterday. Great reading!

We are in a hype environment. Fundamentals of companies have not changed dramatically but the perception has. The regulatory landscape is now more welcoming in USA, but still very much unknown as to final state and timing.

Interestingly, those chiming in on how a Republican Senate would allow “moat building” are now full-on “legalization is coming, let’s dance in the streets!”.

States will be allowed to do their thing within their borders, pretty much as they have been. But if you want your product to cross a border it will have to abide by Federal rules when dropped and operationalized. (Medical has preceded recreational in almost all jurisdictions, and the thinking is it will in US federal too). Should this happen it will impact cultivators and processors more than retail shops.  

Retail shops may have their own issues.  “Social Justice” issues have held up Illinois rollout, and it will be interesting to see what federal views (FDA), legislation and state response are to the Democrat lead initiatives.

Do fundamentals matter? Not right now. When the tide goes out, they will.

In Canada, we have two money incinerating companies back stopped by strategic cash. Neither has shown much in the way of operating efficiency/competency. Yet, investors are assured that this time Daddy took the keys, or the oversight is better now. Oversight was the same as the day the cheque from the strategic investor cleared and their proxies installed on the board and in the c-suite. Until signs of change manifest in the financial statements it is all words. The HOPE of being profitable in the US of A, and the big cash balance they can deploy, seems to suffocate thoughts of past stumbles and ongoing ineptitude.

One of the lone company’s to be showing promise has to buy sales to keep their facilities churning at levels to keep them +EBITDA. You can talk about synergies, Europe, CPG extensions, but the bottom line is they (and many others) built too large of a footprint for Canada and exports. Hindsight is 20-20. 

The next group of Candian companies have diluted the crap out of investors and have yet to stem the bleeding. This latest stock price surge has allowed a new load of cash to come in. The i-banks have unloaded on retail yet again. And retail fell for it, yet again.

Zombies will be staggering around even longer now. Much to my chagrin.  It isn’t fun spreading crap and finding bodies under the rug.

TheCannalysts believe rec sales are stalling (listen to the next Inside the Ropes, we go through it). The last big “catalyst” was the ramp to 80 stores a month in Ontario.  A drop in January (potentially double digits) after a likely reasonable December holiday buying season is a possibility. A 28-day February follows.  The media will likely not differentiate that the $ drop is due to three less days than January (which is one of the reasons we run the daily purchases metric). Back-to-back monthly “decreases” could spook investors.

We might not see an uptick in Canada until March, which will be reported in late May by StatsCan, but those March quarter ends will tell the story by mid May. (Canopy year end is March 31, so financials will drop by end of June). Aphria Feb 28 Q, due by mid April, will include SweetWater revenue. This might occlude a soft to negative Canadian recreational figure with December sell in compensating for soft mid to end quarter sales. The Ontario covid December through February and counting lockdown ennui, limiting retailers to click and collect and delivery, might provide further headwinds.

IF that happens, what will happen with perception on the Canadian names?

The US is different, in that the companies’ viability is further along than in Canada. But does the viability support the stock price? What needs to happen that is not within the companies control for them to support the price? Will regulatory meteors strike, like they have in Canada. (Hey, New York state is on its third year of “this year we are legalizing”). Have founders ensconced themselves with long dated warrants and options?

(An aside… Molly and I have been discussing the impact of long dated in the money warrants and options.  It is interesting to note if a company issues a convertible debenture and the strike is in the money, the company reacts quickly to take the further increases to the debt holder – who has funded the operations – off the board.  But when the same c-suite, entrenched by multi voting super shares to ensure matters of control, are deep in the money -off the backs of new shareholders and paid out converts – there’s a lack of the same urgency (I dropped a Q on Molly unannounced on the latest Inside the Ropes – which is in edit – on the subject).

But you are saying: “Blue, that’s fundamentals. It doesn’t matter.”

Agreed, right now it doesn’t. Not one lick.  You know how I can tell?  The flotsam and jetsam of Canada and US cannabis are ALL rising.

In the USA there are going to be Harvest One, Maricann, RavenQuest, CannTrust, Aleafia Health, WeedMD, Hexo, Organigram, VFF, Supreme, Sundial … type of companies. There are going to be Aphria’s, Aurora’s, Canopy’s and Cronos’. And there will be better ones too.

Every flavour you can imagine.

Molly’s slog through Tier 3 operators confirms that the US has its share of slugs. And those slugs’ stock prices are also benefiting right now.

We harp on fundamentals. This a “fundamental” store. If you are looking for technical analysis, you are in the wrong spot. In the short term the best fundamentals may not equate to the best stock price.

Our subReddit Community members hated when we harped on the operating metrics of Aurora and Canopy in 2017-2019. The outcries were loud and often…

Wait until rec!

Wait until 2.0 formats launch!

Wait until Ontario opens more stores!

We are in 2021, third year of adult use, they are still trying to get their Canadian operations fixed. (I was chuckling with Molly and Cyto the other day upon reading comment upon comment of “my faith in (insert company here) has paid off” when said company has delivered a Golden Sombrero or even a Platinum Sombrero of negative gross margins.)

Others hated that we “favoured” Aphria operationally. (We certainly favour good operators, regardless whose name is on the masthead. Numbers and trends speak to us.) Operationally they have outperformed a very weak peer group.

Canada is like Triple AAA sports (Major Junior Hockey for us Canadians or NCAA football and basketball).  A great player in Triple AAA might go on to be Hall of Famer, might be average or a flop. Only time will tell.  Some, by virtue of being a high draft pick and a big signing bonus (think… those who got strategic money), will get a shot at the majors given they have been invested in.  But generally, a dog in Triple AAA becomes a dog in the majors, if they get there. They could be “coached up” but those that need coaching up after being a high draft pick probably have some missing ingredients, or had some blemishes that were apparent yet overlooked when they were younger.

Did Aphria and Tilray double their stock price (insert every other Canadian company and their increase) in two months because of fundamentals? Hell no! They are riding a wave. The questions become: how much higher is the wave AND how far out will the water level recede?

Big bets. Big risk. Big returns or Big bags?

In a hype market, retail investors seem to be oblivious to the difference between fundamentals and hype.  You can make a lot of money in a hype market. Thinking you are a genius because you hit the lottery seems to be common theme for retail investors.

But when that crazy hype cools, and the tide goes out, we see that folks get very uncomfortable in their positions that they were previously boldly trumpeting their “unrealized gains”.

Aphria was three years between $20 stock prices. And if you account for dilution, Aphria is not yet at the 2018 $20. Three years is forever for many. And I can say that I am surprised how quickly it climbed (and that goes for most of the Canadian industry).

I have scaled down my Aphria position rather substantially from its peak and still hold an oversized chunk. BUT, when hype overran my comfort zone, I sold in January 2018 and took out my entire initial investment and let the unrealized gains ride.  I rebuilt the same number of units just shy of what I sold on de-risking events through 2018-2020, all but one purchase sub C$8.50. I have sold that accumulation and then some.  I am three years closer to retirement right now, thus that, coupled with knowledge gleaned since the start of this journey in March 2016, has me more cautious now. 

I have set stop losses for more units, but I am willing to let a portion ride. That is a benefit of being in at a low price. Would I add here? Not a chance.

For those riding the USA wave. Change takes time. Legislation takes time. Sometimes you get stupid regulations (I am looking at you Health Canada and most of the provinces) that hobble progress.

In Canada it took from 2015 to October 2018 from Trudeau being elected to first legal gram sold. The USA, at the federal level, will likely take that much time to implement.

This is not a “set and forget” industry to invest in. “If you believe in the industry just jump in” is the biggest load of horseshit out there.

I hold around 30 Blue Chips, a few in each sector. I have started selectively adding from my cash position after a long hiatus, save for a March 2020 sector rotation. My target right now, solid performers who should do well in the continuing covid environment.

I do a hundred times more due diligence on weed stocks than I do on my Blue Chips.

But as I always harp… my reality is not yours. My portfolio, age and risk appetite are very likely not yours. And they certainly are not the wallstreetbets gamblers reality.

Right now, putting new money at risk comes with a lot of uncertainty. In the cannabis sector or any other overheated sectors.

Don’t get me wrong. We want you to be rich and successful. If your “at risk funds” stress you out while the market is going up, they will be a load if it should go south. Cannabis investing can change your life for good as well as for bad. I witnessed in 2018 an entrepreneur who went all in Aphria at $12-14, after selling his business that he built over decades, bailed at a loss, loaded into Cronos and it dropped… I wonder how he is doing. He went from the biggest cheerleader to very very bitter in a very short time.

Know what is unknown. There are going to be a ton of opinions on the “unknown”, and in the current environment those opinions are leaning on heavily bullish scenarios. Don’t get in over your head. As I don’t know if I can take three years of pissing and moaning, again. The couch got worn out last time.

And, slowly circling back to the title of the post … I was lucky (stock rebounded faster than I thought possible), knowledgeable (I baby sit my cannabis investment like an eagle on a nest. I know what is in the financials and MDA because of the level of analysis we do), I de-risked (when hype overran fundamentals in 2018 I took out my initial investment, and sold again now as the merger, combined debt, need for dilution, slowing of sales has me wickedly thankful for a $20 exit on a portion of my position), I reloaded as events de-risked (as Aphria was stringing “Progress Quarters” together and de-risking events like Diamond license happened), I was patient (but Progress Quarters allowed that to happen), and importantly early.

Best of luck to all.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has a position in Aphria and will not start one or divest (EXCEPT FOR IN PLACE STOP LOSS) in the next five days. The author has no position in any of the other mentioned companies and will not start one or divest in the next five days.