There’s a ton of phrases and vernacular in commercial trading. While some seep out into the open world, many don’t.

They can also be specific to a commodity/sector as well. I know ‘punching the clown’ from natural gas. It refers to shoulder periods – where financial volatility tends to diminish and physical factors (pipeline outages, storage injections/withdrawal seasons, extreme weather events) are low. It translates to ‘doing nothing’. Low opportunity (reward) against a given risk profile. No point in doing anything at that point but ‘punch the clown’.

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Let’s talk about a trading strategy I’ve been using since early last November. I’ve shared it with a couple of people, and while I usually don’t proffer up this sort of thing, I think it might be useful for subscribers. I’ll caveat this by saying this isn’t trade advice, just describing what it is, and the rationale behind the positions.

The legal cannabis sector (MSOs in particular) presents much risk. It always has: if the Canadian experience showed anything, it was what a metaphorical gold rush looks like. The US – a bit laggardly in regulatory terms – found it’s own gold rush in Q1 of 2021. MSOs have come off hard since – and what I see as a broader realization that sector fundamentals don’t exist in the absence of regulatory certainty. Without a roadmap to profitability, how does one value underlying assets?

Long time readers will probably note that I’ve never used the terms ‘earnings multiples’ or ‘calendar year earnings estimates’ or ‘TAM’ in valuing an equity. Not once.

These – and dozens of others are used far and wide by sector analysts and folks in general. What they describe are comparative measures of financial information in a given sector – EBITDA, revenue, EPS. Their ultimate goal is to comparing relative share prices of companies in a given sector. Worse, I’ve even seen folks port in these measures from other sectors/CPG as comparatives. I don’t see them as particularly useful, especially across sectors/industries.

Instead, I value assets. Cashflows, PP&E, optionality, and deals. That to me, is what describes what a company is ‘worth’. I take that value, and I compare it to share price. If it’s higher than share price, I buy. If it’s lower, I walk on.

That’s served me well for 20+ years, and it’s what I know.

If there’s anything this past year should have taught people, is that the widely used and quoted ‘measures’ only provide relative comparison – not absolute asset value. Now, many will hand-wave at me for that saying: “but the market is mis-priced” or “the RSI is so oversold, there will be a correction“.

Yep. I also heard that when Advisor Shares ETF ($MSOs) was at $30. Then $25. Then $20.

If you like the dope sector (I like dope, and I think there’s upside potential in MSOs in the short term), aside from the ‘diamond hands averaging down’ (ugh), what else is there to do in a market like this but ‘punch the clown’?

Trade it.

I don’t ‘do’ technical analysis, but I look at charts all the time. They tell me sentiment, where resistance may lay, and trading ranges. Best of all, a market with high volatility is a natural hunting ground for trade, whether in up or downtrend.

In trading, any exposure one takes on needs a premise. A ‘feeling’ is not a particularly valid premise to myself (see ‘diamond hands’). In the case of US cannabis exposure, I saw a few things. None of this came about in a day, it’s just what I do – wandering around looking for opportunities:

• $MSOs is just plain old fashioned ‘length’. It also has a history of deploying cash when sector price has decayed.
• I watch a Twitter user – @junglejava1. She tracks $MSOs inflows/outflows and holdings religiously, and publishes daily
• <warning about @junglejava1: I understand she’s employed by $CURA, and I believe there’s a ton of behind the scenes spit-swapping between her and the carnies. Her numbers regarding $MSOs are reliable, although the rest of the account is sell-side-paid-for-carney-twaddle. Forewarned is forearmed>
• I noticed an MSO that has a relatively well defined trading range with demonstrable support on the downside. It was TerrAscend ($TER). It went sub $7, and caught my eye.
• At the time (Nov 4, 2021), $TER got whacked hard before their financial statements, so I opened a position. I closed that position 7 days later. MSOs had some $135MM in cash at the time IIRC.
• On January 26th, $TER went sub $6.50, and I opened another position. $MSOs had cash holdings of ~=$86MM IIRC. I closed that position on February 1.
• Today (March 11), $TER is low 6’s, and I opened a position again at an average of $6.08. MSOs cash is now at $5MM.

Ok. I see risk in this latest position as ‘higher’ than the 2 previously (at this point, MSOs is unable to ‘come to the rescue’ as it were. We also haven’t seen $TER this low since August 2020. I think about that. Because exactly 2 years ago – $TER was trading at $2. Downside remains.

But, I am ok with holding the exposure right now because:

• New Jersey is initiating, which I believe will be a positive catalyst
• I expect some regulatory movement will occur, triggering sentiment.
• My PnL goal is to earn a 20% return on a maximum 90 day hold, potential loss bound to ~=10%. Those values annualized gives me the risk weighted returns I expect for wearing exposure like this. This position turns into a pumpkin when regulatory moves are announced (that’s the backstop) – absent some inordinate catalyst or event takes it well into the money. In that case, it’s gone too.

This trading ‘strategy’ could be described as taking bull money by targeting volatility. Nothing more to it. I know hitting volatility as being called ‘hitting the piñata’ in trade terminology, because volatility is trade’s friend, and good things come from hitting it.

Anyhow, I’ve picked up about $9k on those two trades, within an exposure profile I’m ok with, set against a larger backdrop of a regulatory catalyst of some sort before summer. I’m willing to take on an incremental 2k more shares should it move sub $6 – but will stop the position out should $TER go sub $5.XX. My losses are known in advance, my upside defined.

I noted a comment this morning by the CEO of $MSOs on Twitter. He doesn’t strike me as being much to be honest – running an ‘ETF Long’ isn’t sophisticated. <if one wants, simply ape $MSOs exposure in your own portfolio and there you go. I mean, they publish all of the holdings and percentages. Why someone needs a middleman in that scenario…..I don’t really know.>

The largest risk I see in this position is if $MSOs experiences redemptions (depending on size, I might close the position too). They’re out of cash as well (which is another risk to the position, as $MSOs won’t be riding in to save the day). Future inflows are unknown. Yet another is liquidity – the bid/ask is embarrassingly thin – 100 share lots litters Level 2.

Well, that’s what I’ve been up to. I hope this provides some utility to you and your experiences in the markets.

As to valuing $TER’s assets – it’s a challenging exercise due to the lack of visibility I have into their deals (see $GAGE for example), a wide swath of optionality held, and an uneven operating history. Best number I can thumbnail is ~=$2.45/share within the current operating profile. As an investment, it’s a hard pass for myself.

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Late in January 2021, I valued Trulieve ($TRUL) at $30/share, and Planet 13 ($PLTH) at $3. I was laughed out of many rooms.

This is not a badge polish, it simply happened. I am putting this here only to illustrate the fact that emotion and exuberance can overwhelm judgement. Many comments I’ve seen recently from the #MSOGang is that they’d ‘never imagined‘ the market where it is now a year ago. It was because they were only imagining the market at 7x higher than what it was.

If you decide to put your capital at risk, please, use your entire imagination. And be sure to limit your downside: we wish the best to you.

And a sincere ‘thank you’ to our valued subscribers, both new and old. We are here solely because of your support.

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 position in $TER