I’ll be heading into some dark waters over the next while.
As mentioned in yesterday’s piece on some of the hidden risks in new industries – I’ll be grabbing my 30.30 calculator and going hunting. I’ll be looking to bag potential value that might be laying around in the smaller listed US cannabis outfits.
With an amazing run in the latter half of last year, MSO’s are currently at lofty valuations against existing revenue, and strong investor interest is allowing them cash up. The pace of formation of the industry is brisk, and TheCannalysts expect to see increasing values paid for ‘cannabis ready’ assets as MSO’s look to create their footprints.
The reference to ‘dark waters’ is with respect to two things: the underlying companies themselves, and, how they are publicly traded.
Regarding the companies, they will present a higher risk profile than the sector itself. Please think about that. There is a relative lack of capital in them due to lower levels of cashflow and probable size of the asset base. That they are publicly listed and (in many cases) operating for years – but have not expanded – suggests that returns will not likely stem from asset addition. A single hard wobble in cashflow could probably sink some of them.
The ‘how’ these companies are traded adds risk that many might not have encountered before.
You will have heard me fetishize exchange traded financial instruments before. These are cleared by an exchange daily: think futures. To trade futures, one has to establish an account and place margin. That margin is used by the exchange to take from or add to based upon the day’s closing price. It simply functions as a deposit. The size of that deposit determines the size of position one can take, and futures contracts specifies the margin required to transact in a single contract. It varies widely depending upon the underlying asset/commodity.
I describe this in detail because it’s the gold standard for trading. PnL is marked daily, with no credit nor payment risk. It’s completely hands free. That’s the benchmark for trade.
A slight step down from that is exchanges like the NYSE, TSX, and NASDAQ. They are relatively liquid; historical volumetric and price data is easy to find; rules regarding required filings and related deadlines are clear; and even measures of financial strength are required for a company to be listed on a particular exchange.
Where we will occasionally be going isn’t any of that. We’ll sometimes be heading into OTC markets <shudder>. I will draw a hard line on delving into the pink sheets though (they’re ‘lower’ in overall quality than an OTC). In my opinion – no rational person…….without inside information or a personal financial situation linked to a company…….should ever be in there. I wouldn’t even look at them….you’ll probably come away with a retinal burn.
Now, it’s bad enough to be writing about OTC stuff (I feel icky thinking about it). But. There is utility in them as an asset pricing mechanism, and I’ll need to engage if I’m hunting for the assets whose demand we expect to increase. OTC financial statements are not on SEDAR – I’ll be relying on SEC 10-Q filings for information.
<Regarding exchanges that clear trades and my ardent love for them – a Binder will claim that I’m a just a princess……too precious to go where the ‘real gains’ are made. Of course they do. They’re the ones on the ask. Believe me. Pinks are the stage where the worst of the worst actors peddle their wares >
I can’t emphasize strongly enough to the reader how important the exchange is in all of this. It impacts the ability to crystallize gains, and you might find yourself not being able to exit a position at all. Not as common as in the pinks, but it can happen. Without liquidity, you are playing pretend……..with real money.
In ordination of quality, here’s a top to bottom list of exchanges from highest to lowest (in terms of liquidity and ‘quality’ of listings). It is incomplete (hell, I know a guy who loves the Frankfurt bourse for some reason, but I know nothing about it’s particulars). I put this forward as a general ‘guide’:
Ok. I needed to get that out. I would be doing a great disservice to you if I didn’t, and want to caveat the crap out of OTC market engagement.
This week, I’ll be getting Structures up on TerraTech ($TRTC/OTC), Maripharm ($MRMD/OTC), and Golden Leaf Holdings (CSE). Yes, $GLH is still around, and just completed an over-subscribed raise (it seems like only yesterday when $GLH attempted to merge with $MRMD. I’ve been critical of both companies in the past. I’ve recently been assured that $GLH is a very different company now, and we’ll take a new look at them shortly).
Please though. If there’s anything to take away from the preceding: Due to liquidity, and in some cases financial reporting……OTC markets present a risk to your money that is greater than the sector itself.
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.
Ads Blocker Detected!!!
We have detected that you are using extensions to block ads. Please support us by disabling your ad blocker.
