A reason why I’m not a fan of index investing

Reading press releases like this one makes me quite happy to not being an index investor:

SMITHS FALLS, ON, March 10, 2017 /CNW/ – Canopy Growth Corporation (TSX: WEED) (“Canopy Growth” or “the Company”) today announced that by being added to the S&P/TSX Composite Index, it has achieved another major “first” in the cannabis industry. Management expects this to drive liquidity and increase the percentage of institutions holding Canopy Growth positions. In short, more investors than ever will be buying and holding WEED.

It is pretty obvious that future outsized gains to be made in the marketplace are going to be in companies that are not in the major indexes.

Canopy Growth Corporation

Canopy Growth (TSX: CGC), specializing in the production of marijuana, has gone parabolic.


Today, 12.9 million shares traded (about 10% of the company) around a level that valued the entire entity at around CAD$1.5 billion.

Fundamentally, looking at their last quarterly report, they have sold $15 million of marijuana in the last 6 months.

If you (exponentially) extrapolate their revenue growth curve, they will be selling over $1 billion in marijuana in five years.

Somehow, I don’t think this will happen.

I am predicting two things:

1. Management is going to do a massive secondary offering. They did two of them earlier in 2016 (raising an 8-digit sum of money), but they will scramble to raise an even bigger amount of money which would pay for a lot of marketing. I’m guessing they’re going to aim for over a hundred million. I’d do the same if I were in their shoes, in addition to personally selling shares at the earliest possible opportunity.
2. Eventually, within the next six months, a lot of people are going to lose money on this stock.

Right now, if you are short, I can imagine the pain. Maybe those short on the stock should get a prescription of medical marijuana to ease the pain.

No positions, no intention to take any, but looking at this stock with amusement.