Tag: WEED

Marijuana stocks

Why anybody continues to invest in this sector is beyond me. But for whatever reason, over the past 7 trading days, Canopy Growth has skyrocketed – yes, this is over a 50% surge up:

I’m not short the stock, but those that are are obviously hurting. It is a heavily shorted stock, with about 40 million shares short on the US side and 11 million on the Canadian side, with a cost of borrow of around 25% (assuming you can actually get shares to borrow).

While I’m not the type to gamble on these stocks, my gut instinct says that it might Tilray these short sellers before crashing again. In March 2019, they reported CAD$4.5 billion in cash and marketable securities on the balance sheet, and at the end of December 2019, it was about C$2.3 billion, an impressive cash burn trajectory. While Constellation Brands did exercise C$245 million in warrants on May 1st, I’m sure Canopy would love another opportunity to raise cash again!

I’m guessing all of these Robinhood and Wealthsimple investors have been happily buying shares. Who knows, they might have the last high!

Marijuana companies – smart moves

Marijuana companies have to know at this time their primary objective is the following: obtain real assets other than market goodwill, and do it quickly as possible.

To this effect, you have companies raising cash like mad. Canopy Growth (TSX: WEED) raised $175 million earlier this year. Aurora (TSX: ACB) is buying other marijuana companies like crazy with its inflated stock.

The recipients of these gushes of cash are the ones that will be making the better deals. Here’s an example: Today, an announcement that Aurora is buying nearly 25% of Liquor Stores NA (TSX: LIQ) with warrants to buy more of the company if the stock goes higher.

This works very well for Liquor store management, who will be getting a huge cash injection at an equity price well above market. It works for Aurora, who is trying to desperately diversify into other assets beyond their own stock price.

How did Aurora pay for it? A $200 million bought deal convertible debt financing, earlier in January! Some people have money to throw away I guess!

General comments – market weakness

Another ranting post with little direction.

With marijuana-related equities and cryptocurrencies plummeting, the market for speculative investments appears to be topping. Probably the next short squeeze that occurs will be the best time to be shorting these instruments. Implied volatility on the options sadly are high, and the borrow rate on WEED, APH, ACB, etc., are astronomical.

I also note Aimia (TSX: AIM) has sold off one of their divisions today and most of the negative news is buried in a later paragraph concerning the tightening of their senior credit facility – this is basically part of the slow march to zero. The company is happy to cite the amount of cash on their balance sheet, but not so happy to cite the balance of their deferred revenues, which represents future commitments that will be offset by cost of goods sold – hence the cash reserve. Using an insurance analogy, they are running off their insurance book with little capacity to collect premiums written after Aeroplan expires in 2020.

There’s a lot of young people out there that have witnessed nothing but rising markets and low interest rates and the financial mindset is fixated on these two conditions. There is going to be a lot of financial roadkill along the way, similar to what happened in 2000-2002 where a lot of people got wiped out for believing the dot-com bubble.

Incidentially, 2002-2003 was the perfect time to invest in the inevitable winners of that technology boom (Amazon and Priceline being two great examples). There will have to be winners out of blockchain software, but it could just as equally come from a major player. Very difficult to say at this point in time as I still have not seen any functional system operating with blockchain that doesn’t have a parallel system that is better – unless if you believe that cryptocurrency’s best application is evading monetary authorities.

As I suggested in my previous post, the roller-coaster is just starting. No point in jumping in too early.

Canopy Growth

In a nutshell, this is why it is dangerous to short companies on the basis of valuation – something over-valued can get even more over-valued:

Many people lost their financial lives shorting .com stocks in 1998-2000 due to their valuation. Many people will be losing money shorting cryptocurrency and marijuana stocks (if they haven’t already). Timing this is nearly impossible, but whoever gets it right will become quite rich.

No positions in WEED (now nor likely ever).