[doctrine]

Don't worry about supply. Marijuana companies are raising capital about as fast as can which will keep everyone afloat in paper. The easy bubble money has been made when they all went up 300-400%. None of them have the capital to grow revenue to meet their valuations without raising more capital. These are agricultural stocks, not technology stocks. You don't get unlimited free copies of the software. More issues coming soon to a discount brokerage near you.

 

[doctrine]

Insider selling is spiking. Not a great sign, but don't let that stop anyone from investing, I'm sure it's just for personal reasons.

A lot of friends and acquaintances are asking me about marijuana stocks. Some of them don't even have an RRSP but want to buy in, and probably will. Sigh.

 

[doctrine]

Don't worry, today's growth in HMMJ was honourably taken by Aphria as soaked that up with the $17.5M of convertible bonds that just went into common shares for people to buy. They also issued $40M in more in convertible bonds, which have a conversion price of $3.29 which the stock was unbelievably trading above for almost 15 minutes this morning, before it tanked by over a whopping 23% in minutes. All this from a company which has issued $132M of equity in the last 9 months, and had $1M of EBITDA in the last quarter and a market capitalization in excess of $1B and trades on the most reputable stock market in the country. Aphria's last offering was at $5.00, so I wonder how they feel about the convertible bond being callable at $4.94. To be fair, I'm not certain whether other companies raised capital today, but it seems to happen pretty often. Any warning signs here? I feel like a broken record, so I may stop complaining soon and retreat to my boring pipelines, utilities, telecoms and banks.

 

[doctrine]

I get that, but hope of insanity is not a great investment strategy. You don't want to be the one left holding the bag. If anyone does get in, I would recommend setting a price at which you would get out.

http://www.theglobeandmail.com/news...al-process-for-pot-producers/article34665698/

I heard somewhere there are something like 200 applications to enter the space. And Health Canada is going to accelerate the process. Barriers to entry are being removed. It is fascinating, of course, can't wait to see how it all turns out.

 

[doctrine]

HMMJ is now closed below where it closed on its first day of trading. Aphria dumped $75M of shares last week. That's nearly 60% of the entire NAV of HMMJ in one day by one company - it certainly can't soak up the supply of stock.

I'm guessing the retail price will be north of $5 but not by much, demand for legal pot at black market prices will be very strong as a vast majority of people would rather pay the same to buy it legally. $7-8 is likely, especially after taxes/fees. But that could quickly be pushed down by massive oversupply, which is one of the "big 3" risks of supply (massive overproduction/dumping/competition), regulation(taxes) and barriers to entry (nil).

 

[doctrine]

That's because this came in when prices already rose 400%. If you added up all of the planned capacity, I think you would find that it is closing in on 1 million kg of product, if not more. That would be a billion grams. Or roughly enough for 10 million Canadians to smoke up 100 times a year. I feel like that means there is already sufficient capacity for a fully developed recreational market in Canada. And plenty more capacity is coming online.

 

[doctrine]

There's a new ETF in the US that has been driving interest; MJX on the NYSE. It has most of the big names in Canada, and traded 1.8 million shares today. HMMJ traded another 2 million shares. That's pretty intense volumes, and the US involvement I believe is driving the new volatility. I'm glad I made some money trading WEED in the last month so I can say I participated but it's so volatile that I don't think I can stay in this industry long term.

 

[doctrine]

I would also add, that the amount of stock paper being issued has not dramatically increased. When $1B wants to enter the space, they have to pry it from existing shareholders. And I believe more than that has come in just in the last week or two. This is straightforward supply and demand...people want more marijuana stock.

 

[doctrine]

It's really hard to say it's in a bubble. There are real profits and substantial growth with a likely 5+ year runway to go as it takes years to improve quantity and quality and pry people away from their black market dealers, if the US states like Colorado are any example. An optimistic scenario would suggest more than $10B/year of sales within a few years, meaning potentially billions of operating earnings. There will have to be to justify the $20-25 billion of market cap of the Canadian companies. I think, although I'm not sure, that this is closer to the top end of optimistic scenarios that could any way justify the stock price. Going to the $40-50B of value will have to start to assume that the Canadian companies *are* the future giants, the Phillip Morris's, the Anheiser-Busch's of the world are here and now. That's more of a stretch for me, I think.

The real magic is that investors can price this whatever way they want. If they decide pot companies are worth 25 times earnings, then actually maybe the Canadian market alone could support $50B in companies, which means a double or more from here, or a lot of new capital. I think they keep going up unless significant new capital enters the market.

 

[doctrine]

4.5 million shares in HMMJ traded today. That's nearly 50% higher than the previous highest volume by my count. The demand is incredible. A year ago, these companies were issuing shares hand over fist. Now, that's all dried up. No major IPOs and only a few secondary offerings from the main players which have long since been consumed. MJX, the US cannabis ETF, up to $200M in assets this week. HMMJ about $600M.

 

[doctrine]

I believe total net assets is slightly overstating the growth. Net units outstanding is also important, because a big portion of the NAV growth is from share price appreciation. Although new money is entering, they are now only able to buy less units per $. In any case, I used your net asset numbers and divided by the closing share price on each of those days to get the # of units of HMMJ outstanding:

Jun 8 - 11.8 million
Nov 7 - 17.3 million
Nov 28 - 20.8 million
Dec 29 - 26.3 million
Jan 5 - 32.2 million

 

[doctrine]

I think delusional is an overstatement. This is a real industry, and at least for the first few years, the producers will have all of the pricing power because there will be undersupply. And while they might be squeezed, I think costs can also go lower. As well, oils and other products (drinks, medical) may have higher margins. And virtually every estimate of marijuana demand has been very low. I predict chaos in Ontario in particular as there will only be 40 stores to start. That will only be good for the image of these companies.

 

[doctrine]

I would say, I am slightly more negative on the sector than a few weeks ago. Primarily because of all of the new capital entering the space. Big raises from many companies, I think close to $500M since Xmas, maybe even more. Multiple IPOs as well. Based on some of my predictions of $/kg of cannabis, I actually think oversupply might happen within two or three years. There is easily in excess of 1000 tons production planned in Canada alone, and with the new money it might be 1500 tons. That is up to three times the estimated size of the market. Unless serious export markets are opened up, but I have the feeling most countries want it grown locally, not imported. Now to see how it all shakes out.

 

[doctrine]

See below for the latest tracking of HMMJ total units:

Jun 8 - 11.8 million
Nov 7 - 17.3 million
Nov 28 - 20.8 million
Dec 29 - 26.3 million
Jan 5 - 32.2 million
Jan 24 - 36.1 million

You can see how growth in net assets has begun to slow somewhat, although still very positive. If tracked by HMMJ, there is about $6 million of new units being created per trading day over the last three weeks. There has easily been $500M+ of new stock issued by public cannabis companies just so far this year.

I think the supply and demand of stock paper is more balanced now, as there are enough treasury stock issuances at this time to meet the demand of new investors, at least at this time. Expect many more stock issues. The value of cannabis paper is very high, the barriers to entry low, and the margins excellent, attracting more capital.

 

[doctrine]

The margins of making/selling weed are excellent? Or the margins in issuing new cannabis-related paper are excellent?

Yes.

 

[doctrine]

Action in marijuana seems straightforward TA. HMMJ broke key support at $20 (Weed around $30), and there is no near bottom. No point in owning or holding until there is a bottom. Fundamentally, you have to like WEED more at $27 than $44, that's straight forward, especially since they're loaded up with cash.

Also, money flows have stabilized. 37.5M units outstanding, versus 36.1M on 24 January. That's only about $30M in new money units in this ETF. Most of the volume is day trading, I would say.

 

[doctrine]

Checking up on HMMJ at 4/20 valuation: it now sits at $693 million of assets. As of 4/20, the one year return is +65%.

This has been a very interesting fund. A year ago it only had $100 million of assets.

Here is my old tracking of the # of units being held by HMMJ:

Jun 8 - 11.8 million
Nov 7 - 17.3 million
Nov 28 - 20.8 million
Dec 29 - 26.3 million
Jan 5 - 32.2 million
Jan 24 - 36.1 million
Apr 21 - 41.4 million

In the last 3 months, there has been 5 million new units created, so growth is there, but it is certainly dropped off. The return has been -29% in that period of time.

I think there will be severe oversupply within 12 months of legalization. I think now most investors are going to want to see how sales hold up in such a competitive environment with very little barrier to entry. Scale will matter, I think, if it becomes a commodity and branding is not important. There are some awfully big industrial farming sized greenhouses being built.

 

[doctrine]

Cannabis companies have some value. Real markets are opening up. WEED just took a $5 billion cash injection from one of the largest alcohol producers in the world.

The effects of legalizing cannabis are also real. Alcohol sales have fallen up to 30% as people have substituted cannabis in real quantities.

So, there is something to it - it's not a zero market by any stretch - it's a legitimate multi-billion dollar industry.

 

[doctrine]

I read that earlier, really it's missing the biggest bear argument: simple oversupply. There is something like 3000 metric tons of marijuana capacity planned domestically, and that was a few months ago; it might be even more now. The estimated total Canadian consumption varies, but generally I have seen ranges around 600-800 tons, including the total black market. There is simply going to be tons of weed growing out of everyone's ears and up to their eyeballs at the same time. Combine that with sky high valuations, and something will have to give. It will probably take until 2020 for that full capacity to be planted, so there will be a delayed reaction, but this is rather quite inevitable.

 

[doctrine]

Yes, there will be a shortage at first.

But look at Aurora's projections from their latest Q report:

Facilities and Production update

During and subsequent to the quarter, the Company made significant progress towards increasing its production capacity. As at September 2018, the annualized run rate of Aurora's in-service production rooms is 45,000 kgs. Management anticipates that around calendar year end 2018, the Company will have a production run rate in excess of 150,000 kg per annum, with subsequent scale up to over 500,000 kg per annum

Canopy is producing even more. And there are more big players - Aphria, Hydrocophery, Tilray, and many more. Maybe all planned production won't happen, but right now it is wel in excess of 600-800 kg total market estimates. Aurora alone is planning on nearly producing that much.