Barron’s and Citron Research are at it again. Not satisfied with calling doom on the market and/or individual stocks on several occasions, both organizations have renewed the cattle call this morning. While I find the counterweight to the incessant bullish optimism somewhat refreshing, it unfortunately misses the mark—by a wide margin.
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In a piece titled Marijuana Stocks Just Keep Soaring Higher. But Even the Bulls See a Bubble, Barron’s attempts to foment the bubble narrative based on valuation. Unfortunately, this is exactly the thing you shouldn’t be doing in an early-stage, expanding international market undergoing explosive growth. We get a sense of this right away in the second paragraph, when Barron’s opines that, “All [marijuana stock giddiness] this even before legal recreational sales in Canada finally start on Oct. 17.” Does Barron’s actually think the cannabis market—now valued north of $50 billion collectively here in Canada—is being priced based on Canadian recreational market legalization fundamentals? It sure seems that way.
Barron’s came to the same erroneous conclusions back in late March, when it concluded domestic consumption did not support the dizzying valuations afforded to the then-$30 billion cannabis sector at the time. Unfortunately, expanding international marketplaces never entered their equation.
If Canada’s retail market can reach $9 billion in annual sales in a few years—as one bull estimates it will—that would yield only a couple of billion dollars in cash flow to wholesale producers like Canopy.
The cannabis market, as defined by the Horizons Marijuana Life Sciences Index ETF (HMMJ), has risen ↑41.92% since Barron’s March 30th outlook.
Of course, the cannabis market—irrational and overly forward-looking as it might seem—is pricing-in forward expectations of international distribution. This includes the U.S. on the federal level, where copious amounts of evidence suggests Uncle Sam is the road to de-scheduling cannabis—starting with cannabidiol (CBD) in the near future. Just this morning, U.S. Drug Enforcement Administration approved import of a medical cannabis product produced by Tilray for clinical trial focused on Essential Tremor. This would have never have been possible even a couple of years ago. From South Africa to Germany to Brazil, cannabis legalization barriers are incrementally being extinguished.
Barron’s then proceeds to use the valuation argument on an individual level, using Tilray Inc. as its whipping boy. Barron’s opines: “With barely a backward glance, Tilray stock has shot up six-fold since July 19… Tilray’s $11.5 billion market capitalization is a whopping 300-times the annualized sales of its most recent quarter — which, by the way, was not a profitable quarter.”
While nobody disagrees with the above premise, why ascribe valuation logic in Tilray’s case? That flew out the window a long time ago, owing to Tilray’s ridiculously tight 6.5 million share structure and high short interest—3,499,750 shares were short as of 8/30/18, a 97% jump from the previous reporting period. Tilray is also a major beneficiary of overly insatiable U.S. cannabis inflows, as it’s only one of three major licensed producers to trade on a major U.S. exchange.
While Barron’s is correct that Tilray—and much of the cannabis sector in general—is in ‘bubble’ territory in the classical fundamental sense, they make the mistake of trying to quantify an un-quantifiable marketplace. Heck, Barron’s even quotes a William O’Neil & Co. analyst who admits as much: “It’s hard to pull out a financial model and rationalize the stock prices right now,” Andrew Kessner says. “If you have you head stuck in your model and say, ‘This company looks too expensive based on next year’s earnings or sales,’ then you are not going to be able to navigate this space.”
Perhaps Barron’s should take that advice to heart so that they, too, can “navigate” the markets themselves. Certainly, they will be right one day. In the meantime, investors heeding Barron’s advice are missing out on one hell of an investment opportunity.
Citron Research’s Bad Month Of September
Not to be outdone, Citron Research has fallen into the exact same trap. In the pre-market on September 4th, the famed bearish analytical firm indicated that they were currently short-selling Tilray stock. The reason? Valuations had moved too far, too fast. Here’s what they tweeted out:
Citron LOVED $TLRY at $26 but now we are SHORTING stock. Cowen lowered est and still raised tgt $62 only shows "RETAIL INVESTORS GONE MAD" and forgot $TLRY went public at $17 – 6 weeks ago. We would expect an equity raise at these levels. By far most expensive in space.
— Citron Research (@CitronResearch) September 4, 2018
Tilray’s stock was trading at $65.20/share at the time (previous day’s closing price).
Subsequent attempts to quell the rising price action tide had seemingly opposite effects. On September 12th, Citron Research tweeted out a new in-house story titled Our Final Word On $TLRY Before $50. They even included an giant bubble-popping graphic for investors who didn’t get the memo.
— Citron Research (@CitronResearch) September 12, 2018
Tilray’s stock was trading at $104.95/share at the time (previous day’s closing price).
And just this morning, Citron tripled-down on their bearish TLRY assertions, this time accusing them of underhanded business tactics. If at first you don’t succeed…
Tilray’s stock was trading at $120.19/share at the time (previous day’s closing price).
Perhaps the most surprising aspect is the skimpy logic Citron Research used to define their short thesis to begin with. This begins with the tried & true Wall St. axiom, “The market can remain irrational longer than you can remain solvent”, and ends with numerous example of bear investor carnage (tech stocks circa 1997, Volkswagen, Herbalife, Telsa, Netflix – the list goes on). The common denominator in all such cases is that irrational peer valuations are not a reason to short-sell stocks in isolation. Especially true in growing, early-stage markets trading on what could-be dynamics, instead of what is.
Irrespective of the shellacking Citron is taking on its short TLRY position, we wonder whether its bearish brand has been irrevocably damaged. Not only in response to the negligent Tilray opinion, but also its August 30th $3.50/share call on Cronos Group Inc., in which a portion of the thesis was based on faulty provincial non-disclosure logic (the provinces asked LPs to not disclose off-take totals). After a brief swoon, CRON is trading at just a fraction below the original Citron forecast price.
Currently, Tilray printed at $150.25/share, meaning investors who acted on Citron Research’s original short advice were theoretically down ↓230.44% on their investment over eleven trading sessions. Fortunately, most who acted probably used put options, so the damage was limited to the premium itself, depending on time frame.
Update (4:47 pm EST)
Citron’s tweet $tlry has now crossed to promotional and misleading (last one in this article) has been redacted from their Twitter feed. This would account for the formatting error seen above.
Update #2 (9:02 pm EST)
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