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Analyst Dmitry Zaytsev Examines Tilray Inc’s (NASDAQ:TLRY) Recent Slide

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Analyst Dmitry Zaytsev discusses recent market events and shares his current investment strategies. Zaytsev reveals he tried to buy CannTrust Holdings Inc (TSE:TRST) (NYSE:CTST) (FRA:C9S) after the company missed its earnings targets. Zaytsev used a stop-loss on the trade and emphasizes the importance of proper risk management when trading. Zaytsev believes valuations in the cannabis space are artificially high right now; however, US MSOs have a much greater potential market and still represent a better value proposition, according to him. He notes that Ontario’s retail lottery rollout was underwhelming and warns about similar disappointment when edibles are legalized. Zaytsev examines Tilray Inc’s (NASDAQ:TLRY) (FRA:2HQ) downward trend and is concerned by insider share selling, recency bias, and unimpressive financials. He notes there are still “pockets of value” in cannabis space such as companies with high-value indoor grow, brick and mortar retail, and cheap cultivation and production costs.

Transcript:

James West:   Analyst Dmitry Zaytsev joins me now. Dmitry, welcome back.

Dmitry Zaytsev:    Happy to be here, James, as always.

James West:   Dmitry, what is going on in your cannabis portfolio these days?

Dmitry Zaytsev:    Yeah, so, I think last time we chatted two or three weeks ago, we were discussing how the US MSOs are the place to be, and just shortly after that, we had the Curaleaf news. So with them selling CBD products in CVS, and that sent, you know, the US space higher. I think it’s very notable that the Canadian names, even though we’ve had such market strength with the US markets, they’ve been really lacklustre.

We had, CannTrust missed their earnings, and there was quite a bloodbath from that. So a lot’s happened the last two weeks.

James West:   So which – were you able to expose yourself to the upside in Curaleaf?

Dmitry Zaytsev:    Yeah. So I actually, my core portfolio in terms of US MSOs are iAnthus, GTI, and Curaleaf; those are sort of my core positions. I have some Acreage and some other, you know, other MSOs, but those three are sort of my core for now. And so yeah, I was able to, you always wish you have more, of course. I wish I had more Curaleaf, but yeah, I was able to trade it; it was great. One trade that didn’t work out so well was after the CannTrust earnings, for example, I tried to buy the dip there. So it dropped 10 percent; I said, hey, this looks really good. You know, I looked through the transcripts and all that; it seemed pretty reasonable. Peter Aceto’s very, you know, conservative; he just sort of walked everyone through pretty reasonable assumptions, I thought, and I thought 10 percent, oh, that seems pretty good. That will probably bounce back. Dip and flip, right? That’s what we like to say?

And I got in and, you know, within – I set very stringent rules for how I trade, so as soon as it didn’t move anywhere for half an hour, and, you know, there was no bounce, I got stopped out. I had a stop loss of around roughly $0.15 or $0.20 or so below where I bought it, and I got stopped out. For the next three days, it got hammered, because there’s a lot of retail, and everyone was piling into it from what I could see, and they just got burnt. So no one wanted to buy it. But it just goes to show proper risk management, trade management, is important.

James West:   Right. Hmm, okay. So what about, what about now? Like, so where are you at now? I mean, I’m looking at this market and it’s looking kind of – it’s kind of, you know, wandering, and not really showing any real direction or conviction, I guess I would say. So you know, I’m not a day trader; in fact, I’m really not a trader so much as I am just an investor, for the most part.

Dmitry Zaytsev:    Yeah.

James West:   So, but, as a trader, what are you doing?

Dmitry Zaytsev:    Yeah, so I’m not a day trader either, myself. The way I see it is, it’s – like, the valuations are pretty rich right now. The way I think about it is, look: Canopy is $20 billion, right? If they double, they’d have to, you know, have significant revenues to back that up, and I could find companies across the market, not even in cannabis, that I can probably think will double or triple in the next couple of years, so why am I looking over there? If you look at just the MSOs, right, the market’s way larger that they’re addressing, and their market caps are significantly smaller than a lot of these Canadian names.

So what I think is happening is, there’s the summer doldrums. You know, everyone’s sort of Pavlovian conditioning that oh, it’s summer. People got burnt the last two summers; there’s probably a little bit of fade there. Not a lot of catalysts on the horizon, so what are we waiting for, exactly? We had the rollout, which was kind of lacklustre, in Ontario. Some of the names we mention on the show, like META, right, National Access Cannabis, has been doing well since we’ve spoken about it, as an example.

James West:   Oh, okay.

Dmitry Zaytsev:    Yeah, but there’s really no catalysts. I guess we’ll have some edible regulations coming on in the next couple of months, more firmly coming out.

James West:   Yeah. What do you think is going to happen with the edibles? I mean, by way of preamble, I was at the highest volume dispensary in San Diego; it was called Urbanleaf. They did $43 million top line, and I said, so what’s the breakdown in terms of product segments? And he said, Well, 50 percent is premium dried flower; 30 percent are extracts for vaping, and/or dabbing, so, like, the waxes, the shatters, the butters, etcetera, as well as the vape cartridges. And he said that only 15 percent was edibles and beverages.

Dmitry Zaytsev:    Yeah, and what percentage of that is beverages? Like, from all the data that I’ve seen, beverages are a very small part of how cannabis is consumed in the US, where they have a very free market, it’s vertically integrated, like, you can have your own brands. You can have, unlike in Canada where we don’t have any branding, we don’t have any edibles right now.

So look, I’m just taking a step back and I’m saying, I remember those HMMJ calls, if you recall; those decayed a lot, just because the general cannabis market has been sort of rolling over. But the S&P500 has just been extremely strong, and the fact that these Canadian names haven’t followed is concerning, because as soon as you have, you know, the China deal not work out or some kind of catalyst in the market that sends it lower, you’re going to see these cannabis names lose a lot of air.

There’s other things like, you know, Tilray as an example; that just bleeding, right? Because there’s no catalysts. There’s nothing to –

James West:   Right, well, let’s talk about Tilray for a second, because this is – I’m surprised at the extent of the bloodletting in Tilray, even though I was equally surprised by the valuation it achieved, though I understood, at the time, I thought, well, that valuation’s based on the fact that nobody can sell any stock and it’s all wealthy insiders who are able to sell the stock, but they’re not going to because they don’t need to.

Dmitry Zaytsev:    Well, they have been, right? The CEO has been selling a little bit. They’ve got some options that they’ve sort of exercised and sold.

James West:   Well, that’s just it. So they have either advertently or inadvertently caused the problem they’re now facing, because they’ve started to disclose sales, which gives everybody out there – I mean, it gives the shorts a telegraph saying, Okay, there’s now some stock you can borrow; there’s more stock in the system to borrow, so the cost of borrowing’s going to be cheaper. And it also tells the investor crowd, who are the longer-term holders, that management maybe isn’t as committed to the long term as they originally telegraphed.

So those are the messages they’re sending, either inadvertently or overtly, I’m not sure. One could argue that they might feel that they’ve gotten overvalued and that doesn’t serve a capital structure in the long term any more than does being undervalued. So, we’ll see.

Dmitry Zaytsev:    I think, you know, them selling is a couple of percent is not really a big deal. If you’re a successful CEO and you have all this stock, you’re going to want to get some liquidity; I totally understand that. You know, live life, taxes, other issues like that.

With Tilray, and just cannabis stocks in general, I think a lot of retail investors have recency bias. So they look back and they say, wow, this stock was $300; it could be $300 again.

James West:   Recency bias, I like that. That’s a new term for me.

Dmitry Zaytsev:    So you look back – I mean, technical and all that is based on that in a sense, right? Because people say, oh, look, before when it went to this price, it bounced back, so this is a good place for me to buy. So people look at it, when it IPO’d on the NASDAQ, it was at $24, $25, something like that, and it was, I did like a rough valuation on it, and it was still really overvalued at that price.

And I mean, they do have that, those JVs and deals that they’ve had. They’ve raised, you know, half a billion dollars on those convertible notes; I’m surprised anyone bought those. Good for the Tilray, like, they killed it. But other than that, like, you know, why should I buy it? What’s the point?

James West:   Right. The financial results have not yet been any reason to support them.

Dmitry Zaytsev:    I’d say any cannabis company right now, the financial results are really unimpressive. I think, you know, the US companies are richly valued, but I think, you know, there’s room for them to actually grow; there’s a ramp. But if you do the math, just assume 10 to 15 times EV EBITDA, which is like a longer term multiple for a lot of these beverage, tobacco, whatever companies, and you assume, you know, 20 to 40 percent EBITDA margins, you can sort of back out what kind of revenue numbers are needed to justify just these valuations, right? Just today’s valuations.

And where is that revenue going to come from? It’s not really going to come from the US for these Canadian names, because, you know, they’re losing first mover advantage in terms of CBD there, right? Like, look: Curaleaf’s already there, Charlotte’s Web is already there. International markets, there’s really nothing happening, and you have a bunch of local players like, you know, Khiron, Pharmacielo, Avicanna, you know, they’re all in the South America; they’re trying to lock that down.

In Europe, there’s a lot of regional players trying to lock down licenses, and the market’s very immature there, right? Germany just got their tenders, and I think it was a couple of thousand kilos a year or something that they’re allowed to grow. And so while that is a real market and it’s fertile, it might take a lot longer than some investors will have patience to wait for.

James West:   Sure. Okay, so over the long term, which segment would you say has the best sort of compressed value in it? Like, relative to, like, so there’s recreational, there’s what I’m going to call wellness/bioceuticals, and then there’s also the biopharma level of medical – EU GMP extracted, concentrated cannabinoids with very pure formulations. And then there’s some other ones, but I don’t really consider them significant relative to those three potential massive sectors.

Dmitry Zaytsev:    Yeah, so I think, I like to call them, I guess, pockets of value. So starting from just the grow, I think some of the maybe Latin American or producers that have really cheap costs per gram, that’s sort of a pocket of value, because they can sort of differentiate themselves there. I think indoor grow, so extremely high quality indoor grow, that will always have a market for it, because there’s people that want the flower, and they want high quality; so that’s another pocket where you can have good margins.

I think the actual dispensary level, so having a brick and mortar location, so more so, I mean, the problem is, a lot of these LPs don’t have brick and mortar locations. They, you know, it’s Fire and Flower, National Access, etcetera, that have these brick and mortar locations, but I think those guys can extract value, right? Especially if the regulatory crackdown on the black market actually happens; that’s another pocket of value.

On the US side, definitely when you have limited licenses, barriers to entry, right, the dispensaries are definitely pockets of value. The medical: so if you have DINs and all those other things, actual formulations that are, you know, dosed properly and they’re accepted by the medical community, that can have really large margins. And I think brands as well – real brands, which we don’t have in Canada, except the black market, right? We really have the only brands there. But in the US, I think brands are going to be able to extract the margin, because, you know, if you know Curaleaf or you know Charlotte’s Web and you know their product, you’re going to buy it over some generic thing that, you know, some other generic thing.

Because, you know, this is an important thing. It’s going into your body, right? You want to know that you trust the provider of that.

James West:   Sure, you bet. All right, we’re going to leave it there for now, Dmitry. Thanks very much for your contribution; as per usual, very in-depth. I wish we had more time, but we simply don’t today. We’ll have you back soon. Thanks for joining me.

Dmitry Zaytsev:    Thanks, James.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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