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Ben Smith on Cronos Group Inc’s (TSE:CRON | NASDAQ:CRON) Downgrade

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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.

Midas Letter Lead Financial Writer Ben Smith breaks down what Canaccord Genuity Group Inc’s (TSE:CF) (OTCMKTS:CCORF) (FRA:C6U) recent downgrade of Cronos Group Inc (TSE:CRON) (NASDAQ:CRON) (FRA:7CI) from a hold to a sell means for the cannabis space. Smith believes the downgrade was the “straw that broke the camel’s back” in a cannabis market that had been trending sideways for two weeks. Smith explains that when analysts are downgrading, investors usually see a selloff. He notes that Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) (OTCMKTS:HMLSF) broke key support on the Cronos news. Smith addresses the yield curve and how the inversion of the yield curve has traditionally been one of the strongest indicators of recession. Smith wraps his segment by highlighting extractors with stocks that are still performing well, such as Valens GroWorks Corp (CNSX:VGW) (OTCMKTS:VGWCF) (FRA:7LV).

Transcript:

Howard Glassman:   Hey, Ben, welcome, my friend! How you been?

Benjamin Smith:    I’ve been well! How have you been, guys?

Howard Glassman:   Fantastic.

Ed Milewski:  Benny and the Jets.

Howard Glassman:   Benny and the Jets. Listen, the Ed-man there was just talking about Cronos, and group downgrade by Canaccord Genuity – sorry, Genuity.

Ed Milewski:  That’s it.

Howard Glassman:   Thank you. What do you have to say about that? Because it’s a topic, we’ve been mentioning it, what do you think it’s all – where are you landing on this?

Benjamin Smith:    Yeah, I think it’s a significant moment in the market today; it obviously paid a big factor on the declines that we saw, and I consider this sort of a straw that breaks the camel’s back sort of situation. Because if you backtrack over the last 10 or 12 sessions previously, the market hadn’t really been doing that much better than the broad market, than the, you know, than the S&P 500, than the NASDAQ 100. So it had kind of been treading water.

So I don’t think the marijuana space – the Canadian marijuana space, that is, not the US, it’s a little bit stronger – but the Canadian marijuana space hadn’t actually been that strong. It was sort of treading along, you know, following the market, mirroring the market, when the market had that, you know, broad melt-up that’s been lasting since the start of the year.

So in the last couple of days, you know, we’ve seen, you know, the market weakness really kick in. We saw the market sell-off this morning, and I think Cronos was that straw that breaks the camel’s back, because what it did is, it essentially, you know, when you have sell sign analysts basically coming and out saying that the valuations are too frothy, and this wasn’t the first one; we’ve had, you know, three or four other sell sign analysts, you know, downgrade stocks based on valuation: Tilray, Cronos last week or the week before that, and HEXO recently – you know, when the sell sign analysts are doing that, then the market just, you know, it released. And you saw a big selloff in the morning. A lot of stocks like Canopy Growth, Aurora Cannabis, Aphria, they all sort of took a hit because these downgrades based on valuation don’t support multiple expansion in the sector.

So I think that, in combination with the market selling off, really produced, you know, quite a punch this morning.

Howard Glassman:   And this sort of goes to your point, which was going to be my first question, about the HMMJ: it has broken below some key support?

Benjamin Smith:    Yeah, yeah, it did. And this goes to what I was saying, that the market was sort of treading water. Actually, you know, not a lot of big moves in the big names, Tier 1 space, or the mid-majors; it’s been sort of cresting along with the market, sort of kind of following it, not really much action, and then when we had that break today in combination with the Cronos news, that was the cue for traders to sell off. And you know, the market, you know, the cannabis space is obviously more volatile than the general market in general, so when you have that downside action with Cronos, you saw it release, you know, three or four times the strength of the broad market selloff.

So that was the cue for traders, I think, after not really – sort of treading water over the past two, three weeks, to really, you know, sell some positions. And some technical damage was, I think, was created on HMMJ a little bit.

Howard Glassman:   In your note to me, you mentioned short term treasuries and the 10-year bond inverting, talking about a recession perhaps. Ed mentioned something earlier in the show about –

Ed Milewski:  The German 10-year went negative this week again.

Howard Glassman:   Yeah, that went negative. There’s so much data out there, and Ed just informed me not an hour ago that a lot of the world’s debt is actually losing money. 10 trillion of the 25 trillion is getting negative returns; is that why you’re using that word, the recession? Sir?

Benjamin Smith:    Yeah, well, the inversion of the yield curve has traditionally been one of the strongest indicators of recession. Now, it doesn’t always mean it’s the case, when some of the shorter maturing debt inverts like we’ve seen here; short-term 3-month treasuries, I think, and the 10-year. So we’re not quite there on twos and tens, but we’re getting pretty close, and you know, it’s a very reliable signal that recession is on its way. You know, when people start taking, you know, negative returns and less than the price of inflation, there’s a lot of, you know, fear out there that, you know, people don’t want to be in risk assets. They’re worried about recession, and then the recession, you know, negative earnings sort of hitting stocks…so it’s a very reliable indicator, and you see more debt around the world kind of going this way.

New Zealand, during their Central Bank meetings, they mentioned that there are downside risks to the macro picture globally right now. So there’s no question about it: growth is slowing throughout the world. It’s just a question of, will technical recession happen in 2020 in the States, or, you know, timeline’s a little bit dicey.

Howard Glassman:   Well, Ed’s here, and I like having Ed as something in terms of your experience, and you maybe can talk a little bit about what Benny’s mentioning there in terms of, I just want to know, like: so somebody hears this news, whether it’s the cannabis space investment, or just in general – especially men and women our age, in their 50’s and 60’s – like, when do you, what do you do when you hear news like this? Do you throw your stuff in cash as I mentioned to you last time, or do you -?

Ed Milewski:  When longer-term rates, and Ben and I are saying, like, one of the best indicators things are a little, there’s clouds out there, is when longer-term rates are shorter than short term rates. Inverted yield. So you go out 10 years, you get less than if you just kept your money short term.

Howard Glassman:   Right.

Ed Milewski:  That creates a lot of havoc for bankers, capital markets people…that’s just not the way it should be. And I think, and maybe Ben, you might not agree with me, but I think they’ve printed so much money, and remember, so much debt, yeah, but the money’s out there against it. Someone’s got the money. And so, you know, you create a debt, someone’s got the money. So there’s so much money looking for yield, it almost acts like a weight –

Howard Glassman:   It weighs it down.

Ed Milewski:  Weighs it down, so you can’t get yield, because there’s so much of it! Like, you want to give me 5 percent? Okay, well, here, I got a billion. Well, wait a minute, you’re gonna give me six? I got another 10 billion. And I got a trillion! Like, there’s so much money out there.

Howard Glassman:   What do you think of that, Ben?

Benjamin Smith:    Yeah, there’s no question all this debt is really, you know, we don’t really have, in my opinion, a true form of capitalism like as we’ve known it, say, 30 or 40 years ago. With all the Central Bank intervention, it’s created a lot of havoc. So you know, they tried to – I think the Fed and Central Banks, so you know, mainly the Fed, they saw that, I don’t know if you remember what the retail sales number December was – sorry, in January, after the big selloff from October to December. You know, those numbers were really weak, down something like 3 or 4 percent, I think? Some, you know, big negative number. And I think the Fed, you know, saw that what happens when the stock market goes down and how it affects consumer spending, right?

So they don’t, they’re trying everything they can to forestall a recession, to keep growth going. Of course Trump has, you know, he’s trying to win re-election; if you take out the economy, if you blow up that, then he doesn’t have too much to stand on, or that’s a main pillar for him to stand on. So there’s a lot of vested interest, you know, to keep the economy going. So you know, it’s sort of a, you know, the bull market cycle taking its natural effect versus all this intervention coming from everywhere else, Central Banks, and it’s creating this very big, you know, I don’t know, toxic soup. I don’t know if that’s too strong a word, but there’s a lot of –

Howard Glassman:   I think toxic soup is –

Ed Milewski:  Yeah, you don’t want to go to a restaurant and order toxic soup. I think you should get a teacher that says, Ben says Toxic Soup.

Quickly, before you go: Heritage Cannabis making a new, multi-month high; cannabis extractors remain strong. Is there any good news for anybody, sir?

Benjamin Smith:    Yeah, I think there’s some good news. I think Heritage Cannabis, it did sell off; it actually finished down $0.02 today to $0.58, I believe, but it touched $0.67, and that was a multi-month high. And some of the extractors like MediPharm Labs, Valens GroWorks, they have been pretty strong lately as well. So I don’t know, I think it’s too early to call a trend to see if it’s, you know, if they’re going to outperform the market, but they’ve been among the strongest of the Canadian LPs, the extractor space. So it’s something to keep an eye on, and they may not be as fully valued as maybe some of the LPs and Cronos trading at 9 times earnings. So it’s something that we’re going to, you know, keep an eye on, and perhaps there’ll be an article or two out in the next couple weeks on that.

Howard Glassman:   Fantastic. One last quick thought from Ed.

Ed Milewski:  Yeah, you just, on the CANN, is that the reason why it’s getting so much attention? The thing trades 5, 10 million shares every day, and it wasn’t long ago it was $0.18 and it hit $0.68 today! That’s a mind-boggling move, although it did back off, it was a bit of a reversal, so I wouldn’t want to probably step in tomorrow unless it dropped another $0.07 or $0.08. But it’s been a stellar performer.

Benjamin Smith:    Yeah, it’s been great! You know, Clint Sharples is a regular guest on the show. You know, he made his case, and I think a lot of people bought into it, and they’ve had a lot of good, you know, news cycle action with getting their extractor license recently, and they have a whole bunch of hemp that they’re waiting to process, which should generate 30 or 40 million in sales. But I think overall too that there’s a big, there’s a big opportunity for an extractor to step into the Canadian space, because a lot of oils are in demand and they’re pretty scarce out there. So they’re just taking advantage of that opportunity, and we’ll see if they can keep the momentum going; but it’s definitely been a big move.

Howard Glassman:   Always a pleasure for me, for sure. The Midas Letter financial writer, Benjamin A. Smith, and I hope we get a chance to talk tomorrow. Thanks for the help before the show, and during the show, Sir.

Benjamin Smith:    All right. See you tomorrow, guys.

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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