Watch Out: New Cannabis Companies are Value Traps

Canopy Growth Corp (NYSE:CGC) (TSE:WEED) is enjoying a decisive recovery – there’s no denying that.

Tilray (NASDAQ:TLRY) the same, though not to the same level as Canopy. We’ll talk about why in a minute.

Aphria (NYSE:APHA) (TSE:APHA)? Well…certainly looking better than it was, but not out of the woods yet.

Aurora (NYSE:ACB) (TSE:ACB)? Well, Aurora is still in the game. For now.

Today we’re going to take a quick look at the cannabis industry, and figure out where the opportunities might still be.

The wave of bankruptcies predicted by many has not really materialized yet. And therein lies the problem with predicting the future; you can’t see around corners, and nobody can.

We can all see what’s right in front of us.

By this point, we can all see that too many companies growing too much weed and chasing too few consumers buying such small quantities of product from legal sources while the unlicensed market chugs forcefully higher, gobbling up market share like a combine on a Nebraska wheat field in Autumn. Arrested but unconvicted. Shut down, but not put out of business. Gone for a moment, than back like a determined horsefly in summer.

And then there are the new cannabis companies that, unbelievably, keep going public, and vaporizing investor wealth relentlessly.

The era of the 5 cent private placement being a no-brainer has become a no go.

The industry is in the first stages of a fragile recovery, and as the prices see-saw up and down of the ones that are already public, this never ending parade of newly public cannabis deals continues. Like a line of ants transporting carrion back to the nest, microscopic piece by piece.

And just like a road kill’s corpse rotting on the side of the road, the longer it sits there, the worse it smells, until finally, one day, there is only a stain in the gravel where it once lay, and the memory of its proud and majestic freedom is but distant and feint.

And still the new cannabis companies come, subtly adding supply to an oversupplied market, even while retail supply suffers from a regulatory framework that is like patchwork on a clumsily quilted quilt.

Too many here, not enough there. This is sold out, and there’s way too much of that, because nobody wants it.

This new cannabis reality, though, is temporary.

This is an industry in transition.

You’ll notice you don’t see any multi-billion dollar companies that specialize in grapefruit. Or pomegranates. Or coffee beans. These are the plant based commodity ingredients for consumer products that we buy every day. Just not in their commodity form, for the most part.

The billion dollar opportunities that are based on cannabis as an ingredient are here now, but they are a tiny fraction of the monster commodity producers we have among us now. And they’re even a tinier fraction of the abundant new cannabis deals that almost all have hemp oil or CBD on the label.

And so this is the point: Avoid the companies that are focused on becoming just another cannabis commodity producer. And focus on the ones who have the managerial chops to raise capital at incrementally higher valuations in capital structures that are best described as lean, mean, wealth driving machines.

They are still out there. Just a lot harder to find in all the flotsam and jetsam of crippled old companies and bright-eyed new ones. Quality, as ever, is the name of the game.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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