Lakewood Capital Management, a multibillion-dollar hedge fund led by Anthony Bozza, shorted positions in Canopy Growth and Aurora Cannabis.
Bozza wrote, “Despite recent mania around the legalization of recreational pot in California, there is a little problem: none of these companies sell at all into California (or anywhere else in the U.S. for that matter), since that would, of course, be illegal.”
“Bozza notes that much of the “appeal” surrounding these stocks recently stems from “regulatory momentum, constant press coverage, growing public acceptance, an absence of large incumbents and an enormous, rapidly expanding market opportunity.” But, he adds, that the barriers to entry for the industry are very low and that the number of licensed producers in Canada is growing rapidly.”
Booza estimates Canopy can only grow 150 million Canadian dollars worth of cannabis. Aurora is at $100 million. But Canopy’s market cap is 6.6 billion Canadian dollars while Aurora’s is $6.2 billion.
“Simply, we believe it is not a matter of if, but when these stock prices collapse…otherwise we should all be moving to Canada and growing pot,” Bozza wrote.
Moving to Canada to grow anything should raise suspicion.
With valuations based on an inflationary bubble, these stocks will either fall or inflate into irrelevancy.
We’ve had 18-solid years of tulip mania in almost every sector. Certainly, Canadian real estate and cannabis. Canada’s large LPs leverage too much debt. Still, some people think you can buy enough cannabis stocks to have a half-a-billion dollar ETF.
I don’t know how since “none of these companies sell at all into California (or anywhere else in the U.S. for that matter).”
But, when Stats Canada reports $1.2 billion of Canadian cannabis going overseas, I’m assuming not all that is “black market.”
After all, once these products are out there, there’s literally no way for LPs or anyone to track where they go.
An anecdote from a friend tells me of a CBD tincture from a Canadian LP ending up in Mexico.
So what are we to make of this? Obviously, keep producing cannabis, with or without government permission, and give the people what they want.
Public opinion won’t stand for Ottawa-connected producers corning the market. With original homesteaders of BC Bud raided and prosecuted by the police, even judges will give absolute discharges. Especially if legalization is inaccessible to anyone without a million dollars and a cannabis-clean criminal record.
What then becomes of Canada’s stock-trading cannabis companies?
The same thing that happens to everyone else — recession.
Just be prepared for it. Don’t take the attitude of Cam Battley, Aurora’s chief corporate officer: “We don’t worry too much about shorts.”