Bruce Campbell, president and portfolio manager at StoneCastle Investment Management
Focus: Canadian equities
MARKET OUTLOOK
Cannabis markets continue to be volatile. Since we started investing in the cannabis sector in 2013, we have experienced eight other uptrends and downtrends. During each of these downtrends, investors who had shorter-term horizons or lacked clear vision of cannabis’ long-term potential ended up exiting only to see it rally in the months following. These uptrends and downtrends will continue until a more broad-based institutional ownership exists in the sector.
The current downtrend is exhibiting many of the same characteristics of past selling exhaustions. Investors who are cognizant of these conditions and act to take a contrarian approach will capitalize on the next uptrend.
Several conditions mirror past sell-offs. Share prices are down anywhere from 30 to 70 per cent depending on the company. Financings are difficult to close and investors are scrutinizing new companies with weak business plans and predatory capital structures. Unit financings require extra sweeteners (at the money convertible debentures or 36-month warrants priced close to current market price). Analysts have been downgrading target prices as company share prices have pulled back. Investors are focused on individual land mines and assuming the entire sector is in similar position. Stock technical charts are oversold and unable to bounce. Social media is crowded with comments about technical charts breaking down. Individual investors are looking at ways to enter the pot sector on the short side.
Several catalysts are emerging similar to the initiation of past uptrends. Relative Rotation Graphs (RRGs) for many stocks in the sector have been improving and showing the next move will be up.
Fundamental catalysts are around the corner in Canada, the U.S. and internationally. In Canada, we have cannabis 2.0 products being introduced before year-end, leading to cross over sales this winter and next spring. Expanded brick-and-mortar retail is coming to Ontario and B.C. U.S. catalysts include legislation changes, M&A, optimization in California, additional states legalizing marijuana and balanced markets in Oregon and Washington state. Internationally, we have additional countries adding legalization, export agreements and emerging producers.
We don’t know when the next uptrend will begin, but we do know we’re closer to the bottom than the top in the market. Investors who have not invested in the sector should start to build a position. Investors who have a position should look to add to it to capitalize on the next uptrend.
We review the cannabis market in our monthly webinar. To receive an invitation to the webinar, please send an email to info@stonecastlefunds.ca and we will add your email to our invite list.
TOP PICKS
1933 INDUSTRIES (TGIF:CF)
1933 is a Las Vegas based producer of THC and CBD products for the dispensary market. They recently moved into their new cultivation and manufacturing facility in North Las Vegas. Revenue followed by cash flow should begin to ramp materially over the next two quarters as they bring their new cultivation supply on stream. Last purchase was at $0.51.
PASHA BRANDS (CRFT:CV)
Pasha is a small licensed producer with a large network of craft production. Health Canada has started to licence these micro producers and Pasha is establishing a marketing and sales channel for the highest-quality cannabis and top-selling legacy brands. Last purchase was at $0.38.
TERASCEND CORP (TER:CF)
TerAscend is unique in that it operates a licensed producer in Canada and also operates in the U.S. Chairman Jason Wild is quietly building up the company for success. They have an export agreement with Iuvo to sell into the German market, an agreement with metered dose company Syqe Medical and strong revenue guidance for 2019. Last purchase was at $5.60.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TGIF | Y | Y | Y |
| CRFT | N | N | Y |
| TER | N | N | Y |
PAST PICKS: OCT. 4, 2018
CANNTRUST HOLDINGS (TRST:CT)
- Then: $12.04
- Now: $1.52
- Return: -87%
- Total return: -87%
VALEURA ENERGY (VLE:CT)
- Then: $4.43
- Now: $3.08
- Return: -30%
- Total return: -30%
C21 INVESTMENTS (CXXI:CF)
- Then: $1.54
- Now: $0.54
- Return: -62%
- Total return: -62%
Total return average: -60%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TRST | N | N | N |
| VLE | N | N | Y |
| CXXI | N | N | Y |
StoneCastle Cannabis Growth Fund
Performance as of Sep. 20, 2019
- Year-to-date: 17.77% fund, -3.08% index
- 1 year: -7.22% fund, -35.94% index
- Since inception (Sep. 14, 2018): -7.51% fund, -35.94% index
Index: North American Marijuana Index.
Returns include all distributions and are net of all fees.
Website: www.stonecastlefunds.ca
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