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  • Writer's pictureIshfaaq Peerally


The markets $SPX500 open higher today as Chinese President Xi says that China wants a trade deal. I know that I need to comment about Tesla $TSLA new truck. Does it look ugly? yes but I think that they are targeting a niche and that could actually do well. Even the iPhone notch was laughed at initially. I am not a Tesla shareholder as I see the stock as too expensive but I see the brand in Tesla and like it or not, people are going to buy this truck.

This is one of the rare days when all the stocks in our portfolio is in green.Our $oil stocks Parsley Energy $PE and Concho Resources $CXO are leading with higher oil prices. GameStop $GME and Skyworks Solutions $SWKS doing great as well.


Last year, I said that marijuana stocks were in a bubble and that sooner or later it was going to burst and it did. But now, when we look at marijuana stocks, they look cheap. We know the rule: Buy low, sell high. Besides, a House Committee approved a Bill that will eventually legalize marijuana on the Federal level in the US. It looks like this is the best time to buy marijuana stocks.

The companies we will look at today are all based in Canada where medical marijuana was legalized in 2001 and recreational last year. These companies were able to mature and today, most of the largest marijuana stocks are based in Canada. Of course, the US market is much bigger and if it is legalize there, there is much more potential to make money.

Let's first look at Canopy Growth $CGC . This is the largest marijuana stock by market cap and by revenues. They have 25% of the market share in Canada and also has businesses in the US. Despite the fall in stock price this year, revenues have been increasing at a fast rate but they are still losing money and their net loss is larger than their sales. The number of shares are also increasing rapidly as they are diluting more and more shares for acquisitions and compensations. The have a good balance sheet but with a big problem. They have $1.9 billion in goodwill. I don't think that the brands that they own are worth that much. Even Apple $AAPL doesn't report goodwill anymore. Last time they did was in 2016 and it was only $5 billion. This goodwill is only here to make the balance sheet look better but in reality, there is no real asset to back that.

Let's talk about Aurora Cannabis $ACB . It has 10% of market share in Canada and is the second largest company in the industry. It has much operations in Europe and in the rest of the world and no operations in the US. Aurora Cannabis is actually growing at a faster rate than Canopy Growth at about 300% per year. They are losing money and their net loss is bigger than their revenues but it is not as bad as Canopy Growth. Last year, they were actually profitable so I had to look deeper how did they manage this. They were profitables for two reasons:

1. One of the subsidiaries that they own had an IPO and they made money from this

2. From derivatives

They have $86 million as assets in derivatives on their balance sheet and over $150 million in liabilities. Usually oil $OIL companies have derivatives to hedge against volatile oil prices. If let's say right now oil prices are $57/barrel and they expect it to fall to $40 next year, they can buy derivatives which will allow them to sell oil at $50. Oil companies should be making money from selling oil. Marijuana companies should be making money from selling marijuana. Derivatives are only here as hedge. But Aurora Cannabis is making money from buying and selling derivatives. Warren Buffett $BRK.B called derivatives financial weapons of mass destruction. Aurora Cannabis also has over $3 billion in goodwill.

I don't think that I want to invest in such an industry. The accounting doesn't seem logical. Some companies have more goodwill that actual assets, others are making money from derivatives. And when you look at these companies, they are all selling the same products. There is no moat. Even if we assume the best case scenario, marijuana is legalized throughout the world. Big companies such as Coca Cola $KO , PepsiCo $PEP will be making food and beverages from marijuana, AbbVie $ABBV , $JNJ will be selling medical marijuana. There is no way these small Canadian companies will compete.

The marijuana industry will be big in the future but you should not pay such a premium today. You should always discount the future. Companies with revenues of $200 million and losing money have market caps of over $3 billion. This is buying dreams and not earnings.

Watch the full video on YouTube:

Full analysis of Canopy Growth:

Aurora Cannabis:

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