Cannabis Question of the Week
Question: “Recently, Sunniva (CSE: SNN) (USOTC: SNNVF) announced it intends to spin off its Canadian assets. There have been mixed reviews idea and SNNVF has dropped significantly in price.
In a press release SNN said the Investment Industry Regulatory Organization of Canada (IIROC) asked them to explain the unusual market activity. What does this mean?
What is the “unusual activity” they were referring to?
Do you think the spin-off will “help unlock shareholder value” as management says.
Do you still heartily recommend Sunniva to your readers?”
A.W., Fort Worth, Texas, USA
Answer: We will address your questions in the order you asked them but first here is a little background. Under SNN's announced plans, the U.S. assets will remain in the current entity and the shares will stay listed on the Canadian Securities Exchange. SNN shareholders on the record date will receive shares in a new entity that will own SNN’s Canadian assets and will apply for listing on the TSX and NASDAQ exchanges. The transactions are expected to be completed in the next quarter.
IIROC is the main regulator of investment dealers and stock exchanges in Canada. In this role, IIROC monitors trading of securities in Canada and if there is unusual activity such as exceptionally high trading volume or extremely large price changes, it can halt trading and ask the company to explain what is happening in a press release before it allows trading to resume. SNN’s press release is a fairly generic response when management is not aware of anything to account for the activity.
SNN said “…the recent change in market activity.” This is the unusual activity IIROC asked about.
We believe with SNN the sum of the parts is greater than the whole. Consider these points:
It’s hard to see how you will be worse off. You have the option to keep everything you own now. If you think it is advantageous, you can sell either the Canadian or U.S. assets. But it looks as if you can win and you can’t lose.
After the change, other investors such as large financial institutions can buy a totally Canadian or U.S. investment and this flexibility should increase the total investment in the SNN companies.
If the current problem with the U.S. Drug Enforcement Administration persists, being able to list the Canadian assets on Toronto or NASDAQ should result in additional net investment in SNN as these exchanges attract a larger investment audience. Cronos is an example of a smaller Licensed Producer that seems to have benefited from a NASDAQ listing.
Based on the price per square foot paid by Canopy Growth for three million sq. ft. of greenhouse space in B.C. plus adding a modest value for Natural Health Services, the Canadian assets could account for SNN’s entire current market cap. In other words, at today’s prices, you are getting the U.S. operations for free.
We think it is positive that management not only works to build the assets of the company but it also takes steps to ensure the investor valuation for those assets is maximized.
We remain “heartily” optimistic about the investment prospects for Sunniva and the lower it goes, the more optimistic we become. The reason many investors have a hard time doing well in the stock market is their actions are driven by emotions. The more we study the markets, the more it comes down to the simplest and most accurate axiom in investing – “buy low, sell high.” This is why. The LTB Marijuana Index hit its 2018 high of 1264 on January 5th and at the time the majority of investors were clamouring to buy cannabis stocks. Despite our cautious remarks, their actions were driven by greed.
Today the LTB Marijuana Index is down almost 30% from its 2018 high. The emotion driving people’s cannabis investment decisions now is fear. The fear of losing money. This means the most likely action investor are likely to take right now is sell. It’s a natural product of normal human emotions.
So we can look at the adage “buy low, sell high” and see why it is so difficult for the average investor to do. Emotions drive the average investor to do the opposite. Many average investors can see this in their reactions. Buying high and selling low will not lead to above average investment returns.
Is there are solution? There are two possibilities. First, follow Mark Twain’s advice “Buy a stock and when it goes up, sell it. If it doesn’t go up, don’t buy it.” As a humourist Twain’s advice is funny but not applicable.
The other possibility is to follow Warren Buffet’s advice to be “Fearful when others are greedy and greedy when others are fearful.” The cannabis market is fearful right now. Buffet is one of the most successful investors of all time so his advice is applicable which means this is the time to be greedy. A good time to buy. We think SNN is one of the best opportunities in the group today.
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