Should you sell Sunniva (CSE: SNN) at a loss?
QUESTION: I invested in Sunniva (CSE: SNN) (OTCQB: SNNVF) a while back when I first learned of the company from your articles and newsletter. Even though I did not purchase it anywhere near it's all time high and even though I averaged down often, I am still looking at a large unrealized loss. I have already sold some shares at a loss. At one point SNN was my largest cannabis holding.
While I still like the company, I'm having a hard time deciding whether to sell the remainder of my shares at a significant loss and use the proceeds to increase my position in Khiron (TSXV: KHRN) and start a position in 1933 Industries (CSE: TGIF).
I would appreciate your thoughts on all three of these companies in terms of current stock price and potential for growth in the next year or so.
F. R. from Vancouver
ANSWER: Before I talk about the individual stocks, let me discuss some portfolio theory in brief. In every investment there is a combination of risk and reward. Risk is measured as volatility and reward is the rate of return. Generally speaking, risk and reward are directly related, that is, to get a higher return you have to assume higher risk, and vice versa.
The chart above shows the different ways that risk and return can combine. Sector 1 is “Lower risk, lower return.” This is considered a “fair” result as is Sector 3 which is higher risk, higher return. The quadrant you want to avoid at all costs is Sector 2 which is higher risk, lower return. In other words you take all the risk but don’t get a higher return. The ideal is in Sector 4, that is, lower risk and higher return. Sector 4 is a utopia that is often promised and virtually never achieved.
If you are invested in cannabis stocks today, your profile is in Sectors 2 or 3, that is, the higher risk categories. Even Canopy Growth with around $5 billion in the bank and the implied support of Constellation Brands, a Fortune 500 company, is probably still in Sector 3 even though it has lower risk than many of the other companies in the industry.
If you have two stocks and put them together in a portfolio, the profile of the portfolio might offer more attractive dynamics than either of the two stocks individually. The reason is the effect of diversification. Let’s assume you combine a cannabis stock like Sunniva (CSE: SNN) with a cannabis stock like Khiron (TSXV: KHRN). SNN’s stock price will be impacted more by developments in U.S. regulations while KHRN will react more to the dynamics of South and Latin America. So the stock prices of these two companies will be impacted by different developments and not move in lockstep. This means one day KHRN might go up more than SNN while on another day, SNN might go up in price while KHRN goes down. So the value of the portfolio might fluctuate less than either of the two stock individually. Then you add 1933 Industries (CSE: TGIF) which is based in Nevada and has more exposure to positive events across the entire U.S. Adding more cannabis stocks changes the risk/reward profile of the portfolio even more. By the time your portfolio owns as many different companies as a cannabis Exchange Traded Fund (ETF), your performance profile becomes very close to average.
Your main question is about Sunniva. Is it worth holding on even though you are in an unrealized loss position? As I have many times, where the market price is relative to your cost is pretty much immaterial except at tax loss selling time. As you pointed out, SNN’s stock spent most of 2018 in a tailspin. This happened because the market priced SNN as if every deadline was going to met precisely and that didn’t happen. But the good news is most of those deadlines have been pushed into 2019 which is probably going to be a year of explosive growth. Last week, for example, management provided guidance to analysts and investors by indicating sales from Sunniva branded products are expected to fall in the range of $55 to $60 million in 2019. If that expectation changes for better or for worse, management will provide more guidance. We also know the cannabis inputs for these sales will come from product that SNN has purchased from other growers.
Starting around midyear, the company will be able to satisfy a growing share of their needs from their own production from the operation at Cathedral City. So as sales grow throughout the year as expected, profit margins will start to improve around midyear and will continue to expand moving through 2019 and into 2020. So I still like SNN and see considerable growth potential moving ahead.
You are giving consideration to starting a position in 1933 Industries. This suggests you don’t own any 1933 now and I think your portfolio will certainly benefit from if you did. So I would certainly consider adding a position as soon as possible. Last week, 1933 announced that its CBD infused health and wellness products are now being sold or about to be sold in 46 states. I think sales for TGIF in 2019 and 202 are going to be a pleasant surprise for shareholders of this relatively small company,
If you are a regular reader, you know Khiron has been an absolute favorite of mine since May of 2018 and has been a star among the list of stocks I like. Even though it has gone up in price, I still believe the investment potential from current prices is very significant.
Now I cannot sit here and tell you what you should buy or sell. For one thing, I cannot see your total portfolio and how that fits into your personal circumstances. You should talk to your broker/advisor or make up your own mind. Look at how much of your portfolio is each stock and how much you want to have in each stock and make that happen. You can also follow The Cannabis Report Model Portfolio, follow this (Link) to see exactly what I have done and use that as guidance. Hope that helps!