The thesis behind Ted Ohashi's cannabis investing strategy
Our question this week comes from a Twitter post: “Ted what’s the thesis to this list? [1933 Industries (CSE: TGIF), Canopy Growth (NYSE: CGC) (TSX: WEED), Khiron Life Sciences (TSXV: KHRN), Lexaria Bio (CSE: LXX) (OTCQX: LXRP , Organigram (TSX: OGI) and Sunniva (CSE: SNN)] Other than OGI, most of these companies have little to no operations in Canada so how does a Liberal government loss have any influence here?" from @digimat
ANSWER: Thank you for your question. Perhaps I wasn’t clear enough in making my case. Here is my ‘thesis:’
With Prime Minister Justin Trudeau’s handling of the SNC-Lavalin situation, re-election of the Liberals is suddenly in doubt. The next federal election is on October 21, 2019, a mere 7½ months away. A lot can change in seven months but if the election were held today, the outcome would be a toss-up at best.
In the last election, the incumbent Conservative party ran on a strongly anti-cannabis platform carried to the point that former Prime Minister Stephen Harper continued to spread false information against cannabis. Should the Conservatives upset the Liberals, it would definitely be negative for cannabis investment.
As a result, I currently favour investment in cannabis companies that are focussed outside of Canada. As you point out, with the exception of OGI and perhaps WEED, the others are substantially or fully invested in the U.S. and in the case of KHRN, in Colombia.
In my opinion, the genre of cannabis companies that are at greatest risk are those still waiting approval of their Licensed Producer status and those that are mainly involved in edibles. The easiest thing a new government and new Health Minister can do is to slow down the pace of approvals. With edibles, the Liberals promised approval by October 17, 2019 but edibles legislation is complicated and delays are possible if not likely. With the election scheduled just four days later, a change in government would likely result in a delay in approvals.
So operations outside of Canada is a dominant theme in my selections but it is not the only one. Each of these companies is a “pure” cannabis play. For example, some investors look at Scotts Miracle-Gro (NYSE: SMG) as a cannabis play. To me, that’s a ridiculous idea. Cannabis is a very small part of SMG’s overall business. For each of the companies on my list for better or worse, cannabis is it. Each of the companies also has a clear path to substantial revenue generation in the near term. Even LXX that probably won’t have substantial revenue in the next twelve months could produce a major surprise way beyond anyone’s expectations if the arrangement with Altria (NYSE: MO), the world’s largest tobacco company works out as I expect. Finally with the exception of WEED, the rest of the companies are smaller. As a result, the revenue gains I expect my recommendations to report will be substantial relative to their market caps. So my list is leveraged to provide above average investment returns for shareholders.
I hope that clarifies my thinking.