Why has Khiron (TSXV: KHRN) declined so far in price?

QUESTION: “I am as convinced as you are that the Latin American market will flourish as a large market. But right now I am a little concerned about Khiron (TSXV: KHRN) (OTCQB: KHRNF) and 1933 Industries (CSE: TGIF). Can you explain why KHRN has declined so far in price? Is it related to the issue 8.5 million shares at $1.61 per share for the acquisition of NettaGrowth International of Uruguay?

I have a large position in KHRN based solely on your recommendation and my cost is over $3.00 per share. Do I sell? Buy the dip to average down? Do I hold? The same for TGIF.

I also own shares in Blueberries Medical (CSE: BBM) (OTCQB: BBRRF). For no reason I can find, their stock price is down as well.

Do you have any information that I don’t or can you help me with KHRN, TGIF or BBM?”

B. L. from Ontario, Canada

ANSWER: I selected this question because I think it is one many people are asking about any number of different stocks. In other words, I think this is a question more about the cannabis stocks in general than about the specifics of KHRN or TGIF or BBM.

To the left is a chart of the Dow Jones Industrial Average (DJIA) over the past five years. The DJAI is a stock price index of thirty higher quality industrial companies. It has been continuously published since May 26, 1896, first as an index of twelve stocks. This chart of the DJIA is showing a 9.72% compound annual growth rate (CAGR) excluding dividends. In other words a very attractive five year rate of return compared with certificates of deposit, treasury bills or long term government bonds. The index is also calculated as if you “invested in” the index five years ago and held continuously until today.

But let’s look at something else important about this chart. As you can see, the 9.72% CAGR was earned by holding through the entire five year period. But the five year time frame was made up of periods in which index was rising and other periods during which the index was falling. The circled periods on the chart represent thirteen times during which stock prices were generally declining. This is almost equal to the number of times the stock market was advancing. The antithesis of an old saying popularized by President John F. Kennedy would say, “A falling tide lowers all boats.” In stock market parlance, this would mean when the market goes down, all stocks go with it. Historically, this is correct. During bear markets that are extended periods of time during which stock prices decline, you will be hard pressed to find a handful that managed to rise in price.

The cannabis stocks also generally move in unison as the chart to the left illustrates. But there are some important differences. First, the oldest pure public cannabis company is probably Canopy Growth that is only just a little over five years old. All of the others are not as seasoned and, in some cases, much less seasoned. Although the number has been declining, the management of cannabis companies know very little about the financial and capital markets. There is also some important differences in the people who own the shares. The cannabis group has fewer institutional owners and more individual, also known as, retail investors as shareholders. I don’t have data but I believe many cannabis investors are first time investors. Also, many more cannabis company managers are also founder/significant owners of their companies whereas in the traditional stock markets, management tends to be professionals with very small levels of ownership.

Because of these differences, I find the cannabis stock markets at this point are less sophisticated and less efficient than the major equity markets. If you look at the LTB Marijuana Composite Index to the left, the ups and downs are much sharper.

Stocks go up, get over-priced and drop getting under-priced, where they are bought and go up getting over-priced, and so it goes. Although this creates frustrations for investors, as the questions this week indicate, quite clearly inefficient markets produce opportunities. As the chart illustrates, the cannabis stocks have been in a general downtrend since January 2019 and, as I observed above, have dropped for eight weeks in a row. Since a declining overall market takes all stocks lower, it means companies with a positive outlook go down along with businesses with less potential for success and herein lie the investment opportunities.

The risk to less sophisticated, inexperienced individual investors is higher price volatility can lead to emotionally driven investment decisions that have proven to be wrong over many decades. The simplest but most valuable investment adage is “buy low – sell high.” Looking at the chart I would say cannabis stocks right now are closer to low than high but what are your investment instincts telling you to do? My guess is you are more inclined to sell than buy. But what does the investment maxim tell you to do? Buy! You see there’s a reason we’re not all Warren Buffetts. It’s hard to do but it will be rewarding. So now is the time to definitely hang in there and, if it’s suitable for you, buy.

With respect to specific companies, I admit I am biased in favour of my selections. Readers are well aware of the list. But let me start with a quick answer to your question on Blueberries Medical (CSE: BBM). I looked at BBM when it was first going public but I have not spoken to management. Operating out of Colombia, BBM is a start-up cannabis operator. I did not carry forward with BBM because I do not think this is a good time to take a chance on a very early stage company. If it has a next 12 to 18 months similar to what Khiron accomplished in the past 12 to 18 months, it could be a successful investment. Lack of due diligence stops me from saying more.

In terms of your questions on KHRN and TGIF, I believe both represent excellent potential from current levels. So yes – own them both and buy them both.

My list of favourites starting with the companies you specifically asked about includes – Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF) and 1933 Industries (CSE: TGIF) (OTCQX: TGIFF). But my comments also apply to Cannabis Growth Opportunities Corp (CSE: CGOC), Canopy Growth (TSX: WEED) (NYSE: CGC), Lexaria (CSE: LXX) (OTCQX: LXRP) and Sunniva (CSE: SNN) (OTCQB: SNNVF). Each of these companies has uniquely positive characteristics in my opinion and as a package should comprise a great cannabis portfolio. I realize I have some gaps in the industry and I am doing due diligence on two or three companies that can complete the package.

Here is a very quick summary:

• Khiron: international vertically integrated, rapidly growing, multi-country cannabis company with significant growth prospects operating out of Colombia. KHRN’s main strength are its people led by Alvaro Torres, CEO and Chris Naprawa, President.

• 1933 Industries: has cannabis and hemp based assets operating out of Nevada. Management is the key in my opinion with Brayden Sutton, Chair, Chris Rebentisch, CEO and Ester Vigil, President heading up a strong group.

• Cannabis Growth Opportunity: a cannabis investment company with both public (60%) and private (40%) holdings which trades at a 45% discount to Net Asset Value ($3.27). I think this discount is far too wide especially at a time when private companies are adding to the overall return.

• Canopy Growth: the largest cannabis company in the world with a strong partner in Constellation Brands, should be a core holding in every cannabis portfolio.

• Lexaria Bio: owns a patented technology to increase speed and amount of molecules entering the bloodstream and brain. LXX is currently in a research project funded by Altria (NYSE: MO), the largest tobacco company in the U.S. giving it extraordinary growth potential. Similar prospects exist in cannabis, vitamins and nonsteroidal, anti-inflammatory drugs such as aspirin and ibuprofen.

• Sunniva: has emerged as a company in a leading position in the California market. The next year will be an exciting period as sales from cannabis-based branded products are expected to be in the US $55 to $60 million and their state of the art grow facility begins production.

Conclusion: although I have answered the question with reference to specific companies as requested, the general case also applies. When market trends develop, most stocks are carried along for the ride. When the cannabis stocks decline over a six month period as they have since January 2019, the one thing investors need to determine is whether something fundamentally has changed with a company you invested in. That is why I am going through a company by company detailed review of the companies I have talked about here. If there are no basic changes and the business has progressed, then selling is probably the worst thing you can do. Retaining the position is likely a good thing to do and if it fits your needs and financial position, you can consider adding to the position. Hope that helps.