SCS: What's Happening on November 1, 2021
A look back at the Hindenberg vs. Aphria report. Rivian seeks a $60B valuation. Canada looks for its next big small cap sector.
Back in 2018 I thought Canadian LPs were stupid. Quite frankly, I don’t know anyone that doesn’t think they are stupid today. We just closed the third full year of recreational cannabis in Canada and over the last twelve months here are the operating cash flows of the large Canadian cannabis producers:
Tilray has lost $99M
Hexo has lost $18M
Aurora has lost $211M
Cronos has lost $159M
Canopy has lost $513M
What I found odd three years ago, was every banker, analyst, and large investor I spoke with knew they were doing something that would inevitably fail. They didn’t care. Funny how money does that to people.
Whether it was the kid analyst at Canaccord, thrilled he got paid big bucks to make recommendations. The banker who purchased stock at much cheaper prices. Or the idiot newsletter writer. Everyone was getting paid to build the Titanic, and they all knew it would sink. They didn't care, as long as they got paid.
Enter Hindenberg
The story that stands out for me to this day when I think of the Canadian cannabis boom was the Hindenberg Short Report led by Nate Anderson.
On December 3, 2018, Hindenberg Research put out a short report that took a swipe at Aphria Inc and all the deal-making surrounding the company. At first read, I loved it. I was watching retail investors get dragged off a cliff, and it seemed like finally, someone was standing up to all the greed and insanity.
A buddy of mine likes to say, for a short report to be great you need to have a villain.
Andy DeFrancesco was one of the largest deal makers in corporate cannabis history. And at the time of the report had an Instagram account that showed he wasn’t embarrassed about being a successful investor and deal maker. He flaunted it. He was proud of his successes and the lifestyle he lived.
Oh boy, would Andy make a great villain!
The report took various pictures of Andy and his lifestyle from social media. Linked with cheap paper screenshots from thecse.com and various receipts from transactions. Andy looked like he was living his best Donald Trump life paid for by the unsuspecting retail investors.
The report suggested Andy and his investor group owned various private assets in places like Jamaica, Argentina, and Colombia. They then sold them at huge markups that no reasonable investor would have agreed to. The report then suggested, the clock was ticking until the day that auditors would inevitably write down the goodwill from these purchases.
Quintessential Capital Management founder Gabriel Grego told the audience at the Kase Learning Shorting Conference, “Our target price for Aphria is zero.”
The Stock is Still Not a Zero. In Fact, it’s Up Since the Report.
It’s been almost three years since the original short report came out about Aphria. At the time of writing, Tilray is trading at $13.34. Using the 0.8381 exchange ratio for the merger means Aphria is trading at the equivalent of $11.18. Which is almost a dollar more than the $10.51 the stock traded at the day before the report was issued.
Definitely not a zero.
I think Aphria is stupid. I think all the Canadian LPs are stupid. But the odd thing about the entire fiasco and drama is that it didn’t really make any difference. It was kind of just noise. A short seller made money along with whatever short-sellers participated, so long as they traded the stock strategically around the dates of the report. Of course, retail investors who had stop-loss rules as part of their strategy got hurt as they were stopped out
It makes me wonder: If a short seller just disappears and gives up after putting out a damming report, does that mean they lost? Do they have a duty to continue to pick away? If they sell after making a quick gain on the short-selling activity, does that make them just like the guy they are trying to demonize?
Here’s What I Have Learned
My perspective has changed a lot over the last few years. I used to be a retail investor that looked at deal makers and thought they were all scumbags. “How dare they pay pennies for their shares while I am paying dollars?”
But I’ve come to learn that you need these guys in order for deals to happen. Sometimes the terms may be too egregious, but that’s on you, the investor to decide.
Some guys walk away when the times are tough. Sell through their proxies. And hang out in the Bahamas as they wait for the dust to settle. They will then reappear with a cobalt deal, a metaverse deal, or a plant protein deal. Possibly all three!
Often these are the kind of dealmakers who never cared about building a business. It was always about selling paper.
We can look at companies like TGOD, Namaste, and CannTrust; who all had billion-dollar valuations, but are shells of their old selves as their founders deserted them after making a king’s ransom. As for the Aphria dealmakers, they still have a plan to get US exposure through a convoluted structure with MedMen and a private company that invests in Medmen. It might not be perfect, and probably leaves room for complaint, but it’s easily the best course of action for a company with a TSX and NASDAQ listing that has two hands tied behind its back.
It’s easy to be critical of these guys. And taking it on the chin is what they sign up for. Many deal guys hide behind a hired CEO and blow out their paper through proxies. But if you’re a retail investor and things don’t break perfectly for you, having a guy who picks up his lunchbox, shows up at work, and takes his licks, is a thing.
We’ve been somewhat hard on Andy on our site. Still, he told me that he wanted to do his first interview with us on my live show. I’m usually happy when people come on, so I don’t give them a hard time. Maybe after I hit 1 million subscribers I can be a dick. I don’t know. After the show, he told me he was disappointed that I didn’t get into all of Nate’s complaints and wants to come back to explore them. I’m sure we will, but I can promise you this, I will have the fairness assessment from Cormark in hand.
Anyways, last week Andy came on the Daily Dive to talk about SOL Global Investments (CSE: SOL) with Cassandra Leah.
Macro: The Macro Themes Surrounding Equities
The COVID-19 pandemic has now killed 5 million people around the world (NPR)
US warehouses are running out of space as containers pile high (FT)
Jes Staley’s Barclays legacy shattered by Epstein links (FT)
Large-Cap News We Can’t Ignore
Ferrari is the favorite electric vehicle stock at Morgan Stanley (SA)
Facebook's Wall Street reactions: Move to metaverse better, or worse? (SA)
Rivian Automotive Targets IPO Valuation Just Above $60 Billion (WSJ)
Small Cap News
Global Crossing Sees First Aircraft Starts Cargo Conversion, Bares Fleet Growth Plans For 2021 (TDD)
Eguana Technologies was halted after trading 7.58M shares (NW)
Freeman Gold Announces US$10 Million Non-Brokered Private Placement for Lemhi Resource Expansion (NW)
Things to Be Watching Out For:
The following companies have earnings schedule this week from Earnings Whispers.
Canadian Small Caps With Jay Lutz
As any good small cap investor knows, investing in small caps is all about focusing on where the money is going, not where it is today. At least, that’s what any good investor in the space seems to claim.
Despite this, the Canadian small cap market space seems to be at a crossroads. Just a few short years ago, we had the cannabis craze that took the space by storm, with new retail investors signing up so fast to invest that it frequently crashed the trading platforms of many banks, much to the annoyance of investors. Between the spurts of excitement in potstocks, we also had the first blockchain boom, followed by a psychedelics boom, and then a pandemic boom.
Now there seems to be minimal excitement for any sector. With retail investors burned by cannabis markets of days past, exchanges are slow in terms of volume. While painful now, it may be setting us up for the next run as larger and smarter investors take positions in the next perceived hot market.
The trouble is identifying just what market that is. Commodities are seemingly going through accelerated booms and busts (lumber anyone?) as the markets try to cope with the excessive money printing that occurred over the last year and a half, and the inherent inflation that comes with that. Yet gold and silver, and the accompanying explorers, couldn’t catch a bid if their lives depended on it.
While myself and Steve are speculating that it just might be the oil and gas market (by now seemingly everyone knows I’m a huge bull on NG Energy), other contenders include uranium, dementia-focused names, AI, and the metaverse.
Whatever it ultimately is, you can bet the small cap sector will once again see a slew of related names rush in to try to claim a stake in the excitement.
MEME of the Day:
Full Disclosure: NG Energy, Freeman Gold, and Eguana Technologies are clients of Canacom Group, which is also long each of these names. Steve Hyland owns a minority interest in the Canacom Group.