When a group of stocks (sector) or an asset (Bitcoin) goes through the roof, we usually take a few inbound emails from clients asking if we own them or if we are going to participate in them. Canadian marijuana stocks were one such group where we were questioned.
My answer over the past six months or so has been "we only invest in cash flowing companies". That is to say, when investing in corporate bonds and equities, what we are really buying is a stream of cash flows. There are many ways of valuing what that stream is worth (the tricky part) but investing in businesses that have zero cash flow adds a second derivative...ie...will the business even survive? Marijuana stocks certainly fall into this category. Heck, the federal bill has yet to pass through the Senate and receive Royal Assent as of yet (I would be pretty sure that will happen however).
I must admit that I haven't spent time looking at the sector from a fundamental research perspective (and may never) but I do have some close associates who have. Their conclusion over the past month or so has not been a positive one, that is for sure (it pays to have smart associates to share research with).
And, as usual, right they were. I have been watching from afar and have noted that some of these stocks have sold off a fair bit. Today, I thought I would look at what they have done in general over the past month. A quick look at the Canadian Marijuana Index of 24 Canadian Marijuana public stocks reveals the following chart:
The peak was Jan 9th at a value of 1,045 and today it is at 615.5. That is a 59% Decline in value over about 7 weeks. Killer for a portfolio if an investor had a large weight to the sector. To be sure, I have no idea if this thing will pop right back up. It very well may but a 59% cut is a big move.
What is driving this massive decline? An educated guess might put forth the following:
And the bottom line is - Scott and I are investing our own money exactly the same as our client money. We are doing so prudently and with the proper fiduciary duty that we owe ourselves, our families who we invest for and, most importantly, our clients. Sure it would have been nice to have made some dough on the way up on these marijuana stocks but we see that as gambling, not investing and it could, arguably, violate our fiduciary duty to our clients.
If you want your money manager to "gamble" your hard-earned after-tax (and tax rates don't look like they are going down after yesterday's Federal Budget) dollars then I would suggest you: a) go to Vegas and/or b) find a Broker at Canaccord who is way smarter at gambling on marijuana stocks than I am.
If you want your money manager to create a well-diversified portfolio by using an investment process that has been in place for decades, attempts to create superior risk-adjusted returns, allows you and your family to sleep at night and, ultimately, over time, meet your future financial goals, then High Rock might be right for you. If so, give us a call...you have nothing to lose and maybe something to gain.
NB - Past performance is no guarantee of future performance.