Big Swings: what to do with this choppy marijuana market

Waste baskets in Moms’ basements everywhere filled up this morning with blog post drafts from yesterday night. We were all looking at a screen full of red, wondering whether or not to come in the next day, trying to figure out which way was up, and ready to file drafts about plagues of locusts and the sun turning black. By the time the market opened today, the question had become whether or not anyone could come up with a good, theoretical reason to ever stop building this tower of Babel, and we had all started writing drafts wondering out loud if this market will triple or quadruple in six months. It’s been quite a ride, and here’s how it went.

The stagger

Sector bellwether Canopy Growth was off 8% yesterday, following having been off 5% the day before. The rest of the sector was being dragged down with it. Aurora off 9.7%, Aphria off 9.5%. Tilray off 9%.

Yesterday Canopy Growth sneezed…
..and the rest of the pot market was put in the ICU.

The perceived dawning of the apocalypse wasn’t sudden. On the contrary: we’ve known in our souls for some time that $30 billion in aggregate market cap is too much for a sector that booked $80 million in aggregate revenue last quarter. These valuations were being achieved by a sell side that amplified the potential and, yesterday at closing time, we were wondering if there was any potential left to sell. The charts for hype champs Aurora and Hexo had been telling us something for quite some time. This felt like a confirmation. The chatter took on hushed tones.The Aug 13th announcement from the Ontario government was the first hit. They were going to allow private industry to run brick and mortar private stores, as the street had expected, but not right when the feds go full-rec legal in October. The target is April. In the meantime, Doug Ford’s business-friendly conservative government is going to have a go at an e-retail monopoly. Ontario will run the only legal source of recreational marijuana in the province through their own web portal.

That didn’t sound too good for Canopy, whose brick and mortar Tokyo Smoke coffee shops, recently acquired by way of pending takeover of Hiku, suddenly looked like dead weight. So CEO Bruce Linton went where any CEO goes when he needs to control the narrative: television.


He didn’t do so well. Bruce skyped it in to BNN in his best branded T-shirt with the appearance, haircut and demeanor of a guy who only left the beach because the surf died. He was dismissive of the Ontario delay to real-world retail. He may have been going for unaffected, which would have played better, but it didn’t come through that way. Buried in his flippancy was the very relevant point that the government doesn’t grow its own weed, and will first have to buy it from LPs, including and especially the largest LP, if they want to sell it themselves. Linton didn’t stick that point or any others. We would have liked to have heard a follow up from the host about if they’re going to be able to displace the black market without stores, but BNN doesn’t deal in that level of forethought.

With everyone watching, the surfer bro whose plan appeared to be “whatever, maaannnn,” didn’t exactly inspire confidence. In that moment, in popular sentiment, the industry bellwether had achieved a $7B+ valuation through manufactured scarcity. Being the first movers in a new sector with high barriers to entry made them the biggest in that sector. This executive did not telegraph unique ability or talent. The pot sector looked like an amateur punching way above his weight. The sell was on, and it rolled downhill.

The recovery… and he comes up swinging!

Then, this morning, liquor giant Constellation Brands (STZ.N) put up $5B at a premium to market to take a stake in Canopy, and remind us all that Linton looking like a slob on TV doesn’t have anything to do with anything. Those barriers to entry still exist, and they exist in all jurisdictions. Canopy is still the first mover and largest player. A $5B leveraged investment shows the market that Constellation is serious about hedging out what they stand to lose from the portion of their revenue (US$7.5B last year) that legal cannabis stands to cannibalize. It’s the only investment the $41B company could reasonably make without being laughed at.

The deal gives Canopy $5B in green money, and puts that surfer bro and his team in the immediate driver’s seat both domestically and internationally. They already had $657 in cash June 30th. Canopy lists $620 million in debt.

A $5B investment from Constellation Brands put Canopy Growth right back in the fight. They came out swinging, trading $618 million worth of volume today.

Just like that, the trade was back on. Aurora was up 19.5% on 35 million shares in volume. Aph was up 20.5% on 10 million shares in volume. Hexo was up 12% on twice its average volume.

The rumor mill went from being shut down for care and maintenance to full-tilt at whiplash speed. Prospective big-dollar buyers in big liquor and private equity are being whispered loud enough to be overheard in bars and coffee shops by rounders with special knowledge of advanced talks they’re in with whichever junior LP is smart enough to pay for the promotion.

“My best friend’s sister’s brother’s broker is dating this Joey’s waitress who looked over a lawyer’s shoulder at the bar as he was flaunting a takeover offer that Canopy made for Invictus to his mistress on his phone and it was for $3 billion, so I guess it’s pretty serious…”

This thing found its bearings right where it left them. It’s still a market full of potential. $30B is cheap for all the pot cos in the world, and we’re still in an equities market that’s keen to bet on the next move, chasing the next big event.

The next round

The fundamentals that matter to mature businesses (like whether or not the business makes money as an enterprize) are going to matter to the market when these are mature businesses. At the moment, fundamentals like the gross margin of active facilities should matter. They definitely matter to private equity, big liquor or big-fish cannabis companies who are shopping for accretive acquisitions, but they don’t matter to the street. Way too complicated.

It’s an instagram-style attention economy out there. Companies would do well to hire publicists and get themselves mentioned in the same breath as big-cap liquor co’s, then make a big show out of refusing to discuss rumors like that on James West’s show. The companies who can create the most splash will get the attention of the herd in the short term.

The rub is: which company is going to produce the most attention grabbing headline is a hard thing to handicap. Moreover, there’s no way to tell when it’ll stop working. As soon as a big splash fails to reverberate, the trade will be off again, and the best thing to look for in a weed stock will be something else entirely.

Maybe even sales volume or operational efficiency…


Feature image of Mickey Ward and Arturo Gatti beating the hell out of each other taken from


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