One year ago, marijuana stocks were all the buzz on Wall Street. In October 2018, Canada became the first industrialized country in the modern era to green-light the sale of recreational cannabis, with the expectation that derivative pot products (vapes, edibles, infused beverages, and so on) would go on sale by no later than October 2019. We'd also been witnessing plenty of momentum in the U.S., where new states were legalizing medical and/or recreational weed.
But the green rush has mostly gone up in smoke in 2019. Supply issues have hit the Canadian marijuana market hard, while select U.S. markets have been pulverized by high tax rates and a persistent black-market presence. Perhaps no collective group of stocks has performed worse this year than pot stocks.
And yet, during the third quarter, billionaire money manager Jim Simons, founder of the Renaissance Technologies hedge fund, added to or opened positions in six cannabis stocks.
One billionaire hedge fund manager has taken a liking to marijuana stocks
No later than 45 days after the end of each quarter, companies with more than $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission. Form 13F provides a snapshot of what each of these investment companies and hedge funds have in their portfolios (as of Sept. 30), as well as gives investors insight into what the brightest minds on Wall Street have been buying and selling in recent months.
Jim Simons and his team are managing close to $118 billion in assets, and as is the case with pretty much every quarterly update, Renaissance Technologies was extremely active. According to 13F aggregator website WhaleWisdom.com, Simons' fund bought 415 new stocks, added to 1,859 existing positions, completely sold out of 534 companies, and reduced holdings in 1,110 stocks during the third quarter. All told, Renaissance owns a stake in more than 3,300 securities, so you can rightly call it a highly diversified (and very active) operation.
But the biggest surprise might be that Simons added to two existing cannabis positions, as well as opened a position in four more pot stocks. Here's the rundown:
- Canopy Growth (CGC -2.06%): New position of 510,900 shares
- Aurora Cannabis (ACB 1.28%): Added 584,995 shares to an existing position
- Aphria (APHA): Added 80,400 shares to an existing position
- HEXO (HEXO -8.06%): New position of 35,000 shares
- Cronos Group (CRON -1.76%): New position of 100,000 shares
- CannTrust (CNTTQ): New position of 104,700 shares
Why these six pot stocks? Let's take a closer look.
What does Jim Simons see in these six cannabis stocks?
Perhaps the biggest selling point of these six companies is sheer production potential. Making the assumption that each and every one of these six companies is able to bring all of their grow farms to full operation, these are some of the largest growers in Canada. For example, Aurora Cannabis, Canopy Growth, and Aphria have the capacity to generate close to 700,000 kilos, well over 500,000 kilos, and 255,000 kilos, respectively, per year. Given their significantly reduced valuations and the known demand for cannabis (at least based on annual black-market sales), this might represent an intriguing bargain.
Another factor that could be playing a role is the healthy amount of dealmaking and partnership opportunities we've witnessed among these cannabis stocks. Cronos Group, for example, received a $1.8 billion equity investment from Altria Group in mid-March, while HEXO has been a busy bee on the dealmaking front. It acquired Newstrike Brands to bolster its capacity earlier this year, and signed a two-year agreement with Valens GroWorks for 80,000 kilos of cannabis and hemp extraction.
Simons might also appreciate the international reach of marijuana. Aurora Cannabis and Canopy Growth have a respective presence in 25 and 17 countries, including Canada. Aphria is also closing in on the one dozen country mark, thanks in part to its purchase of Nuuvera in March 2018. With foreign markets expected to be buyers of high-margin medical cannabis over the long term, this international push could be pivotal to bolstering pot stock margins.
Sorry, Jim, but you and your investors may be swimming against the tide
Unfortunately, Simons' marijuana investments via Renaissance have seemingly come before a flurry of terrible news events that have hit the Canadian pot industry.
For instance, CannTrust announced early in the third quarter that it had grown cannabis illegally in five grow rooms for a period of six months. This led to the company's now-former CEO being shown the door, as well as a number of restrictions while Health Canada's investigation was ongoing. In September, Health Canada officially suspended CannTrust's sales and cultivation license. So, for the time being, CannTrust is an empty shell simply trying to regain compliance with Canada's regulatory agency.
Then there's Aurora, HEXO, and Cronos Group, which have all announced some degree of cutbacks to better align their respective operations with early stage supply issues. Aurora Cannabis plans to halt construction at its Aurora Nordic 2 facility in Denmark and Aurora Sun campus in Alberta, ultimately removing up to 330,000 kilos of annual run-rate output from the market in 2020. HEXO, meanwhile, is idling its Niagara facility, which was acquired with the Newstrike Brands purchase. Finally, Cronos Group is repurposing some of its cultivations space at Peace Naturals for processing and derivatives production. These are all telltale signs of trouble in the industry.
Lastly, none of these six companies has delivered the operating results we've expected. Aphria has been profitable, but only because of fair-value adjustments, and not due to strength from cannabis sales. Comparatively, Canopy Growth's share-based compensation in its latest quarter was higher than its net sales. That really says something about the state of Canadian cannabis stocks right now.
It's possible that a significant amount of Simons' investments in these pot stocks could go up in smoke. Thankfully, Renaissance is so diversified, Simons and his investors may not even notice.