Between the U.S. election and multiple drug companies reporting coronavirus disease 2019 (COVID-19) vaccine efficacy results in November, a lot of otherwise important news was lost in the shuffle. Among these news events was the quarterly filing of Form 13Fs with the Securities and Exchange Commission.
In simple terms, a 13F provides an intricate look at what money managers with over $100 million in assets under management were holding as of the end of the most recent quarter (in this case, Sept. 30). A 13F also allows investors to decipher what stocks successful money managers have been buying and selling. This can help professional and retail investors spot trends in the market that might not otherwise be obvious.
Successful money managers can't stop buying into this surprising industry
In the third quarter, many of the industries and trends you'd expect to be hot, like cloud computing, cybersecurity, and healthcare, remained top targets by money managers. But there was one surprising industry that saw incredible purchasing activity from billionaires and aggregate 13F filers: Canadian marijuana stocks.
Here's a quick rundown of the increase or decrease in aggregate ownership by 13F filers from the sequential second quarter (declines noted by parenthesis):
- Aurora Cannabis (ACB -11.71%): 27.2%
- Canopy Growth (CGC -7.33%): 9.6%
- Tilray (TLRY): 26%
- HEXO (HEXO): 32.8%
- Sundial Growers (SNDL -8.72%): 104.4%
- OrganiGram Holdings: 22.7%
- Aphria: (5.6%)
- Cronos Group: (2.3%)
Aurora Cannabis, the most popular pot stock among millennial investors, saw Jim Simons' Renaissance Technologies open a 447,378-share position, while Ken Griffin's Citadel Advisors added 418,994 shares to its existing stake. Meanwhile, Jeff Yass' Susquehanna International tripled its position in Canopy Growth and substantially upped its stake in Tilray. Even Israel Englander's Millennium Management got in on the action with a nearly 52,000-share purchase of Sundial Growers.
Here's why Canadian pot stocks are suddenly the apple of Wall Street's eye
Why have billionaire money managers suddenly changed their tune on what's otherwise been an awful place for investors to park their money over the past 21 months?
One possibility is that we're finally seeing Canadian regulators work through some of their most pressing issues. For example, Canada's most-populous province, Ontario, had been using a lottery system to assign dispensary licenses through the end of 2019. At the one-year anniversary of adult-use cannabis sales being legal (Oct. 17, 2019), only 24 retail stores were open in a province that could probably house 1,000 dispensaries. The new process, which simply involves vetting applications, is moving along much faster, with over 150 dispensary licenses assigned, as of September. This should relieve supply bottlenecks and allow for sales to pick up in a big way in 2021.
These Canadian pot stocks have also gotten serious about reducing their costs and aligning production to meet consumer demand. Aurora Cannabis has shuttered five of its smaller cultivation farms, halted construction on two its largest projects, and sold off a 1-million-square-foot greenhouse. There's also Canopy Growth, which permanently closed 3 million square feet of licensed indoor cultivation in British Columbia.
Beyond just operating costs, most management teams are tightening their belts when it comes to share-based compensation. This was a serious problem for Canopy Growth under Bruce Linton, but it's not been nearly as big of an issue since former Constellation Brands CFO David Klein took the reins in January.
Finally, I'd opine that billionaires are counting on increasing uptake of cannabis derivatives in 2021. Derivatives are alternative consumption options like vapes, edibles, infused beverages, concentrates, and topicals that bear considerably higher margins than dried cannabis flower. Similar to the initial launch of dried flower, regulatory and supply issues dominated the landscape. By next year, many of these supply issues for derivatives should be resolved.
Billionaire money managers might be throwing away money
While there's no question that cannabis is going to be one of the fastest-growing industries this decade, I'm highly skeptical of billionaire money managers putting their money to work in Canadian marijuana stocks.
For starters, Canadian pot stocks have been notorious for secondary stock offerings and at-the-market share sales that destroy shareholder value. Aurora Cannabis' share count has skyrocketed more than 11,800% over the past six years. We've also seen Sundial Growers and HEXO issuing stock on a regular basis to raise capital. With the industry still working out some kinks, additional cash raises are likely, which is bad news for investors.
Furthermore, the entire industry has been losing money hand over fist. There have been massive impairment charges over the past fiscal year for Aurora Cannabis, HEXO, and Tilray that were tied to overzealous and overpriced acquisitions. But even beyond one-time charges, operating expenses have been far too high considering the challenges the industry has faced.
Another clear-cut issue is that Canadian consumers are buying up valued-based flower products. Canadian regulators assumed that placing a relatively low 10% tax on legal weed products wouldn't deter consumption. However, illicit growers are consistently undercutting licensed producers and retailers on price. Canadian pot stocks are fighting back with value-based products, but it's crippling their margins.
It's also unclear when Canadian weed stocks might have an opportunity to enter the lucrative U.S. market. President-elect Joe Biden's plan to decriminalize and reschedule marijuana at the federal level isn't going to be enough to allow Canadian marijuana stocks to enter the U.S. cannabis industry. Without Democrats in clear control of the U.S. Senate, it's unlikely we see the green carpet rolled out anytime soon.
If you ask me, billionaire money managers look to be throwing their investors' money away by placing their faith in Canadian pot stocks.