I made the mistake of not investing in Cisco and Amazon back in the early and mid 90’s because they were overpriced. Back when Ebay IPO’d I once told a fellow investor that Ebay was, “just an online garage sale, why would I pay 50x earnings for an online garage sale?”
Not this time around. It took me a while, but I learned from those mistakes.
I now understand paradigm shifts and rule breakers better. I now understand paying a high multiple can be not just worthwhile but potentially game changing, if you expect the growth rate to be even higher than the multiple for the next 5 years or more, and you end up being right.
I still believe in fundamental investing. I just realize there are situations, rule breaking situations, where sticking to fundamental investing criteria is going to hinder more than help you. Because I think cannabis is such a situation, and Canopy (CGC) is the company best able to take advantage of that over the next 5 years, I continue to own the shares.
One mistake cannabis investors and cannabis potential investors make is focusing on Canadian farming of cannabis and dried flower sales too much. It is understandable, this is currently almost the entire market in Canada and still roughly half the market in places like Colorado. But it is not where the growth or long term margins are. It’s like trying to drive your car while looking in the rear view mirror. To use another metaphor, you need to play to where the ball is going to be, not to where it is.
Where the ball is going to be is branded cannabis products with moats in a variety of different industries as well as the patents, processes, and distribution which makes that possible. Edibles, beer, improved medical treatments, athletic drinks, beauty products, salves and ointments, hemp fiber based products, etc. is where the ball is going. Creating and enabling those products is where the real long-term money is going to be made.
Consider people grow and eat a lot of their own tomatoes, yet Heinz does pretty well selling ketchup, transforming those tomatoes into a branded product with a moat. Likewise the future profit in pot isn’t selling tomato strains to officianado’s (pot flower strains to heavy pot smokers), or low margin tomato growing (pot farming, or square feet of greenhouse space devoted to pot farming), it is in everyday ketchup purchases (cannabis based products).
I was an ebbu seed investor way back in 2014. This was the focus of the Powerpoint presentation presented by ebbu that caused us seed investors to put our hard earned money on the line when ebbu was nothing more than two guys with a Powerpoint. That and the realization that with pot the variability of outcomes were what mattered. Coming up with the best combination of cannabinoids and terpenes to produce a consistent, water soluble, clean crisp intoxicating effect with much less calories and no hangover is the outcome that mattered for making a great beer product. The combination of cannabinoids and terpenes which dulled pain, reduced anxiety, and gave you the munchies was a great outcome for cancer treatment. A better sleep aid than ambien. A pain masking/reducing drug that rivaled oxycontin yet wasn’t addictive and didn’t have as many unwanted side effects. These were all outcomes that mattered.
Canopy may also have seen this way back then, but in addition realized they needed to be a Canadian grower first in order to gain the access to capital necessary to best take advantage of the opportunity. Honestly, I don’t know.
What I do know is Canopy clearly sees it now. It was clearly focusing on ketchup not tomatoes when they bought Hiku, ebbu, and Storz & Bickel in 2018. It was clearly on their mind when they announced the New York Hemp Industrial Park in January 2019, a sight seeking to synergistically foster hemp and eventually marijuana product development, production and logistics in the US. It’s also what investors should focus on when they listen to Canopy Growths earnings conference call the morning of February 15th.
Hopefully this brief blog post will help others have their aha moment. Hopefully it will help them better focus on who is going to come up with the most popular ketchup, not who is growing the most tomatoes.
If it does, and helps you make a few bucks, you owe me a Corona Genesis*.
*my guess of the name of the most popular cannabis infused beer in the world, circa 2024
Disclosure: Darren McCammon has a Long position in CGC. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.
