Pigs get Slaughtered: Sundial Trades more than Facebook?!?

by | Feb 11, 2021 | Comp Table, Free | 2 comments

There is an old saying that “bulls make money, bears make money, and pigs get slaughtered”.

If you’re fat on meme stocks, congratulations, you better get out now before you’re bacon.

Tilray has increased 148% since last Friday, giving the pro forma Tilray-Aphria combination a market cap of $31 billion.

Sundial has increased 160% since last Friday to a $4 billion market cap.

The OTC equity sliver of MedMen has increased 650% since February 3. I haven’t bothered to figure out the capital structure since it was basically recapitalized via synthetic preferred equity by creditors, but I doubt most retail buyers understand the complexity of the loan terms – I struggled and I’ve been doing this professionally for over 20 years.

What is more interesting is that Tilray traded $11.5 billion – more than Amazon, Apple, and the QQQs. Tilray was behind only to Tesla and the SPDR S&P 500 ETF.

Sundial traded more than Twitter, Facebook, and GM.

Organigram traded more than Eli Lilly and Nike.

Canopy Growth traded more than AT&T, and Aurora traded more than Coca Cola.

And MedMen’s two tickers combined traded more than Scotts Miracle Gro and Whirlpool.

This is not normal.

Below are the stocks of the S&P 500, NASDAQ 100, and most cannabis stocks, ranked by volume.

You can download a sortable excel file of the volumes here.

Touchdowns off the backboard

Why? Because as we described in our investing philosophy article originally titled “Know the Game You’re Playing”, the guys in football helmets have walked onto the basketball court and are now scoring touchdowns off the backboard.

The game is currently different. Reddit groups (subreddits) have driven moves in many cannabis names with rocket-emoji investment theses, misinformed opinions, and we’ve heard stories of selective deletion of posts that don’t support bullish narratives.

Most of the investment theses ignore fundamentals such as market access, reasonable capture of a total addressable market, normalized margins pre and post 280E, capital structure, and capital needed to build out a new industry from scratch.

We at MJResesarchCo are starting to get worried about market risk here to the extent that non-fundamental investors have driven recent moves, especially in the more fundamentally driven US operators with good long term investment cases that may drop in sympathy – opening up opportunities to allocate more long-term capital.

If you had the good fortune to be long Tilray and Sundial and the other meme names, congratulations. We think it would be wise to sell.

The best thing the meme stock managements could do is raise significant new capital and then put it to productive use.

Some companies are doing this; since writing this we have already seen another $119 million announced (and $219 including GTI’s $100 million on February 9), so more smart companies are raising capital into the optimism. Good capital allocators will find high return uses for this capital.

Will the meme stocks keep rising? Maybe, but probably not for long. When momentum and non-fundamentals are driving them up, it will continue until that last buyer has run out of capital.

All of this all feels very, very toppy.

This is also why shorting is dangerous here, since the price setters won’t suddenly become rational just because you put a short trade on. If momentum drove a stock up 100% beyond fundamental justifications, why can’t it drive up another 100%? If $4 billion market cap is irrational, is $10 billion or $100 billion any less irrational?

The Canadian names (and cannabis in general), had the highest dollar volume trading day ever on February 10, 2021, at $24 billion, versus the previous peak of $13 billion on September 19, 2018, during the Tilray short squeeze and general Canadian legalization euphoria.

The US operators traded only $616 million, so the Canadians traded 39X the volume; Tilray alone traded 19x.

In a sign of retail and risk-taking YOLO driving the moves, the Tier 2 Canadian operators’ volume increased to $6.2 billion vs never going above $142 million before November 2019:

The concept that Canadian cannabis has higher valuations and lower margins and US opportunity than the US has been explained many times. If you are new to cannabis, please read it and other market commentary notes.

The price increases have been accompanied by huge increases in average daily dollar volume, and the question is can this volume continue.

We don’t think so.

Stable volume increases are driven by institutional investors allocating to the sector, which will buy when prices drop, not day traders who bought with a rocket emoji and will sell to buy the next rocket emoji.

Things to note from the table:

  • the average US and Canadian operator saw volume increase an average of 370% vs the 90 day average
  • the correlation between increased volume and price increases
  • Tilray traded 100% of its market cap, Sundial traded 131%; for reference the highest in the S&P 500 was Twitter at 9%. This is not long term capital taking a stable position.
  • the divergence in the prices on Canadian and US tickers which usually track closely. TGOD in Canada increased 7%, TGOD OTC increased only 1%; throughout the day there was a large divergence in VFF’s US and Canadian tickers as well, but this narrowed at the close. This shows non-institutional investors are swinging prices around.

Comp Table priced 2/10/2021

Given the enormous moves yesterday, below is our comp table priced on 2/10/2021. We are including our In The-Money Pro Forma Enterprise Values, which will be exclusive to premium clients in the near the future.

I have also removed the caps on multiples that are normally “not meaningful” – such as Hexo’s 1018X EBITDA multiple – to show what the market is paying, so the averages in this table are less relevant for comparison.

Normally the table has caps on multiples (I keep having to raise them), since a 300X multiple is not meaningful (eg no rational investor says “I’m going to buy at 300X because the market will pay 400X” – 300X is only an artifact of a reasonable multiple in the future on much larger growth assumptions).

Watch out for drops in volume

Finally, we present Gamestop’s price and volume chart courtesy of Sentieo; what is more important here is the price as the volume changes, and the drop in volume as the price first rises (fewer marginal buyers) and then the price collapse with fewer marginal sellers.

We remain optimistic for the long term growth prospects of the legalized cannabis industry driven by legislative catalysts and increased penetration of non-users from product innovation, but investors must be mindful of short term episodes like this.

Don’t get slaughtered.

Disclaimer: This is not investment advice or solicitation, and these reports will be provided to our members for free, for a limited time.

As of 2/10/2021, the authors have positions in AYR Strategies, Cresco Labs, Curaleaf, Green Thumb, Harvest Health, Village Farms, and Vireo Health, and make no commitment to update holdings in these positions.

MJResearchCo has no business relationship with any of the companies mentioned in the article.