Cannabis Portfolio – At The Mercy of The Market

Overview:

One of the challenges with investing in a new industry is keeping your emotions in check.  The cannabis industry is no different than the alt coin, dotcom or biotech markets where greed and hope turned to losses and despair.  As industries mature, competition will weed out the weak and few will emerge profitable.  We need to look no further than eBay vs Amazon among all the other e-commerce sites that popped up during the dotcom bubble.

Sure there are many that succeeded, but for every one that succeeds many more fail.  There are about one hundred thousand e-commerce companies in the US and Canada alone. Most do not make any money, and a good example of this is Overstock.com.  This is likely to be the situation with the cannabis industry as well.  As more and more companies come into play, farmers are allowed to grow, margins will be squeezed and few will survive.

You can listen to our podcast on Cannabis stock fundamentals on our podcast page or here on podomatic.

 

Our Goal with our Cannabis portfolio:

The goal is simple, to accumulate a small portfolio of those cannabis stocks we feel have the best opportunity to become profitable in the future.

The Challenge:

Cannabis companies are popping up and the FOMO around them is no different than the altcoin market in 2017 or the dotcom market in 1997.  The challenge is picking which ones have the best chance at surviving and making money.

Plan:

To build a small portfolio of stocks and remove our initial capital.  In the end, the ideal goal is to have no capital risk in our portfolio.  However this takes time to do and will not be done overnight.  Similar to the CGC trade where we took some pain before making 13% profit, we have to be patient and diligent to stick to the plan and strategy.

Strategy:

To buy into weakness and sell into strength using position and or our options strategy, removing our capital when we have opportunity not ride the rollercoaster and end up wishing we had.  This market will go up and down, and many companies will simply fall to the way side.  Nobody has a crystal ball and foresight to pick the rags to riches stock, it is simply luck.  What we are attempting here is to minimize our chance of losing our capital.  It is all about risk management and if you go in with this mentality, your chances of success are greater.

There are numerous companies out there, and most are traded over the counter or OTC.  This implies they are not required to submit quarterly reports or financial data to the SEC. They are simply un-regulated and as such should be treated as high risk.  If you see an “F” at the end of a symbol it is indicative of a foreign company.  TGODF is an example of this.

Reverse Mergers:

We hear about mergers all the time, yet in the cannabis industry, as well as many emerging industries, “reverse mergers” seem to be all the rage.  I will go more into detail about the pitfalls and warning flags of reverse mergers in another article, but this should throw up a flag when a company does a reverse merger.  Not that it implies foul play, but the transparency surrounding these deals can be cloudy at best.

Bottom Line:

We all only have a limited amount of capital to invest.  Getting to big too fast is a recipe for disaster.  In our portfolio we ear-marked 10k as our investment capital and we will work within these constraints only.  We will not be adding any additional capital.  Our goal is to use position trading and our options strategy to acquire shares over a broader period of time and in the end have a small portfolio of cannabis stocks, with all our capital removed.  We want to be in a risk free environment not at the mercy of the market.

Remember if it does not pay a dividend it is not an investment it is speculative.

CGC

Canopy Growth

Canopy is our pick for best in breed cannabis company.  It is one we want to acquire for the long term.  They have branding, marketing and the size providing a better chance at success.  After several trades using our options strategy we have a profit of $545.0.  This money is now ear-marked to buy the shares of CGC outright.

We are looking to sell another PUT on CGC to do the same process all over.  Again the money made from these trades will be earmarked for CGC shares and over a period of time our goal is to accumulate 100 shares.  This is not going to happen overnight, but if we stick to our plan and strategy we have a chance of making our goal at a reduced or no cost.

The 35.0 area is our initial target to look for re-entry and it may take a week or so to pullback.  Nothing to do but let the market play out here, and look for better pricing.  There is a reason why these stocks are so heavily shorted, but if we could only choose one company this would be it.


NBEV

New Age Beverage has been our best trade to date.  Currently we are short the 6.50 Put for 1/29 expiration at 75 cents on half of our 200 shares.  If they expire worthless we will wait for a rally and sell into them again.  This has slowly reduced our average cost to under $3 per share.

For those of you that bought the stock outright, and sold above 7.00 and are in the remaining shares free, or even at a profit or close to, all there is to do is wait.  This is a home-run whenever you own the shares for nothing.  I would not be a buyer until the mid to low 5.0 area and only on a weekly reversal signal.  Patience is key.


TGODF

The Green Organic Dutchman is a pure speculative play, but “funding is secured” for their new facility.  They are only one of two certified organic growers at this scale, and had no revenue as of the 3rd quarter of 2018 but are expected to report income in the 4th quarter.  There new hybrid facility which is over 1 million sqft has an estimated annual production cost of 142,000 kg or organic cannabis annually.  Since there organic cannabis will be at a premium and they will be the largest grower we picked this one as our long shot.

The 2.50 level is the area of resistance to push through.  There is an overlapping projection and retracement at the 4.00 area where we will look to take in some profits. Currently our average cost per share is just under $3.0.

There are several others on our radar like Aurora and Innovative Industrial Properties, but we do not want to get too big too fast.  We also want to have capital ready to take advantage of selloffs or to acquire stocks via options if the price is right.

Summary

Investing in speculative stocks, cryptos or commodities is all about risk management.  Managing our capital allows us to take advantage of sell offs, or provides capital to position or swing trade.  These markets can turn quickly and they are not highly shorted by hedge funds for no reason at all.  They are high risk period, which is why we limit our total exposure at any one time.

There are others that we are interested in, but we must be patient.  There is always an opportunity, I will never forget when I thought I missed the boat on Google at $165 or Amazon at $250.   We want our money working for us not all tied up in a bunch of stocks where we are at the mercy of the market.  If a good trade presents itself we want some capital to take advantage of it which is why we keep a big chunk of our allocation in cash.

Our actual position trades and portfolio management strategies are posted for our Premium Members.  Again this is not a get rich scheme our intent is to grow a portfolio over time and end up with our capital removed and a small portfolio of stocks in the end.  Do not expect outrageous 10% a week returns, we are realist and all trades and stocks are the ones we personally take with our own capital.

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