Is Canopy Growth Done Growing?
On Wednesday afternoon, Canopy Growth shocked the cannabis investing world by posting a $1.28 BILLION loss in its most recent quarterly earnings report.
Although sales were higher than the prior year, the company missed even the lowest of revenue estimates. And the stock got crushed even before the markets opened.
It had already dropped 11% by the time most retail investors were able to get in orders to sell. And it kept falling once the market opened. At the time I’m writing this, it’s down 14% for the day and looking like it may go lower still.
But every single person out there could have avoided the shock and yesterday’s loss if they were willing to do a little more research...
The More You Know
You see, even before the fireworks started launching here in the U.S. last month, I knew almost exactly how big Canopy’s loss was going to be this quarter.
It’s not because I have some connections at the company that gave me non-public, inside information. And it’s not because I have some crystal ball, either.
It’s because I pay attention.
When companies talk, I listen. When they write, I read. And I don’t just listen to the words being said or read the words that were written. I look for the message they’re actually conveying.
And when I see a company submit a filing called an “early warning report,” I make sure to read every word and in between every line.
So when Canopy filed one of those on July 3, I gave it a read. And when I figured out what it was saying, I decided I wouldn’t touch Canopy with someone else’s 10-foot pole. At least not for a while...
Headlines Hide the Real Story
Back in June, everyone was pretty excited to hear that Canopy had entered into an agreement to acquire U.S. multi-state operator (MSO) Acreage Holdings.
There were (and still are) some stipulations to the deal that must be met before it’s completed. The biggest one is that the U.S. has to legalize cannabis.
But since we know that’s a foregone conclusion, the market was mostly focused on Canopy’s new pathway into the U.S. market.
But a few days after the company announced its new deal, it sent the Canadian Securities Administrators (CSA) a letter that went completely unnoticed by the general public.
The CSA is like the SEC here in the U.S. for those unfamiliar with the name. And it’s where Canadian companies send regulatory filings.
But this wasn’t a quarterly or annual report. And it also wasn’t a press release. It was something that could have saved Canopy’s shareholders a collective $3.16 BILLION.
On July 3, when this information became public, Canopy had a market cap of $14.2 billion. After yesterday’s rout, it’s fallen to around $11 billion.
On a per-share basis, that’s a 32.2% loss every single shareholder could have easily avoided... if those shareholders had been willing to do some research.
When Equity Becomes a Liability
That’s because in order to enter into the deal to buy Acreage, Canopy had to modify its share structure. You’ll remember that I wrote to you about the deal last week and pointed out that nearly all of it would be financed by creating additional Canopy shares to exchange with Acreage’s holders.
That is going to dilute the current Canopy shareholders even more than they already have been. And the biggest Canopy shareholder, Constellation Brands, isn’t okay with that kind of action.
Constellation already put its foot down about widening losses at the cannabis giant. It fired then-CEO and company founder Bruce Linton.
And on July 3, I found out that Constellation was flexing some more muscle to change the terms of its $4 billion investment in Canopy.
Last year, the announcement was made that Constellation would up its ownership from 9.9% to 38% of Canopy’s outstanding stock. But the company would also get warrants that would give it the potential to purchase up to 55% of Canopy.
Warrants, in case you’re unfamiliar, are like options. They give the holder the right to buy a security at a strike price by an expiration date. But, unlike options, warrants are not backed up by existing stock.
That means when they’re exercised, the company has to create more stock to cover it. And that dilutes existing shareholders’ equity. More shares on the market means less power per share. Pretty simple.
But warrants, since they’re offered directly by the company, also have to go on the balance sheet. And they have to be accounted for on the income statement as well.
Now, this is where it gets a little more complicated:
If the warrants are exchangeable at a fixed price for a fixed number of securities, they count as equity on the company’s balance sheet. But if either price or number isn’t fixed, they count as a liability.
Constellation had two levels (or tranches) of warrants with Canopy. The first level (Tranche A) of warrants let the company buy shares for $50.40. Those were valued at $1,505,351 and were set to expire on November 1, 2021.
The second level (Final Tranche) was set to expire on the same date, but it did not have a fixed strike price. Its value was determined to be nominal (or practically nothing).
So up until July 3, Canopy was carrying the Tranche A warrants as about $1.5 billion in equity. And the Final Tranche warrants were carried as a liability with a nominal value.
But once the Acreage deal was announced, that structure needed to change. The Tranche A warrants remained the same, but the expiration date was pushed out to 2023.
But the Final Tranche was split up and replaced with entirely new warrants. There’s now a second (Tranche B) and third (Tranche C) level.
The new Tranche B warrants give the right to buy Canopy shares at a fixed strike price of $76.68 and an expiration date of November 1, 2026. The new Tranche C warrants, like the Final Warrants they replaced, don’t have a fixed strike price and were determined to have a nominal value as well.
So now, since the Tranche B warrants are a fixed price for a fixed amount, they become equity instruments, and the Final Tranche they helped replace needs to be removed from liabilities.
But that means the balance sheet is no longer balanced, and a write-down equal to the value of the new Tranche B warrants is in order.
That letter to CSA on July 3 pointed all this out. It just didn’t have all the dollar values. I had to work a little for those. But I was able to take the number of new Tranche B warrants and the strike price on them and determine a ballpark mark-to-market value.
They’re worth $1,176,350, or nearly $1.2 billion. So on July 3, over a month before Canopy announced earnings, I already knew it would post a massive loss. And I’ve advised against investing in it multiple times since.
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Times of Crisis Call for Good Advisers
I know all that accounting stuff is complicated. And it’s a little confusing — even to me, and I had to take countless accounting and corporate finance courses to get my degrees.
But it’s the kind of research that can save you millions or even billions of dollars — as was the case with Canopy.
It’s also the kind of research that’ll make most people want to claw their own eyes out. Not only is it complicated, but it’s also really boring. Trust me. I do it a lot.
But I get paid to do it. It’s literally my job. How I pay the bills. Most people don’t have the time to read pages and pages of financial reports and esoteric corporate lingo.
And most that do have the time don’t have the desire.
And that’s the exact reason you read Wealth Daily every day. Because we’re here, getting paid, to do the research that will keep your money safe no matter what the market is doing.
I co-author an investing service called The Wealth Advisory. It’s a subscription-based wealth-building community. That means people pay an annual membership fee and get access to premium research and recommendations.
I bring it up because every time the market starts to hit the skids, I see people canceling their memberships and asking for refunds.
But that’s exactly the time they should be using their membership the most. Anyone can make money in a bull market. It takes skill to make it and keep it in a downturn.
Just to give you an example, I ran the numbers for all the investments we’ve got going at The Wealth Advisory yesterday morning. As of the open, our average gain on open positions was over 70%.
Over the past month, the markets have dropped between 6% and 7% (depending on the index). Our portfolio average dropped as well. But only by 4%.
In the past year, the markets are barely holding even. But our portfolio averaged an 8% gain.
And so far in 2019, the markets are holding onto decent gains — 9.4% for the Dow, 13.6% for the S&P 500, and 17.6% from the Nasdaq. But The Wealth Advisory portfolio is up 23.12%.
Can your adviser say that? Can your portfolio match that? Most people would answer both with a resounding “no.”
If you’re not one of them, then congratulations. But if you are one of the folks who responded in the negative, all hope is not yet lost.
Blazing a Clear Path
You don’t have to settle for subpar returns. You don’t have to be content putting your money in an ETF and hoping to match the stock market’s returns.
You can take control of your financial future. And I can help. It’s not just my job. It’s really my passion.
I left Morgan Stanley because I wanted to use my abilities and skills to help people. And that’s just not the narrative on Wall Street. Now, I make less when bonus time comes around, but I feel good about what I’m doing.
And that’s because every day, I get the chance to help people avoid the Canopy catastrophes and find the market-beating investments.
My goal (and my job) is to help people like you blaze a clear path to retirement. Think of me as your scout. I’ll be out front, running point and helping you pick the safest and most profitable path you can.
Speaking of safer and more profitable paths, the whole time I’ve been warning folks to avoid Canopy, I’ve been encouraging them to load up on shares of another cannabis company.
And it’s paid off big for them so far. But the rally in this company isn’t over yet. It’s got the kind of growth potential that scores +1,000% gains.
I’m talking about 10 times your money — the kind of investment where every $1,000 becomes $10,000, every $15,000 turns into $150,000, and a $100,000 investment turns you into a millionaire.
One Stock to Retire On
You all know I love a good picture. So let me show you just how explosive this stock is with two charts.
First, I’m going to show you how the top cannabis stocks and the S&P 500 have been performing the past two months:
Not too pretty, huh? The market is down nearly 2%. Canopy, Cronos, and Tilray (three of the biggest cannabis companies on Earth) lost 33%, 25%, and 13% respectively.
But then you take a look at a company whose growth is not behind it and see why my averages are always higher than the market:
Now that's an investment. Up nearly 300% in two months.
But it’s not just how big the gain is that should impress you. It’s the fact that the stock market was falling and nearly every other cannabis stock was tanking.
While the “safe” cannabis investments were getting hammered and losing a third of their value (in the case of Canopy), this one nearly quadrupled in price.
It literally gained 10 times more than Canopy lost. That’s called relative strength when an industry is falling but a stock is still rising. And that’s how you beat the market and the other stock pickers at this game.
You find companies that are so valuable they’ll weather any storm. You find the boat that’s floating while the rest sink. And you invest before anyone else has the chance.
Now, obviously, you can tell from that massive move that this company is getting discovered and investors are piling on board.
But there’s still way more profit to be had. This is a small company in a cannabis industry niche. And it’s got some major catalysts coming its way that will drive attention to the stock and tons more money into the shares.
Then it's going to really break out and give investors those +1,000% gains that are all but guaranteed to follow. And it'll make the past two months' near 300% gain look small by comparison.
So before that happens, I’m urging you to watch this presentation we put together. It details the opportunity and explains what you need to do to get in before the crowd.
But don’t wait. As you saw from the charts, this isn’t staying a secret much longer. And it’s moving up fast. Every day you wait to get involved could cost you hundreds of percent off your total profit.
To your wealth,
After graduating Cum Laude in finance and economics, Jason analyzed complex projects and budgets for the U.S. Army. Then, at Morgan Stanley, he led the assistants' team for the North American repo sales desk, responsible for hundreds of multibillion-dollar trades every day. Jason is an editor for The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.
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