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Leaves of Change
Ross Silver • Oct 14, 2019
The hay is in the barn and the leaves are changing colors, hello Fall. The equity markets are nervous and there seems to be a healthy amount of fear reflected in the tape. A friend of mine who runs a hedge fund believes we are headed a lot lower due to the economy looking frail. A friend of mine who runs a bond fund is loving life and thinks rates move lower leading bond prices higher and he is seeing some healthy inflows to his fund. Per Lipper, “For the week ended 10/02/2019 ExETFs - All Equity funds report net outflows totaling -$7.031 billion, with Domestic Equity funds reporting net outflows of -$5.395 billion and Non-Domestic Equity funds reporting net outflows of -$1.636 billion...ExETFs - Emerging Markets Equity funds report net outflows of -$0.382 billion...Net inflows are reported for All Taxable Bond funds of $0.641 billion, bringing the rate of inflows for the $3.065 trillion sector to $3.135 billion/week.” That fund flow data is likely not changing while the “risk off” trade is in effect. The questions my fellow “riverboat gambler” friends are asking are: do we take a shot on volatility in the hope the market swings lower (or higher) rapidly and/or do we buy out of the money puts (or calls), far out of the money, in the hopes we see a prolonged move higher or lower. The S&P 500 is flirting with the low it set near the end of July and the Russell 2000 is back to where it was on May 28th before it went on a 10% tear for the next three months. Buy on the dip has been an ATM machine for the past 10 years. My guess is funds looking to chase alpha may take the market higher this month so that they can close their books at the end of this month and collect fat bonuses in the New Year. If those funds create an artificial bounce from here leading to some hefty short squeezes, be prepared for a rapidly moving elevator on the way down in November. As they say in this business, the market moves on an escalator up and an elevator down.
What am I doing you ask? Well, I am buying high quality dividend stocks in an industry I know will experience growth. An example is Service Corporation International (ticker: SCI). Service Corporation runs funeral homes and is the largest funeral home operator in the U.S. I am also playing growth stocks in the cannabis, biotech, resource and tech industries because I want exposure to small cap high beta stocks that may work in any market environment.
I just looked back at my records and believe this is the 150th newsletter I have published. I have been publishing my monthly newsletter for nearly 13 years and I hope you have enjoyed reading them as much as I have enjoyed writing them. I still get nervous every time I write a newsletter in that I am convinced what I will write something that is not remotely interesting or informative.
Thank you for reading!
Silver Family Sports Desk
This past weekend my oldest son had another Pick 6 and he has been lighting up his 1st and 2nd grade flag football league with his arm and legs. His younger brother has been a force of nature on defense and had an awesome run in a scrimmage we played last week. The Silver boys are listening to any and all offers from universities. Should any recruiters be reading this, I encourage you to bring some Pokémon cards to get my oldest son’s attention and bring nerf guns in order to get his younger brother’s attention.
As for their sister and younger brother, they are both in the athletics incubator for the time being. My daughter is currently in gymnastics and loves it and I plan to unleash her athletic prowess come T-Ball season in the Spring. She will likely be the youngest player in the T-Ball league but may be the fastest given she spends a considerable time running from her two menace older brothers. Yes, I will be coaching her team and cannot wait. Skipper Silver will have 3 baseball / T-Ball teams to oversee in the Spring, pray for me!
Last but not least, my two year old son has absolutely no fear as evidenced by the fact he launched his stuffed animal frogs and then himself down a fairly large slide at a park I took him to yesterday. When I say launched, I mean he dove into the slide feet first while kids 4 years old and older watched in amazement. He also decided to scale a grassy hill that some 6 year olds were climbing leading me to chase him down so he didn’t jump off the rock the older kids were jumping off. He also has a cannon for an arm, he threw my daughters toy tea cup at least three feet and accurately when throwing it at me and smiling.
October Featured Company: Emerald Health Therapeutics, Inc. (ticker: EMHTF or EMH.V (Canada)
Canada Reveals Final Legislation for Edibles
The Canadian government recently announced new regulations for the cannabis market. With this regulatory change, edibles, ingestibles and topicals will be available for Canadians to purchase in late 2019 and early 2020. This change has major implications for the cannabis market, and the new wave of growth that is anticipated to occur.
In 2018, Canadians spent over $1.6 billion on legal cannabis. By the end of 2019, the Canadian cannabis market is expected to clear $7.17 billion. This estimate includes both medical and recreational cannabis products.
A recent Deloitte study suggested the potential economic impact of legalized recreational marijuana in Canada could clear over $22 billion by 2025. The Deloitte study further indicated that the edibles market could be a $2.7-billion in size, with tinctures and capsules at $116 million and $114 million respectively.
On the heels of such large estimates, many investors and companies search for the best way to ride the “second cannabis wave” in Canada.
Though the Canadian government is giving recreational edibles the green light this month, there are a few rules that must be met.
Cannabis producers must notify Health Canada 60 days in advance of their plans to sell new products. On October 17, the department will start accepting new product applications. Government officials added, “Provincially or territorially authorized distributors and retailers will also need time to purchase and obtain the new products and make them available for sale”.
Who Stands to Benefit?
If the legislation spurs a second wave of growth as expected, the companies that will benefit are those in the best position to produce, manufacture and distribute sufficient product to capture market share. Our longstanding favorite in the space is Emerald Health Therapeutics (EMHTF).
Emerald is a vertically-integrated cannabis company with a massive 1.1 million square foot Pure Sunfarms (PSF) greenhouse in Delta, British Columbia, which is a 50%-owned joint venture with Village Farms for large-scale, low-cost, quality cannabis production. With its Q2 2019 all in production cost at 0.65$/gram, Pure Sunfarms achieved its full production run-rate of 75,000 kg of dried cannabis in its 1.1 million square foot Delta 3 greenhouse this summer. PSF also provided impressive Q2 financial results with sales sequentially increasing 125% to CAD$32 million. Another same site greenhouse of 1.1 million square feet is on its way to be converted. This retrofitting operation will benefit from the first greenhouse experience with which PSF is setting a precedent in the Canadian cannabis industry with its pace of operational scaling and low-cost production.
Emerald has secured recreational cannabis supply agreements with the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, Prince Edward Island, Newfoundland and Labrador and the Yukon territory.
Additionally, Emerald recently launched a wholly-owned organic operation in Metro Vancouver, British Columbia, which includes two 78,000 square foot greenhouses and 12 acres of outdoor land. The company’s Québec-based, 88,000 square foot licensed indoor cannabis production and processing facility, Verdélite, recently announced it had received from Health Canada its cultivation license amendment for its complete growing area, expanding its production from 4-21 grow rooms for year-round production and a focus on high-quality, craft-style cannabis products.
Emerald has also secured 1,000 acres of hemp, which can be used to manufacture CBD products, which are in strong demand. The company plans to primarily process this material through its partnership with Factors R&D Technology, Inc (“Factors”), Canada’s largest nutritional supplement marketer and manufacturer; a relationship that gives Emerald large-scale production capacity as Factors has extraction capacity of about 1 million kilograms of biomass annually combined with softgel production capacity of up to 600M capsules per year.
However, Emerald isn’t stopping there. The company has recognized that there is a significant segment of users with a deep interest in the health benefits of the endocannabinoid system but who do not necessarily want to use cannabis products or enter cannabis stores. To capture this market segment, Emerald has introduced, through its joint venture Emerald Naturals, a cannabis-free herbal and botanical endocannabinoid-supporting health supplement, the Endo product line.
The Endo product line, developed by Emerald’s independent U.S. sister company, is already award-winning and available for purchase in U.S. stores, such as Whole Foods and Amazon.com, and was recently launched in Canada. The proprietary active ingredient, PhytoCann® Complex, in the Endo products offers the potential to be incorporated into an array of supplements, foods and beverages.
Emerald continues to strengthen its intellectual property portfolio and is well-positioned to carve out a unique role as Cannabis 2.0 opens up new opportunities for the sale of products in different delivery forms. Part of Emerald’s strategy includes its Defined Dose™ program, which aims for consistent product characteristics and dosage for inhaled and oral consumption.
In our view, Emerald is one of the few companies well-positioned to benefit from the forthcoming change to Canada’s cannabis regulations. Investors looking for a way to play the second wave of cannabis growth in Canada should take a look.
Disclosure & Disclaimer
Sylva and/or Ross Silver (the sole officer of Sylva and a Registered Investment Advisor “RIS” in the State of Oregon) has been compensated for marketing services. This compensation constitutes a conflict of interest in Sylva’s ability to remain objective in the production of this newsletter. Sylva, or Mr. Silver via his personal accounts or affiliated accounts, such as VJRA Corporation, may be actively buying or selling securities on the companies mentioned in this newsletter.
This newsletter is based upon public information available about the topics mentioned. Sylva has not independently verified such information, and in addition, Sylva has been compensated by Emerald Health Therapeutics, Inc. for digital marketing services for up to a one-year period. Statements in this newsletter that are not historical facts are “forward-looking statements” that involve risks and uncertainties. Forward-looking statements can be identified by the use of words such as “opportunities,” “trends,” “potential,” “estimates,” “may,” “will,” “could,” “should,” “anticipates,” “expects” or comparable terminology or by discussions of strategy. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. Additional risks, uncertainties and other factors are identified under the captions “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in Emerald Health Therapeutics, Inc.’s reports filed from time to time with SEDAR. Sylva and Emerald Health Therapeutics, Inc. disclaim any intention or obligation to update publicly or revise any forward-looking statements, whether as a result of new or additional information, future events or otherwise. Emerald Health Therapeutics, Inc. is solely responsible for the accuracy of that information.
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