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DAILY DIARY

Timothy Collins

A Few Thoughts on Apple, CannTrust and eSports

I know I haven't talked much about the overall markets today. My analysis falls well short of Dougie in this regard. I tend to trade or focus on specific sectors with volatility and action. That means I spend a lot of time with cannabis, eSports, China, and 5G.

A few thoughts as you wind down for the day.

I see a few folks disappointed in the recent Apple MacBook Pro along with the cancellation of AirPower. One has to wonder what will be the go-to stock once it is no longer Apple (AAPL) . I'm not even sure Apple remains the go-to stock. It may be more FAANG stocks as a group, but I've got my eye on Xilinx (XLNX) . The company is hitting on every 5G cylinder at the moment and I don't believe it will slow anytime soon. This won't take the place of Apple, but I think it might become a hedge fund hotel for the next 12-18 months.

CannTrust (CTST) wasn't a name I had the opportunity to touch on today. The company is another one of those cannabis names showing 100%+ year-over-year revenue growth, but with losses greater than anticipated due to expansion.

I hold the CEO in high regard. He brings a business acumen from outside the industry that I believe will be necessary for success as these companies transition from basement hobbies to legitimate businesses. When the banking side of the world truly opens to the cannabis world, CannTrust will be well suited to take advantage of financing opportunities in optimum fashion thanks to CEO, Pete Aceto's background and experience in the finance industry.

The current concern here is their cash cost per gram for high-grade medical cannabis is still near $3.00, but from what I've seen, they offer some of the highest-grade cannabis on the market for patients. This touches back to our quality vs. quantity discussion below. Add in the property in Pelham that wasn't an easy get/approval and I think after the earnings hangover wears off, CTST can head higher.

On the eSports side (and somewhat on the China side), I've maintained a focus on Bilibili (BILI) and Huya (HUYA) as well as YY (YY) . Alphabet (GOOGL) is getting into the game, and certainly worth a watch. Extreme Networks (EXTR) is a smaller name trying to reinvent itself in the space as well. Also, in China, don't sleep on Tencent Music (TME) . This is still my favorite name in the streaming space, and probably in China right now.

In terms of the overall market, there simply aren't a lot of short catalysts. I understand the difficulty in chasing, but if you are long, I would simply maintain a trailing stop or sell in partial lots so you can participate in any additional moves higher.

I enjoyed my time here today. Have a great evening folks.

Position: Long CTST, XLNX, BILI, HUYA, TME

About Those CBD-Infused Beverages

I've noted a few names from the comments that may be involved in the CBD-infused beverage market in the form of New Age Beverage Corp. (NBEV) and Constellation Brands (STZ) . While I'm a big supporter in the potential of CBD and cannabis, I have my reservations around CBD-infused beverages. Note, I view non-alcoholic THC-infused beverages differently, but I'll get to that in a second. 

CBD-infused beverages will get a lot of play in the early going so that will be a positive, but I fear they will fade as education grows. Drinking a beverage or eating a CBD gummy avoids the stigma of vaping and it's more convenient than drops. Tastes better too. Unfortunately, CBD-infused beverages and CBD edibles may be more novelty than health supplement for one simple reason: bioavailability. 

Oral consumption is the WORST manner in which to introduce CBD into the body. Would you believe me if I told you entrance via suppositories actually was twice as good. Granted, I think we'd all happily power through a second serving of CBD gummi bears before selecting that alternative. On average, only 6% of the CBD taken orally will be absorbed into the body. 

Six percent. 

When you compare that to the 12%-35% you can get via delivery through the sublingual gland under the tongue or 40%+ via vaping, believers in the benefits of CBD will likely steer away from oral consumption once they are educated.

True there are different methods of delivery. Encasing the CBD in a lipid/liposome should increase bioavailability, but again this would be more effective in sublingual delivery.

This means we should temper our long-term expectations for CBD-infused food and beverage. 

In terms of THC-infused non-alcoholic beverage, it aims for a different result, so success will likely depend on early consumer feedback. Ironically, THC-infused edibles run into their own problem versus inhalation. The challenges associated with THC-infused edibles will also require education. Since the THC is ingested, it will take longer to affect the consumer. Sometimes the consumer will fall into the notion that the edibles "aren't working," so they will eat more. And then some more.

Unfortunately, the lagging effect does catch up and when it does the consumer runs the risk of overdosing. I'm not talking about a meth OD where the person's life is in danger, but there are possible negative short-term impacts on the users. Highs can last far too long or psychologically run too deep. Will that stop edibles from becoming popular? Heck no. There's no stigma for the soccer moms and dads to chew on a few gummies, plus they are darn convenient but edible CBDs won't get the same benefit.

So, I'd be wary on the long-term view for companies focused on CBD-infused oral consumption products. There are better opportunities in the cannabis/hemp space as we've begun to outline.

Position: None

Multi-State Cannabis Operators

The fact that everyone wants to know everyone's thoughts about Canopy Growth (CGC) should tell you everything you want to know about CGC's current valuation and ownership. In fact, the Canadian LPs (Licensed Producers) are a tough game right now. These are the companies with a license to grow and/or sell legal medical and recreational cannabis. Health Canada, the federal department for public health, grants approval.

In the States, we have turned our attention to MSOs (multi-state operators). The name implies what they are. There are companies that have operations/licenses in more than one state. Until the passage of the 2018 Farm Bill, the valuation of MSOs significantly trailed that of Canadian LPs. Despite the Farm Bill passage, MSOs still struggle with the inability to bring product across state lines. They do have the benefit of sharing IP, equipment, branding, and even employees across those lines. Given the temporary barrier to entry caused by limited licenses we've witnessed, many enter markets through acquisition to supplement organic growth. While regulatory risk has decreased, it hasn't vanished. As is my view with limited licenses, I expect the regulatory challenges to diminish over the next few years as well. Neither will vanish completely, but they should change. Limits on the number of licenses should rise while the regulatory picture becomes clearer (thus easier to manage).

Often these companies are vertically integrated, sometimes not by choice but by requirement. This includes everything from growing to extraction to product to sale. And as I said earlier, right now bigger is better. Obtaining new licenses is easier when you have existing licenses, even if it is another state. Regulators warm to a company that already has an established standard of procedures.

One sidebar we may see as we wait for the FDA to rule on CBD (non-THC hemp products) is the addition of CBD-only licenses. Currently, Virginia has implemented this approach granting a handful of licenses. Mail is the CBD distribution of choice for most companies since it is permitted without the same risks as brick and mortar sales. Still, companies selling CBD products cannot make health claims, so branding and creative marketing continue to rule the day. At some point quality will matter, but for now there's no need to detail much in the way of product composition and bioavailability beyond some buzz words.

With its targeted acquisition of Origin House (ORHOF) announced this morning, Cresco Labs (CRLBF) immediately becomes a top name in the MSO chatter. Curaleaf (CURLF) , with its 41 locations in 11 states is another name worth a look. The company will reach nearly 75 stores before the end of 2020 as it serves nearly three-quarters of the U.S. market. Lastly, I will add Village Farms (VFF) into the mix. I've written about this name before. Lastly, Acreage (ACRGF) will need to be included as it is the largest of the MSOs in the States.

This doesn't currently fall under the MSO space, but with a massive greenhouse in Texas (which is pretty close to a multi-state by itself), along with today's announced expansion of its greenhouse facility in Canada, Village Farms is set to join the thin air of cannabis companies operating on a scale level in both Canada and the United States.

When examining MSOs, investors will want to consider not only how many states, but what states a company is licensed. Additionally, check out the number of dispensaries as well as their (city) locations, cultivation facilities, processing facilities, and manufacturing licenses. After writing all this, I feel like I'll need to put together a spreadsheet for easy, visual comparison of these. Guess I have some homework.

Position: Long VFF, CURLF, ORHOF, CRLBF

The Upside Potential of Telaria

This morning, I talked about Unicorn Riders, which can make a profitable trading thesis, but often falls short in terms of an investing thesis. There is an investing side of that coin as well, which involves finding "The Next." Folks are always talking about finding the next Amazon (AMZN) or the next Apple (AAPL) or the next Netflix (NFLX) , but often they are thinking too big. Some companies are unique. There won't be a next.

However, if we adjust our thinking, we can find "The Next," but it won't be a 12-figure market cap company. Instead, look for a company in the $50 million-$500 million market cap that can become a $5 billion-$15 billion company.

Over the past year, The Trade Desk (TTD) has risen nearly 300%, despite the poorly timed objections from noted short-seller Citron (CTNI) . The company has been one of the biggest beneficiaries of cord-cutting by selling programmatic ad selling via mobile, over-the-top (OTT), and smart TVs. In short, this is an ad market that can bypass broadcast/cable television.

While TTD has ballooned to an $8 billion market cap, now might be the time to look towards another small player in the field: Telaria (TLRA) . Telaria is a fully programmable software platform specifically engineered for digital video. Like TTD, TLRA supports Smart TVs, mobile, and OTT in which it acts as a matching engine, designed to pair buyers of advertising with a publisher's sellable video advertising. Additionally, within the platform, TLRA provides publishers with real-time analytics, data, and decision tools.

While TTD has operated on the demand of programmatic ads, TLRA functions on the sell-side. They aren't competing for the same clients. Rather than competitive, they are somewhat complementary. Cheddar, one of TLRA's clients, is of interest to me as I see it on the television of many bars and restaurants in our area. It's a great spot for ads with a captive audience.

TTD trades at 29x the market cap of TLRA despite sales only 8.5x greater although TTD is profitable while TLRA is approaching breakeven performance.

Perhaps, the most intriguing aspect is Telaria's discussions of offering a subscription-based pricing model with certain publishers. Success with such a model would offer visible, consistent revenue that should propel the valuation higher.

No small company is without its share of risk, but with no debt, over $40 million in cash, and profitability on the horizon, TLRA may offer greater cord-cutting upside potential than names like Roku (ROKU) or The Trade Desk.

Position: None

Cannabis Enters Its Most Challenging Stage for Investors and Traders

Not to be outcome by a unicorn company, the unicorn sector of the markets, cannabis, is unleashing a blitzkrieg of news this morning.

On the acquisition side, Cresco Labs (CRLBF) is buying Origin House (ORHOF) (CannaRoyalty) this morning for a small premium. It appears to be around 5% versus Friday's close, although much larger when compared to the past 30 days and twice the price the stock from the beginning of 2019. When all is said and done, this will likely be the first billion-dollar cannabis merger in the U.S.

Rather than discussing the intricacies of this particular deal, I want to touch on the confusion it will cause with investors: valuation.

As I see it, cannabis is now just entering the midpoint of the valuation cycle.

The first stage is the hopes and dreams stage. This is the time where speculation runs wild, the sky is the limit for EVERY company with the word hemp, CBD, cannabis, marijuana, extraction, dispensary, and whatever other cannabis-related terms you can place in your company name or description. We've seen it with the dot-com era. I remember when the words "gene" or "genome" meant buying hand-over-fist if you wanted fortunes heaped upon your portfolio. Or how about DSL? And who could forget blockchain? So recent, but remember you can't spell crypto without crypt, which is where many of those companies and currencies now lie.

We've reached the end of that first stage. I'm not sure if we've completely cleared it. The stages don't simply end one day with the next immediately beginning. It's a transitional process.

We've now entered stage 2. This is your groggy-eyed waking up to a wonky alarm after a night of hard partying and not enough sleep. A few realities are bound to set in, some good and some not so pleasant. The first few minutes are spent trying to assess exactly what happened in your dream. In terms of cannabis names, it equals rationalizing valuations. We've JUST entered this stage.

With an ever-growing number of cannabis companies becoming public and listing on the big boards in the United States, investors are finally getting a look behind the curtain. As quarterly reports pour in, the fundamental story begins to grow. Still a dream for some and a nightmare for others.

Is one quarter really enough to judge/value most of these companies? In my view, no. Bulls will point to the ridiculous triple-growth rates while bears will argue it is easy to grow that much when you've had virtually no revenue. Both sides have a case. Bulls will argue demand significantly outstrips supply, so all the revenue numbers can and will be larger. Bears will counter that demand for the next few years is already priced into the stocks. If we were to continue down the fundamental path, I'd say the bears will have the easier argument to win, but we have a wrench in the system: mergers and acquisitions.

Money, big money, is flowing into big names at big valuations. Companies like Altria (MO) , Constellation Brands (STZ) , and Molson Coors (TAP) are either stuck in stage 1 or they've glimpsed ahead at stage 3 already. Furthermore, we're seeing consolidation within the sector, so you can argue your fundamentals all you'd like but if a company like Cresco is willing to pay the Origin House longs a price they are willing to accept, then your bearish sentiment or short position is wrong. Price wins. End of story. It matters not if Cresco overpaid, at least not in the short term.

Yes, there will be plenty of names that flame out. That's also what we start to see in stage 2.

Stage 3 will bring us to the light of the day. Reality will set in. The market, for the most part, will find an agreeable valuation method and the vast majority of the companies will be judged under those parameters. I imagine as cannabis becomes commoditized it will be centered around lowest-cost supplier, branding, and uniqueness. Size will also be a factor. Don't let anyone tell you size doesn't matter. For the better part of the next decade, it's going to be all about size.

So, congratulations, you've now officially entered the most challenging part of trading and investing in cannabis names.

Position: None

Riding on a Unicorn

Will 2019 be the year of Unicorn? While the year may not be thought of in terms of pure volume, if we do indeed see Uber and Pinterest joining Lyft (LYFT) with public offerings this year, then we can certainly begin the debate. Should Slack, the We Company (WeWork), Casper, or Palantir join the mix, then I'd conclude 2019 is a full-on Unicorn year. The only one I have any interest in as a public company in terms of owning is Palantir, but it is likely all of those issues will make fantastic trading stocks in the first 18 months of existence.

As we see more unicorns hit the big boards, expect to see more "unicorn riders." These are associated companies, whether suppliers or related businesses, that are already public but much smaller or relatively unknown.

The most recent example of this is Hyrecar (HYRE) . The company works as an intermediary matching drivers without cars to car owners without the want or ability to be drivers. I like to call it the Tinder of Ride-Sharing. The company was the No. 1 independent activator of new Lyft drivers in the U.S. over the past year, so the link to the excitement around Lyft wasn't a difficult one for traders to establish.

These unicorn riders often become the epitome of buy-the-rumor, sell-the-news. Let's take a look at the action on Hyrecar throughout the Lyft IPO.

December 6, 2018 -- Lyft files a confidential submission for IPO. Hyrecar was trading around $1.75.

March 1, 2019 -- Lyft files its IPO. Hyrecar now traded at over $5.00.


March 18, 2019 -- Lyft proposes million shares between $62-$68 per share. Hyrecar hits an all-time high intraday at $8.00.

In the time it took Lyft to move from confidential submission to filing, HYRE nearly tripled in value. In early February, the company did report preliminary numbers, but the stock already traded around $4 at the time, so clearly that wasn't the driver.

March 27 -29, 2019 -- Lyft raises its price range, prices at the top of the range, and opens up 21% on its first day. During this same time, Hyrecar continues selling off, then reports revenue and gross profits 6% and 10%, respectively ($200,000 each), below guidance provided less than two months earlier.

Hyrecar is now back to its March 1, 2019, levels when Lyft filed its IPO.

Hyrecar is now left to operate under its own merits for the most part. I imagine some traders will keep it on the screen (I will) as it will come up from time to time when Lyft makes some announcement. Furthermore, I expect we'll see it make the rounds again as we get closer to an Uber IPO.

This isn't about Hyrecar, though. Rather, this is about looking to benefit from Unicorn Riders for upcoming IPOs. Unfortunately, getting a jump on associated names now won't help much. Whether trader or investor, I would want to see the same timeline as Lyft -- therefore, I want to see submission and formal filing. Also, I should consider exiting, partial sales, and/or implementing tight/trailing stops once pricing of the associated unicorn has hit the tape.

The excitement doesn't often last, but traders who can identify the stocks early, can enjoy a profitable ride on a unicorn.

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Position: None
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-35.69%
Doug KassOXY12/6/23-14.96%
Doug KassCVX12/6/23+10.20%
Doug KassXOM12/6/23+12.04%
Doug KassMSOS11/1/23-28.97%
Doug KassJOE9/19/23-16.61%
Doug KassOXY9/19/23-26.35%
Doug KassELAN3/22/23+33.30%
Doug KassVTV10/20/20+63.03%
Doug KassVBR10/20/20+76.55%