Key components of this newsletter's strategy include less competition and higher barriers to entry for competitors

Aurora puff piece and short sellers

Liam Kelly

Mar 7, 2023

Aurora puff piece

I saw this piece a few times yesterday on Twitter, but none of the comments prepared me for what I would eventually read. I mean, I know a Puff piece, but this is a puff piece:

Aurora Cannabis CEO’s ‘transformation’ of company offers lessons for rivals
It seems counterintuitive on the surface – bet on a market that’s been around for years rather than following the herd on flashy adult-use cannabis and fantasies of hundred-billion-dollar markets.
But Aurora Cannabis did just that three years ago, wagering its future by betting on medical cannabis at a time other companies were wagering on recreational marijuana, which Canada legalized in 2018.

OK, let me stop you right there. What are we talking about here? There is no difference between ‘medical’ and ‘adult-use’ weed!1 They are the same thing! But, alright — Aurora wants to focus on selling into a ‘medical’ market that regulators have created, fine, got it. Moving on:

It’s working, and it could offer lessons to other CEOs and top executives.
The Edmonton, Alberta-based licensed producer zigged when everyone else zagged, putting the company in the enviable position of having far fewer competitors, a healthy balance sheet and organic growth in overseas medical markets.

What? The lesson is… flee overseas? That’s zigging? If they moved overseas, how is that a lesson for Canadian rivals? Presumably, the reason you are a Canadian cannabis company is because you want to sell cannabis in Canada.2 Is ‘quit and run’ a lesson? I missed that one in Aesop’s fables.3

OK, but wait, they must be like operational wizards?

In early 2020 – before Martin was CEO – an investor presentation boasted that the company’s cultivation capacity was 150,000 kilograms per year, spanning 11 sites in three countries.
That year, Aurora sold 51,441 kilograms (56.7 tons) of cannabis – only one-third of the 152,740 kilograms of marijuana it grew that year.
And among those 11 sites, only four are in use today.
Selling most of them during its corporate makeover helped Aurora save money and halve production in the 2022 financial year – to 73,371 kilograms.
The company sold 50,003 kilograms of cannabis that year – a major improvement over previous years.
Martin said of the excess cultivation: “There was just no path forward to making it work.”

Their “major improvement” was to… sell less cannabis? Look, I get it, but this is not a novel tactic. It’s very common, and it’s always hilariously called ‘rightsizing.’ It means that when companies get ahead of themselves and produce way more weed than they need, they slash production. We’ve already talked about it — it’s what Canopy did.

By the end of the article, CEO Miguel Martin just lays the whole “strategy” out there:

In February 2022, Martin said key components of the medical strategy would include better margins, less competition, higher barriers to entry for competitors and the availability of potential sales in markets that already exist today – rather than hypothetical ones that might exist down the road.
Martin observes that medical markets outside Canada are numerous and experiencing steady growth.
“Medical cannabis is the absolute lion’s share of profitability right now,” he said, referring to where marijuana companies are making money today.
“(Overseas) you only compete against a couple of companies (in medical), unlike Canada, where we have 250. So these (medical markets) are real, they’re today. They’re great economics.”

Incredible. Finally, a corporate cannabis CEO admitting what we all already know — their only strategy is to limit competition. And they can’t compete when other companies are allowed to enter the market.

I know a rising tide lifts all ships, but… a sinking ship also kills its passengers. Let’s try to do better at distinguishing between the two.

Cannabis short sellers

The opposite of a puff piece is an equity research report from a short seller. A short seller is someone who borrows a stock from a broker, sells it in the open market, and then eventually buys back the stock and returns it to the broker. Why do they do this? They are betting that the stock price will go down in the time between they sell the borrowed stock and the time when they have to buy it back and return it. If the price does indeed decrease, they earn the “spread” between the price they sold the stock for and the price they bought it back for.

This can be a very lucrative strategy; it can also be extremely risky.4 The market may not know what you, the short seller, know. That's good, or otherwise you wouldn't be able to make any money. But you eventually do need the market to learn of the negative catalyst — generally some sort of fraud or complicated financial trickery — so that everyone else can sell and the price goes down.

How do you do that? You short the stock, and then put out a “research report” that explains why you think it’s a lemon. I put research report in quotes because it’s really more of a hit piece. For a view into this world and the people who make their living as a “short,” I recommend this piece from Evan Hughes at The Atlantic called, “The Man Who Moves Markets.” And there’s this amazing nugget from Andrew Left, a notorious short:

In one report about a company called Medbox, he wrote, “You have to be smoking crack to buy this marijuana stock.” He issued a dare to the founder and CEO: “Your first reaction will be to want to sue me. I hope you do!”

Now that’s more like it! In case you were wondering, Medbox was eventually outed for a fake weed vending machine. This is the one scenario where I’ll say it’s good to be a narc.

Other Puff

Also, note the switch from ‘cannabis’ to ‘marijuana’ — why?

Though perhaps not I guess!

‘The Tortoise, and the Hare who decided to run a race overseas instead.’

There is theoretically unlimited risk (and loss potential) because there is no ceiling for a stock price; there is, however, a floor ($0).

2 Comments

John

Mar 7

Curious if THCa hemp is on your radar? Have sampled some and it’s essentially the same effect as cannibis.

The 2018 Farm Bill has this astonishing loophole allowing Hemp to have high amounts of THCa which converts to THC when heated. I’ve read the Farm Bill gets reauthorized in the fall so am curious to hear of any groundswell to redefine Hemp.

Hemp growers have far fewer restrictions on sale of THCa products than state cannibis vendors. They get normal tax write offs, access to banks and can send their products in the mail across state lines. All the Cannibis corps you cover will have a hard time competing, so if any Hemp growers go public that would be an interesting opportunity.