Bigger Isn’t Better

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Big Cannabis took a critical turn this week, with the major cultivators I track rebounding 13 percent. They still have a long way to go before reversing all the summer’s losses, but this is a step in the right direction.

The catalyst, ironically, was industry giant Aurora Cannabis Inc. (NYSE:ACB) deciding to exit its 10 percent stake in relatively tiny Green Organic Dutchman Holdings Ltd. (TSE: TGOD).

In theory, the investment gave Aurora the right to buy 20 percent of Green Organic Dutchman’s crop at wholesale prices. This would boost its overall capacity at a reasonable price, while keeping the door open to a full-fledged acquisition.

But the reason markets are cheering is that cashing out now demonstrates that Aurora’s management recognizes that boosting production is not the goal. This is a commodity business. More supply is not good.

Sometimes you need to give demand time to catch up with supply. For Aurora, there’s evidently enough cannabis flowing through the system now. They don’t need more.

And since Aurora bought into TGOD early, they’re exiting the relationship with roughly a 70 percent profit. Other investors who believe in TGOD as a going concern can take over from here.

What turned the Big Cannabis stocks around this week was the simple admission that they’ve gotten too big. It’s time to get smaller.

Likewise, we’ve steered clear of all but the best Big Cannabis cultivators in my Turbo Trader “Marijuana Millionaire Portfolio.” The stocks are too big for their business models.

I think it’s time to get a little smaller. Companies like TGOD may be where the real future of this industry will play out.

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After all, the FANG stocks of Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google, more formally known as Alphabet (NASDAQ:GOOG), have run out of steam. It’s time for the baby tech stocks to take their place. That’s true in any mature industry. Cannabis is no exception.

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