YOLO: September 2019 Portfolio Manager Review
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/yolo.
Almost across the board, cannabis stocks were negative in September. Only our largest holding, and consistently one of our best performances, Innovative Industrial Properties (NYSE: IIPR) was up 4.44% in September.
As a group, cannabis stocks are being shorted aggressively. Short interest in cannabis names has increased and basically all cannabis stocks are being attacked. Most short sellers begin with fundamental short ideas, but then operate technically for the most part in their short sell or cover decisions. That means they will short just as long as they possibly can. In general, short sellers believe they can get out of their short positions very quickly – leaving someone else holding the bag. Even though cannabis stocks are very expensive to borrow, the short sellers tend to milk their short positions for every penny of profit they can get. And shorting cannabis stocks has turned into a herd mentality.
Vaping news hurt the stocks, but in my opinion, for irrational reasons. The recent vaping “crisis” of sicknesses and deaths have been focused on illegal, black market cannabinoid products. In a sensible world, it should actually be GOOD for cannabis stocks. No one wants to stamp out the low priced, black market cannabis products more than the publicly traded companies with their higher priced, safe, and legally marketed products.
A number of companies, especially the largest Canadian operators, have suffered recent reduced revenue expectations. Top line estimates are coming down among many of the larger Canadian LPs. Canopy’s recent sales volume and net revenue were disappointing with both coming in below street estimates. Unexpected regulatory uncertainty around “Cannabis 2.0” is adding to Canadian issues. Some jurisdictions may seek to limit new cannabis derivative products. There’s at least delay and uncertainty.
In my opinion, none of these things fundamentally justify the massive cannabis selloff we’ve seen. But such news has fueled the short sellers to continue. With everything being sold without regard, it brings to mind the creepy saying about “throwing out the baby out with the bathwater”.
In many cannabis securities, particularly in U.S. related stocks, short sellers have ignored positive news such as the SAFE Bank Act approval in the House, recent company executive stock purchases, new license approvals and acquisitions, and even revenue growth and positive earnings.
The Good News:
I believe cannabis stocks are going to bounce back; I just don’t know when exactly. With basically all cannabis and CBD stocks selling off, and selling good news right along with bad, it doesn’t appear to me that the selling is fundamentally sound. I think the selling is now far overdone, and mostly technically driven at this point. Many stocks that I like and are in YOLO’s top ten holdings are now severely undervalued, according to top analysts in the cannabis space. And, as I stated above, the so-called vaping crisis is nonsensical. It doesn’t seem to involve legal products offered by legal, publicly traded companies. Illegal drugs are dangerous. Cannabis stocks are going to bounce back. But there’s more to it than that. I believe cannabis stocks have the potential to bounce back extremely hard and fast. Once its starts, the upward trajectory could be extremely aggressive. Short sellers can and will cover their positions quickly when needed. With cannabis short interest very high and stocks with comparatively low floats, there could be a mad rush of short covering and shorts squeezes.
If cannabis stocks do bounce back and grow, I believe YOLO is strongly positioned for growth. I don’t think the bounce back growth is going to be led by “the usual suspects” of the largest Canadian growers. We underweight stocks like Canopy, Tilray, and Aurora. We choose not to own Cronos.
- U.S. cannabis exposure. YOLO has significant U.S. cannabis exposure through U.S. multi-state operators (MSO’s) which, in general, trade at much more reasonable valuations than their Canadian counterparts. While still growing state by state, the U.S. cannabis market is many times that of Canada’s. Many U.S. operators are seeing solid growth and earnings and we’ve chosen to overweight MSO’s, such as Curaleaf (OTC: CURLF – swap), Green Thumb Industries (OTC: GTBIF – swap), Trulieve (OTC: TCNNF – swap), and other U.S. focused companies like Innovative Industrial Properties (NYSE: IIPR), Charlotte’s Web (TSX: CWEB), and cbdMD Inc (NYSE: YCBD.
- Pure cannabis exposure. YOLO’s fund name is AdvisorShares Pure Cannabis ETF for a reason. All of its constituent companies are primarily in the cannabis business. YOLO doesn’t own tobacco, alcohol, fertilizer and weed-killer companies, lighting companies, or drug testing companies. These companies haven’t sold off and become seriously undervalued like true cannabis companies. They don’t have the same upside potential from today’s prices.
- Active portfolio management. Cannabis is fast paced, rapidly changing and requires a great deal of information. We’ve chosen to underweight (or avoid completely) the largest Canadian cultivation companies that some indexes have as their largest positions. In addition to U.S. companies already mentioned, we overweight companies like Village Farms International (NASDAQ: VFF), and Organigram Holdings (TSX: OGI). As an actively managed ETF, we can trade at any time that we see fit and do so in a tax efficient manner with care and expertise. We aren’t forced to rebalance on a fixed schedule and size each month or each quarter.
Since its launch on April 18 of this year, AdvisorShares Pure Cannabis ETF (NYSE Arca: YOLO) has continued to experience in-flows (ETF creation units) of new investor money each month, even though cannabis stocks have very obviously performed badly. I appreciate that people are smart enough to average down and try to buy low. Even during this rough ride, investors seem to feel (as I do) that cannabis stocks will bounce back and grow.
|Ticker||Security Description||Portfolio Weight %|
|IIPR||INNOVATIVE INDUSTRIAL PROPER||6.36%|
|VFF||VILLAGE FARMS INTERNATIONAL||5.78%|
|OGI||ORGANIGRAM HOLDINGS INC||4.40%|
|TCNNF||TRULIEVE CANNABIS SWAP REC||4.28%|
|GTBIF||GREEN THUMB INDUSTRIES SWAP REC||4.11%|
|CURLF||CURALEAF HOLDINGS INC SWAP REC||4.04%|
|CWEB||CHARLOTTES WEB HOLDINGS INC||3.63%|
|CRBP||CORBUS PHARMACEUTICALS HOLDI||3.60%|
|GWPH||GW PHARMACEUTICALS -ADR||3.55%|
As of 09.30.2019. Cash holdings not included.
Please see our complete Fund holdings at https://etf.as/YOLO. The holdings details are updated each market day.
During the month of September, no new positions were added. We do always manage the fund in attempts to take advantage of opportunities and to limit risks. Among September trades, we further reduced Canopy Growth, Aurora Cannabis, Aleafia Health, and Aphria. We increased positions in Sundial Growers, Valens GroWorks, cbdMD, GW Pharmaceuticals, and Corbus Pharmaceuticals.
NOTE – Short selling is an investment or trading strategy that speculates on the decline in a stock or other securities price. The investor ( a short seller) borrows a security and sells it on the open market, planning to buy it back later for less money.
Past Manager Commentary
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.
There is no guarantee that the Fund will achieve its investment objective.The Fund is subject to a number of risks that may affect the value of its shares. This section provides additional information about the Fund’s principal risks. The degree to which a risk applies to the Fund varies according to its investment allocation. Each investor should review the complete description of the principal risks before investing in the Fund. As with investing in other securities whose prices increase and decrease in market value, you may lose money by investing in the Fund.
Cannabis-Related Company Risk. Cannabis-related companies are subject to various laws and regulations that may differ at the state/local and federal level. These laws and regulations may (i) significantly affect a cannabis-related company’s ability to secure financing, (ii) impact the market for marijuana industry sales and services, and (iii) set limitations on marijuana use, production, transportation, and storage. Cannabis-related companies may also be required to secure permits and authorizations from government agencies to cultivate or research marijuana. In addition, cannabis-related companies are subject to the risks associated with the greater agricultural industry, including changes to or trends that affect commodity prices, labor costs, weather conditions, and laws and regulations related to environmental protection, health and safety. Cannabis-related companies may also be subject to risks associated with the biotechnology and pharmaceutical industries. These risks include increased government regulation, the use and enforcement of intellectual property rights and patents, technological change and obsolescence, product liability lawsuits, and the risk that research and development may not necessarily lead to commercially successful products.
Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times.
Holdings and allocations are subject to risks and to change.
The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.