How do you improve as an investor? You must admit and then analyze your mistakes. Otherwise, how will you ever make sure you don’t repeat them? So, in that spirit, here are the biggest mistakes I made in 2021.
Not Shorting The Parent Company
In March of 2021, I wrote the below post:
In it, I highlighted two companies, The Parent Company and Parallel (which failed in its attempt to go public via a SPAC six months after my post). This is what I said at the time about The Parent Company:
54% of the company’s revenue in 2020 came from low-margin bulk wholesale. And the higher margin branded wholesale business is projected to grow 250%. But that is nothing on their expectation that their delivery business will grow incredible 10 times in two years!
And the financial projections show this story: the company is currently a low margin business that loses money but is supposed to make a ton of money in the future. They may be able to execute, but investors are taking on a lot of risk if the ramp is less than expected.
On March 2, it was $10.69 per share. It’s now barely above $1 per share.
My reason for not shorting it was primarily fear. At the time I was watching the insanity of the meme stocks where companies with no real future were rallying thousands of percentage points. I also worried what might happen as it appeared back then that the Democrats were going to go full bore on legalizing cannabis.
What is upsetting about this, is that The Parent Company (OTC: GRAMF) would have been the perfect hedge to my bullishness on Glass House and would have mitigated the losses after Glass House (OTC: GLASF) itself fell 65%. My principal lesson learned is even when you are wildly bullish about an industry it pays to have a hedge, especially if one appears in front of you and is so obvious.
Getting the Short-Term Timing Wrong on Glass House
And I have so far been spectacularly wrong on Glass House. I have written about the company a few times:
Here is what I got wrong, while Glass House was working on its SPAC, cannabis and other SPACs started imploding. A simple comparative analysis to valuations would have told me that Glass House was poised to fall 25-30% just on how valuations had changed.
Then, the California price of cannabis suddenly plunged in July. My biggest mistake is that I should have been more patient in buying Glass House. I should know better after 25 years of investing in small caps that when there is a dearth of buyers, these stocks can fall much more than you expect.
The current share price literally values the company below its real estate value and ascribes nothing to its operating business, retail license value or brand value. I believe the company is in a great position to consolidate the California market and continue to believe they own a unicorn of a greenhouse. And most recently I wrote a deep dive about the company and how there are interstate commerce scenarios in which the company could earn north of $12 a share.
The lesson for me is to be more patient when a stock has negative sentiment and the short-term environment is unfavorable. By being more patient, I could have picked up more shares at the currently absurd share price.
Being Wrong in the Short-Term on Cannabis
As shocked as I have been by Glass House, I have been more shocked by the unrelenting selling in the overall cannabis sector. Never did I think that AYR Wellness (OTC: AYRWF) would trade to 5 times my estimate of this year’s cash flows, or less than 4 times my 2023 numbers! I did not foresee that Verano (OTC: VRNOF), which is either the best run or the second-best run cannabis stock would trade down to 6 times 2022 estimates and 5 times 2023 ahead of the entire northeast opening. Why in the world would investors sell ahead of New Jersey, Connecticut, New York, Pennsylvania, Maryland, and Virginia all going full adult use in the next 12-18 months?
And here is where is where experience helps. Sometimes in the short run, stocks go down and sometimes they can trade completely divorced from fundamentals. And if I was trying to trade or time the market, this would be important, but I’m not.
Sometimes your stocks just go down. Consider that Apple (NASDAQ: AAPL), one of the most analyzed and liquid companies on the planet, went down 40% in a five-month period in late 2018 and then proceeded to go up six times from that low. Of course, cannabis stocks, in which investors are restricted, and have massive liquidity problems can go down a whole lot more.
Summary
So, what did I learn? When a good hedge presents itself, put it on. Don’t be in a hurry to buy a stock when things first turn short-term negative and sometimes you just must suck it up and understand that even the most liquid and solid companies can experience heart wrenching drawdowns right before they soar.
I look forward to next January, when I can regale you with all new mistakes I made in 2022!