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Danny Moses Talks Cannabis Stocks, Private Markets: 'I Don't See A Reason Right Now To Short'

December 7, 2018 2:04 pm
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Danny Moses Talks Cannabis Stocks, Private Markets: 'I Don't See A Reason Right Now To Short'

Danny Moses is a well-known investor who navigated the 2007-2008 financial crisis as the head trader at Steve Eisman's FrontPoint Partners. The story of how FrontPoint made a killing by betting against collateralized debt obligations has been documented in Michael Lewis’ book “The Big Short,” which was later adapted into a film by Adam McKay.

But while Moses is often identified as a big short seller, there's one industry he's long: cannabis.

Moses in October was appointed as the third independent member of Merida Capital Partners' six-person investment committee. Merida is a private equity firm focused on fundamental growth drivers in the cannabis space.

Benzinga recently sat down with Moses to learn more about what makes him so bullish on the cannabis industry.

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No Point To Short Right Now

On a relative basis, Moses said one might want to consider going long U.S. producers and shorting Canadian cannabis companies

On an absolute basis, Moses doesn't see any reason to short the cannabis industry in general.

“For short purposes, nothing in cannabis really excites me […] I don't see a reason right now to short," he said. "That's only because when you go to short a company, a lot of times there's a structural issue with the company — whether it is too much debt or whether the product itself is becoming out of date."

The reason why there aren’t many opportunities for short selling among cannabis stocks, according to Moses, is that the market is still growing and isn't fully developed yet to show investors whether there are certain flaws short sellers can take advantage of.

How To Analyze Cannabis Stocks

Moses focuses on several things when analyzing a potential investment.

“A few things I look at, obviously, are the make-up of the company, corporate governance, everything from shares outstanding to how the executives are paid… How they pay themselves and, do they really even care about the shareholder? Or are they using the company as their own piggy bank?”

After that, Moses delves deeper, analyzing the company’s balance sheet, access to capital, product strategy, shareholder base and other aspects.

“Many of these companies are Bulletin Board stocks in the U.S. or CSE in Canada, so you’ve got to be very careful,” he said.

U.S. Vs. Canada

We’ve been hearing a lot about Canadian cannabis producers being overvalued. This seems to hold especially true for U.S.-traded Canadian companies such as Canopy Growth Corp (NYSE:CGC), Aurora Cannabis Inc (NYSE:ACB) and Tilray Inc (NASDAQ:TLRY).

But as more companies go public and more Canadian companies choose to list on major U.S. exchanges, this removes the scarcity, Moses says: “And therefore valuations start to come in [as a deciding factor for investment]."

It’s important to focus on U.S., as cannabis companies that operate in states with more potential.

“You've got to figure out which states offer the most compelling returns and then target those companies you think meet that criteria,” Moses said.

Compelling Opportunities In Private Markets

Within the cannabis industry, Moses considers there are more interesting opportunities in private equity.

“Capital is starting to grow in this space,” he explained. “If you can find the right management team, the right product in the private space, you can latch onto an investment at a reasonable valuation. And if it works, more than likely you are looking at a tremendous return.”

Moses said an important factor that makes the private markets compelling is that there are talented people getting involved, both from the companies’ perspectives and money-management.

"These people can help a company grow and get access to capital in the private space. So being able to latch onto a private company, help build the board, help build strategic relationships, to me, if you have the time and effort, can prove to be very fruitful," he said.

Moses invests in the cannabis private equity through Merida Capital. As a member of Merida’s investment committee, Moses gets a lot of feedback and analysis tips from the fund’s managing partner Mitch Baruchowitz and his team.

"So, I've kind of been in an enviable position where I have access to great resources and it actually allows me to do more digging,” he said.

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