Dmitry Zaytsev’s 2019 Cannabis Industry Outlook

Analyst Dmitry Zaytsev shares his expectations for the cannabis space in 2019. Zaytsev cautions retail traders to have a trading plan and suggests current stock values are providing good entry points for a number of cannabis names. Zaytsev discusses using puts as an investing strategy in relation to current stock volatility. He thinks cannabis stock prices can stabilize in Q1 and Q2 of 2019, as quality takes centre stage. He believes Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) still leads the pack and an entry point in the low 30s for Canopy is an attractive long term position for investors. Despite this optimism, he thinks analyst projects for 2019 revenues in the Canadian recreational space are extremely aggressive.

Transcript:

Ben Smith:    We want to welcome Dmitry Zaytsev to the program today. Dmitry, welcome.

Dmitry Zaytsev:    Happy to be here.

Ben Smith:    Okay, I guess we’re going to start out with talking about or trying to get your feelings about the macro environment for stocks in general, and also the cannabis market. Obviously, we’ve had a lot of, you know, capitulation lately. How do you see this playing out into the Q1 of 2019?

Dmitry Zaytsev:    Yeah, so I think the market generally has been marked by lower lows, supports breaking, and generally a really pessimistic environment; and this is, you know, we’ve chatted before with James and others on this program, but it’s really important to have a trading plan and to have a lot of cash going into these kinds of scenarios. Because look, there’s opportunities left and right, not just in the cannabis market, but globally speaking.

And so generally what you’ve seen is a lot of fear, a lot of liquidity being pulled out from the market, and the Fed not really being as cooperative as some people fear. I think this is, you know, is providing, and will provide a buying opportunity, and I think it’s time to start looking at names you’re interested in and start thinking about some long-term positions.

Ben Smith:    Okay. So I know in our writings and my appearances on the show, I’ve been really stressing that easing into positions in the cannabis space, for example, or growth stocks in general, is what you want to do. It doesn’t appear that we’re in a market environment that’s going to be very forgiving for bad entry points. Now, would you agree with that? And also, the over-leveraging aspect. Retail investors tend to over-leverage. Now, would you agree that easing into positions, getting good entry points and not over-leveraging on, if you’re investing in growth stocks, is the key to 2019 surviving whatever may come?

Dmitry Zaytsev:    I think it’s a psychology thing. So like you said, a lot of retail investors, and there are studies on this, they go all in on the weed stocks, or on high-growth, you know, Shopify or whatever, things, and generally they say to themselves when things are going up ‘I’m in it for the long term’. The reality is, when you’re putting 100 percent of your money into something and it goes down 50 percent or more, you start panicking, and especially if you didn’t do your due diligence and you really weren’t there for the long term, you don’t know what you’re holding, why you’re holding it. So I think generally speaking, what you’re saying, slowly easing into long-term positions, absolutely. You know, the way you should be doing it is honestly just setting a bunch of orders and good to cancel orders and just forgetting about it, if you’re really in it for the long term.

And if they hit, they hit; you check every once in so often and you get on with your life. Otherwise, I would say, if you’re trading it, you have to have a trading plan, and like an example today, like we just chatted about earlier; I thought, you know, maybe Canopy bottomed out; looks like it was at the bottom of the range; I bought some. It went up. I’m like Oh, looks like I’m right. Rolled over, it broke the support, I covered. So I have a lot of cash, there’s lots of opportunities out there, I’m not just going to throw myself into this market until I see some green shoots.

Ben Smith:    So that’s a good point. So it seems that in your mind, anyway, it’s a psychology aspect: you know what your point is, you did the low bottom fishing, you knew what that point was, it broke it, and instead of doubling down or perhaps purchasing more and putting more money into what could be a poor short-term move, you just eliminated that mistake right now. So as a trader, thinking more short term, is it one of the keys, would you say, is to exit positions as soon as it going against your, you know, base-down level? Or your, you know, final –

Dmitry Zaytsev:    Well, it just depends, right? Everybody has a different approach, but generally speaking, if you don’t have a plan to what you’re doing, you’re just flying by the seat of your pants, and you have to accept all of the pain that comes with that, right?

So when you have a plan, you know exactly what you’re doing, and you’re just going to say, Yeah, I’m willing to make this, you know, at some point Canopy is going to rally. Will it rally to $76? I don’t think so, not in the short term, maybe later on. But the cannabis space is prone to 10, 20 percent rallies over a couple of days, weeks, whatever, and so you say, Hey: I’m willing to put my feet in and see if this goes. And if it does, my upside is huge. But my downside, okay, like I’m down 1 percent on the position, I’m going to cut it. So it’s just managing the risk.

Ben Smith:    Right. Now I know a lot of our viewers know that you specialize in options trading, and with prices so low right now in weed stocks, or descending over 40 percent in the last three months, would you – are you writing puts now? Are you thinking about writing puts? Because the downside might be a little bit lower right now, now that we’ve had this outsize move?

Dmitry Zaytsev:    Yeah, so what I’ve been doing is just generally speaking, I was writing puts even before this, and on various names; a little bit on Aphria, but mostly on Canopy, that was my go-to. And when the Aphria short report occurred, I covered all of my non-Aphria puts and then I managed that position differently, because I was just trading around it. And so I covered a lot of those puts.

Now, like you said, things are starting to come in, so I have rally just started writing some puts. Not too aggressively; I think –

Ben Smith:    So you’re kicking the tires at this point?

Dmitry Zaytsev:    I’m kicking the tires, but not all in. absolutely, not all in; I’m kicking the tires, I think the implied volatility could be a little higher. It doesn’t seem like the pricing has gone up as much as I would like it to, but yeah, if I can, for example, the puts that I’m writing are typically two-ish months out, and if I can get Canopy sub-$30 for a long term position and get paid for it, I’ll do that.

Generally speaking, in terms of going long on call options, right now that could be a losing proposition because you don’t know how long this sort of situation, you know, downtrend, is going to go. I would say watch to see the S&P and global markets really stabilize and volatility to come down, and maybe some sideways action a little bit, and at that point, I would start looking, scouting out some positions I might want to get into, maybe leading into summer.

But you also have to consider catalysts and risks that are going to be coming up in 2019 and positioning yourselves around that.

Ben Smith:    Accordingly, yeah. The macro picture looks a little dicey right now; I know everybody, you know, I think everybody agrees that growth is going to slow down in the US economy and the world economy, it’s just a matter of whether there’s going to be a recession, how bad that would be in 2019. Now, looking forward to the first quarter of 2019, what do you see, if you pull out your crystal ball, what do you see for the market for next quarter beginning January to March, and what do you see for weed stocks in particular?

Dmitry Zaytsev:    Yeah, so just generally speaking, I mean, the global economy has actually been slowing for a long time now; probably six months or so. And generally speaking, the US will slow as well, I think. But you’ve had commodity prices come in really aggressively, like crude, copper, like a lot of these base metals, that’s actually somewhat of a stimulus for a lot of these economies. So I don’t think, I’m not as bearish on the economic picture, just generally speaking; I’m not extremely bearish, or Great Recession, Great Depression type bearish, but this is more of a story about valuations.

So you could have the economy still grow at 1 or 2 percent, and stocks can still fall 30, 40 percent no problem, without a serious recession. And that’s just because valuations got really stretched, and cannabis stocks, generally speaking, are the perfect example of this.

Ben Smith:    Tip of the spear.

Dmitry Zaytsev:    Tip of the spear. Yeah, you’re literally investing in one of the highest-risk asset classes out there at this point, and it’s like a tech stock, similar to that, where the revenues are far in the future; a lot of the opportunities, two, three, five, ten years in the future. And the issue with that is, as cost of capital and risk tolerance goes down, right, people are more risk averse, they’re not going to want to be in a lot of these names.

Ben Smith:    Now, that being said, let me stop you there –

Dmitry Zaytsev:    Sorry, quarter one, quarter two, you were asking about that. I think we’ll have some kind of stabilization. I think it all kind of will depend on what the Fed does, and if they do back off the rate hike path and the US dollar index weakens, and generally if there’s a trade deal and you know, some stimulus that’s done by China and maybe others, you stabilize from here, potentially. And what does that mean for the cannabis stocks? I think the story is, you’re going to start seeing quality. So the quality is going to start moving. I think Canopy is probably the tip of that spear, to use your expression, in terms of quality outperforming the rest of the bench. And so I think you’ve seen that even now; a lot of the stocks that have much more questionable business models and standings have been really falling apart, because people realize, if we’re going, you know, this hype is dead. I won’t have my money.

Ben Smith:    Okay. It’s funny: like, now that you say that, let me ask you this: do you think there’s a perception that analyst projections, revenue projections, profitability projections through 2019, full year 2020, do you think there’s some investor credibility issues with that? Because we’ve seen some of the analysts downgrade –

Dmitry Zaytsev:    We’ve spoken actually I think with James on this on the last program – I don’t know if you watched that, but I took a look, actually, on analysts’ projections for revenues for 2019/2020 and I think they’re out to lunch, to be honest. I think 2019, at least, is extremely aggressive, considering some of the initial numbers we’ve seen from OCS and this and that. It’s probably like twice as, like 2x.

Ben Smith:    2 times?

Dmitry Zaytsev:    I think the analyst projections are 2 times higher at least, in my opinion, than what m of these guys are going to report. So I’m talking as an aggregate, so all I did was, I took the top 8 producers by market cap and I just looked at the consensus calendar 2019, because they all have different reporting periods, right? Revenues. And I said, okay, well, how realistic is this given the pace of OCS sales and some other anecdotal information we have from the other provinces.

Ben Smith:    And it didn’t quite measure up to expectations.

Dmitry Zaytsev:    No, absolutely.

Ben Smith:    Okay, so the hockey stick is a little shorter than some other analysts out there. Okay.

Dmitry Zaytsev:    Yeah, and just generally speaking, and I mean, I think something I’m going to do in the next couple of weeks is compare what the consensus estimate is for revenues and say, how realistic is this? And if it is, maybe it’s a good play, because maybe some of these companies will meet that or exceed that.

Ben Smith:    Right.

Dmitry Zaytsev:    But if someone exceeds it, it’s market share being taken from someone else, right?

Ben Smith:    Perfect. So let’s end it off with your final Q1, 2019 for weed stocks. Are we going up, are we going down, are we going sideways? I know it’s a loaded question; three months is a long time in this market, but where do you see things going in the first quarter looking at the, you know, March 31^st?

Dmitry Zaytsev:    Yeah, so just big picture, I think equity markets, you know, there might be a little bit more downside, but I think we’re through most of this move, or maybe more than half definitely, for sure. And then as those stabilize, and as some of these valuations come in maybe a little further, we’re talking Canopy in the low 30s, or around 30, I wold think that’s a really, really attractive long-term entry point, given their cash balance and given the passing of the Farm Bill recently.

I think the next kind of set of catalysts will be some of these well-capitalized Canadian names potentially expanding and driving growth in the US, and also establishing infrastructure and distribution channels in the US, just based on the hemp business line, and they can piggyback off of that in the next couple of years as it gets de-criminalized de-prohibited.

Ben Smith:    It’s a tough word.

Dmitry Zaytsev:    Yeah, sorry. And so I think those are sort of the positive catalysts, and maybe some revenue numbers, stores, rollout in terms of that. But yeah, obviously a lot of these companies are going to miss, as we talked about, their revenue, so I think there’s a lot of negative catalysts; and I’d also ask the question, if we can’t rally on the news we’ve had in the last two weeks, with Novartis, with Tilray, you know, in bev –

Ben Smith:    South Korea, Luxembourg, you name it. There’s been over a dozen.

Dmitry Zaytsev:    Yeah, there’s been a lot of deals that have happened recently, Farm Bill, and we’re just selling at the open. So if we can’t rally in a good news cycle, when are we going to rally? And what’s going to happen when there’s another Aphria-type short report, or there’s some kind of other negative catalysts?

Ben Smith:    Yeah, definitely, yeah. It’s definitely been tough in that regard, and that’s been one of our tells as well, the lack of catalysts really moving the market that would have sent the sector up double-digits previously is not working at the present time.

So, okay, Dmitry, we’re going to leave it there. Thank you for joining the program. It’s good to see you, as always.

Original article: Dmitry Zaytsev’s 2019 Cannabis Industry Outlook

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