CanadaBis Capital (CANB.V) - A Quick Post-Mortem
To make no mistake is not in the power of man; but from their errors and mistakes the wise and good learn wisdom for the future - Plutarch
To introduce the post-mortem, laying out my initial investment thesis will help explain how this abysmal mistake occurred.
When analyzing CanadaBis Capital, I initially wrote a short-form thesis consisting of the following key points:
Vertically integrated Canadian cannabis company that has scaled revenues from 0 to CAD 22m for FY23 (net sales grew 90.4% during FY23, an acceleration compared to FY22 and FY21 where the company still grew 69.9% and 55%, respectively) in 7 years. In other words, revenue growth has actually accelerated the last few years, partly due to economies of scale and improved distribution. Â Â
Gross margins > 50% and operating margins now exceeding 20%Â
Decreased net debt/EBIT to <1xÂ
Founder-led company (Travis McIntyre), with the CEO also being CEO of SS Pipelines (13-year tenure), thereby having the experience and know-how to run a complex manufacturing process with high-quality and efficient outputs. Â
2023 ROIC and ROCE of 37.8% and 34.2%, respectively, with a wide ROIC/ROCE-WACC spread given a WACC of approximately 8.7%. This implies significant value creation for shareholders if management retains earnings and is able to deploy that capital into investments/projects with sustained attractive returns on capital. Â
Long growth runway/structural tailwinds given the domestic (Canadian) cannabis market projected to generate annualized revenues of $4.7B in FY24, and reaching annualized market volumes of US$7.98B by 2028 (14.2% CAGR). Additionally, if CANB.V expands to the US, the TAM will grow significantly given the US cannabis-market's estimated 2024 annual revenue of $39.85B (2028E of $67.15B ~ 13.9% CAGR). Â
Cost controls remains a focus with the company continuing to manage input expenses through negotiation with multiple suppliers to capture cost savings while increasing concentrate yields. Management expects a continuation of this trend in 2024 as cultivators reposition themselves in the industry.
McIntyre owns approximately 49% of outstanding shares, thereby ensuring alignment between management and shareholders. Â
Management has also expressed interest in M&A activity during 2024, to either expand further into Ontario (due to the region tending to protect its own businesses) or the US. Â
Underestimating cyclicality
My biggest mistake in relation to CANB.V was not fully grasping the cyclicality of cannabis. I was too fixated on the potential upside and failed to account for the significant competitiveness within the cannabis-industry ~ and the difficulty of differentiating the business from other operators. Despite CANB.V's focus on developing new and popular SKU's, it was obvious that most new products failed to gain real traction.
High insider ownership does not guarantee integrity
Additionally, high insider ownership does not guarantee a true alignment between management and shareholders (which CANB.V illustrates). Despite McIntyre owning a little south of 50% of outstanding shares, he has failed to be frank in his communication with shareholders. Not only did the company not publish a profit warning for 2Q24 despite sales and earnings falling 30.7% and 91.5% YoY, respectively, they also published misleading financial numbers for 3Q24. The press release mislabeled net revenue as net income, used gross revenue for net sales, and added back faulty numbers to inflate the disappointing EBITDA of CAD 345.8k to a bizarrely inaccurate number of CAD 5m.
Financial highlights 3Q24- CanadaBis Capital (Q3 press release)
Hesitation
Furthermore, I could have limited my losses if I sold immediately after the disappointing Q2 numbers in April. Personally, I consider one bad quarter insufficient to accurately gauge whether a company is experiencing structural and lasting problems or not. Still, given CANB.V's minuscule size and the lack of accurate and honest investor communication, I should have seen the abundance of red flags on the horizon. To ensure that I do not commit a similar mistake in the future, I will tell myself the following: if I am having difficulties rationalizing a holding, it has no place in my portfolio.
Closing words
Due to the aforementioned mistakes, I lost 75% on my CANB.V position ~ the absolute worst investment so far in my career.
An important caveat is that nano caps offer both large potential gains and large potential losses. Small companies beating consensus estimates often lead to price surges exceeding 20-30%, but this is a double-edged sword. Due to CANB.V's size (sub CAD 10m) and consequential illiquidity, horrendous quarterly results, such as 2Q24, trigger massive sell-offs.
Overall, CANB.V was a frustrating investment. This probably does not come as a surprise, but losing 75% on a stock is not an enjoyable experience. With the benefit of hindsight, my mistake can be traced back to the unjust emphasis I laid on isolated factors such as accelerating revenue growth, margin expansion, and high insider ownership. Investing is complex, and an attractive set-up (re the factors I focused on) does not guarantee a positive investing outcome. By neglecting the cyclicality of cannabis and due to my inability to grasp the competitiveness (and consequential pricing pressures) of the cannabis-industry, my money was lost even before I made the investment. Going forward, I will attempt to always take a holistic view when evaluating potential investments, and do my best to avoid investing in companies that solely screen well - i.e., that are quantitatively cheap with attractive metrics.