In Hexo Corp.’s fiscal third-quarter earnings call in 2019, Chief Executive Sebastien St.-Louis made a bold statement for a cannabis industry executive: “If you ever hear me say something and not deliver, you have to call me out.”
MKM Partners analyst Bill Kirk and his team did just that Monday.
The analyst and his team pored over every transcript for the six Canadian pot companies they cover and determined that executives made 947 promises, predictions or forecasts for the future. Then the analysts figured out how many were right, wrong or remain unknown.
Weed executives were right 51% of the time for predictions they made where the outcome is clear. “The group’s predictions were no better than a coin flip,” Kirk wrote.
Pot executives were very good at making forecasts about things in the sector going wrong, being correct 93% of the time, according to Kirk’s analysis. But marijuana company leaders were not very good at judging their own limitations and made bold promises that only lived up to reality 48% of the time.
“As a result, it is difficult to rely on company commentary about positive expectations, but if they are making negative commentary, investors should take notice.” Kirk wrote.
|Ticker||Correct predictions (of known outcomes)||Incorrect predictions (of known outcomes)||Correct positive predictions||Correct negative predictions|
|Aurora Cannabis Inc.||47.2%||52.8%||46.2%||100%|
|Canopy Growth Corp.||38.9%||61.1%||37.6%||100%|
|Cronos Group Inc.||67.9%||32.1%||62.7%||93%|
Kirk wrote that his team analyzed 59 separate events such as earnings calls, analyst days and other public transcripts, and that while there is an element of subjectivity to unpacking predictions and outcomes, his team made an effort to be as objective as possible.
The analysis, he wrote, can help investors evaluate the extent to which they can trust weed executives’ promises. “This analysis can help determine management reliability, which is important as many have imminent fundraising needs,” the analyst wrote. “Some of the limited visibility is outside management control, but in a similar sense it is also then outside of investors’ ability to handicap.”
Several of the worst predictions include Hexo’s estimate that it would bank C$400 million in fiscal 2020 revenue, that Canopy Growth would achieve a revenue run rate of C$1 billion in fiscal 2020 and that Aurora Cannabis would remain partners with Green Organic Dutchman Holdings Ltd. /zigman2/quotes/229419907/delayed CA:TGOD +1.33% for the rest of their existence (Aurora sold its Dutchman stock last year). For its part, Cronos predicted that weed would be worth more than C$8 a gram, though it never has for the company. And Tilray thought it was take 24 to 36 months for marijuana supply in Canada to meet demand — it took “a few months,” according to the MKM note.
As the cannabis sector rallied Monday, Tilray /zigman2/quotes/209129655/composite TLRY +5.19% stock gained 8.5%, Hexo /zigman2/quotes/206508254/composite HEXO +1.91% /zigman2/quotes/200008967/delayed CA:HEXO +0.96% stock rose 11.2%, Cronos /zigman2/quotes/206842762/composite CRON +3.28% /zigman2/quotes/202715342/delayed CA:CRON +1.82% climbed 8.5%, Canopy /zigman2/quotes/200603886/composite CGC +6.69% /zigman2/quotes/202205609/delayed CA:WEED +6.33% rose 9.9% and Aurora /zigman2/quotes/210559470/composite ACB +6.98% /zigman2/quotes/203734337/delayed CA:ACB +6.11% gained 1.8%. Flowr stock fell 1.6%. The ETFMG Alterantive Harvest ETF /zigman2/quotes/204332491/composite MJ +4.33% rose 4% and the Cannabis ETF /zigman2/quotes/213173823/composite THCX +2.92% rose 3.9% in Monday trading.
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