For those that follow trending stocks, one thing has become apparent as of late: sector rotation has slowly begun. This is evident in all aspects of the market: the talk of twitter, analyst discussion, and even the attention of the media. Perhaps the strongest indication, is the focus of the ordinary uninformed retail investor. All signs point to a sector rotation currently being underway.
What exactly are you talking about? What is sector rotation?
Specifically, we are speaking of the movement of money from the cannabis sector, to that of the blockchain and cryptocurrency sector. With the rise in price of Bitcoin, increasing attention has been placed on this emerging market by analysts, news media, and most of all small cap investors.
Cryptocurrency and blockchain have become buzzwords in the junior markets, much like the word cannabis or marijuana were for the last several years. A company with literally no assets can announce their intentions to enter the sector, and stock traders along with early adopters swarm in, hoping to get cheap shares of a future Goliath. Rather than focus on any fundamentals related to a company, they are focused on finding the next potential Canopy Growth Corp, or Aurora Cannabis in these emerging sectors. To do so, they are willing to take on the risk of not being correct on all stock picks – because if they are right, the potential gain is huge.
But wait, stocks in the cannabis sector are smashing 52 week highs, you must be wrong!
We’re not denying that there are still companies with legs left in the Canadian cannabis sector. The future king of the sector may not even yet exist, we can never be certain. Certainly, plenty have hit new highs over the last week or two. And over the last two months, several have hit all time highs – including the current monsters of the industry.
However, with recreational legalization looming in Canada, the hype will soon be over. Instead, companies will have to resort to truly growing their bottom line to provide value for investors. This means the rate of share price increases will decrease dramatically by the mid point of next year in all likelihood. The theory of “sell the news” has the potential to cause a lot of red in investment accounts once the hype is eliminated and companies are instead valued based on fundamentals. We are also well overdue for the mid-winter sell off the cannabis sector typically experiences. This will likely occur sooner rather than later, and this sentiment exists amongst many sector investors.
It is estimated that this mid-winter sell off, should it occur, will further drive investment in the blockchain sector. This is based on where money flowed to when cannabis stocks slumped in mid April of this year. Hungry for gains, investors flocked to this new emerging industry and assisted in driving the gains seen in Bitcoin and several other digital currencies.
Smart Money: Keeping its eyes on the future [potential] prize
Further evidence for our theory exists in the form of private placements and other financing for stocks in this emerging sector. In December alone, there has been at least $183,000,000 in private financing announcements in the blockchain sector. These come from a total of five companies, and took us under five minutes to find. We know there is more out there, and that this is just a start. The crazy part? They are being filled extremely quick. This count doesn’t include what has already since been closed for placements this month.
In an effort to assist our readers in gaining a leg up in this emerging industry, we’ve compiled a quick list of currently open private placements. Our hope is that you are able to take advantage of this information, after you have performed sufficient due diligence. Please be aware that we are not giving a recommendation to buy or sell these securities, and that there are no finder’s fees or anything in the mix for us. We are simply trying to give viewers a solid head start in this industry that often contains complex concepts.
- HIVE Blockchain (TSXV: HIVE): Announced on December 13 that a $100 million private placement was occurring. The purpose is to raise funds for further expansion of their facilities for up to 44 MW of mining power. $50 million of this financing has already been reserved, leaving half the placement available at the time of announcement. Hive is the owner of Genesis Mining, the largest mining operation in the world. They are currently heavily focused on expanding their operations, as is displayed in the related news release here.
- Block One Capital (TSXV: BLOK): Originally announced on December 11 as a $5 million placement, they up-sized the financing a day later to $8 million purely due to demand. There is also an over allotment option of up to $2 million. The company is focused on becoming a low cost coin miner, and we previously did a briefing on them which can be found here. Further information on this financing can be found via this link.
- Transeastern Power Trust (TSXV: TEP.un, TEP.DB): In addition to announcing its proposed name change to Blockchain Power Trust, the company announced a private placement to the tune of $40 million on December 12. An over-allotment option of up to $10 million also exists for this raise. The funding will be used to complete the purchase of the OMV Wind Project, a wind based power generation facility. This facility will then provide power to a proposed 10 MW crypto currency mining data centre. Additional information on the raise can be found here.
- BIG Blockchain Intelligence (CSE: BIGG): On December 6, the company announced a $10 million financing. The proceeds of the raise will be utilized for its development and sales team, and increasing its current hardware capabilities. The company itself is focused on forensic security of the cryptocurrency sector. Further information for this raise can be found at this link, however there are rumours that it has already been fully subscribed.
- DMG Blockchain Solutions (TSXV: AXN.H): Announced on December 4, this $25,000,000 subscription receipt raise is related to the acquisition of DMG Blockchain Solutions by Aim Explorations Inc. The deal is contingent on Aim moving up to the TSX Venture exchange from the NEX. DMG is focused on monetizing blockchain technologies, and recently received a 9.9% investment by Element Fleet Management Corp. Additional information on this raise can be found here.
If you don’t have the funds available to participate in such a placement, don’t be discouraged. In the early days of the cannabis sector, although it was counter intuitive to the general market, private placements and financing often made stocks move northward. Why? Because when these placements were fully subscribed, it displayed that smart money had confidence in the company to the point they were willing to make a sizable investment.
Furthermore, much of the investors coming over from the cannabis sector were in similar positions once too. The beauty of emerging sectors is that quality companies and future Goliaths can be had for extremely cheap prices. For example, there are countless stories of investors who bought Tweed at prices of $1.xx or lower. This is where quality deep dives become so important. If you can get in now to the future star of the sector, you’ll be well off even with a small initial investment.
Finally, although sector rotation is occurring we are by no means stating that the Canadian cannabis sector is dead – it is very much alive and well. However, current valuations have become disconnected from the basic fundamentals of most companies. The concept of “future earnings are just being priced in” only goes so far – at some point, those future earnings need to be realized. Until valuations come down to more realistic levels, it is difficult to justify further investment.
Remember that the market is a wave that occurs in cycles. At some point, that wave will reach its high point and begin its descent down to reality. In a phrase, we are “short term bearish, long term bullish” on the Canadian cannabis sector. The rotation of money out of the sector and in to the blockchain sector is only part of this natural cycle of the markets.
Sector rotation is a natural process. Emerging sectors can provide excellent opportunities. Just be certain to do one thing: Dive Deep.
Information for this analysis was found via Block One Capital, HIVE Blockchain Technologies, Transeastern Power, BIG Blockchain Intelligence Group, and DMG Blockchain Solutions. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.