Famed short seller Andrew Left is starting a fund dedicated to the scorching-hot cannabis industry.
"There's an obvious fascination with investors, but at the same time it's a space that's open for hype," Left told Business Insider in an interview on Wednesday. "So I think it's very difficult for some investors to decipher the real players."
Left, who gained notoriety for shorting the pharmaceutical company Valeant, told Business Insider he's going to focus on long and short plays in the emerging sector. He's building out his fund immediately.
While his short targets — Tilray and Cronos — are well-publicized, Left said it's "going to be a lot easier to find the hype than the true value."
Separating over-hyped stocks from the real thing
Management behavior is what separates over-hyped stocks from those that deliver long-term value, Left said.
When finding short targets, Left looks for CEOs who are overly enthusiastic, or who don't offer "realistic expectations" of their business. Stocks in those companies may ultimately reflect these overblown expectations, he added.
Left's firm, Citron Research, published a scathing report in August about the Canadian cannabis industry, squarely aimed at cannabis cultivator Cronos.
"Although the hype is big and the prohibition after 100 years is real, it is critical to understand that in the Canadian landscape, there are over 100 licensed producers and there will ultimately be more losers than winners," the report said.
Left said Cronos didn't properly disclose the size of its distribution agreements with Canadian provinces — and that they're much smaller than the company advertised. The stock, according to Left's firm, is trading at a premium based on the hype around cannabis in general rather than a winning strategy.
Who cares about blockchain?
While the hype surrounding cannabis stocks may be reminiscent of other frothy markets — like the dot com bubble of the early 2000s, or the recent hype around cryptocurrencies — Left said there's a clear difference.
The internet of the late 1990s and early 2000s underwent a real revolution, Left said, so the public's enthusiasm around those stocks could be justified even as the market got carried away.
But according to Left, it's unclear what purpose blockchain and cryptocurrencies serve other than as speculative vehicles. Now that the market cratered, "It's like, who cares? What's blockchain?" Left said.
He believes that the cannabis market, on the other hand, has an "underpinning of truth," and clear demand for products.
In his view, most investors are relieved that the longstanding prohibition of the plant is ending. "We're just throwing our dollars in front of that," Left said, which could contribute to the sky-high valuations of some cannabis companies.
There's a lot of hype, but it's not a bubble
Left said that while some cannabis stocks will crash, he doesn't think it's a bubble. As more US-based cannabis cultivators, or LPs, go public, he expects valuations of Canadian LPs to come back down to Earth.
Left said he's looking to invest in stocks on a longer time horizon than most — and that's what he thinks his investors will be looking for.
"I'm waiting for the cannabis market to chill out," Left said. "Right now, I think the investors you're seeing in the cannabis market are the quick money guys, not the true investors."
He declined to name specific stocks he'd put in his long portfolio.
"Because if I say I'm going to buy a stock — that means I own the stock as an investor. I'm not saying, 'Go buy it. It's going to go up 30% tomorrow,'" he said.
Left isn't the first prominent short seller to jump into the emerging cannabis sector. Danny Moses, a hedge funder at the center of the "Big Short" trade chronicled by Michael Lewis, has called cannabis the "big long."
Leon Cooperman, who recently converted his legendary fund Omega into a family office, is a shareholder in Green Thumb Industries, a Chicago-based LP.
"We're in the early innings of the cannabis story," Left said.
