Received the latest Patient Capital letter this week. This is a boutique Toronto-based value fund run by Vito Maida. One of the few capital managers that didn’t get completely mauled in the 2008 Global Financial Crisis.
In itself, that’s instructive: Maida’s investing career spans over 40 years, he started Patient Capital in 2000 so he’s seen the odd bear market. Contrast with say, a Ross Gerber, who started his fund in 2010. While Gerber was somewhat of a wunderkind prior to co-founding Gerber Kawasaki, since inception his fund has only known one prevailing market condition over its entire history: straight up. So it is understandable why a Gerber would be überbullish on things like FAANGs, on Tesla, and on pot stocks.
Maida on the other hand, knows from experience a bubble or a fad when he sees one, and he typically gives them a wide berth:
The legalization of marijuana in Canada has set off a buying frenzy for all sorts of cannabis related businesses. The interest in this sector has driven the valuation of emerging companies in this industry to speculative and unsustainable levels.
We are reminded of the 1998 to 2000 period. As many of you may recall, at the time any company related to the internet immediately and consistently went up in price. Public companies that had a “plan” to launch an internet related business were valued in the billions of dollars. Reality was suspended and all sorts of reasons and valuation metrics were developed to justify these extreme valuations. My all-time favourite valuation tool is the “market cap to eyeballs.” Anyone that didn’t understand this “new paradigm” was considered out of touch. Traditional businesses were at best ignored and in many cases sold at any price.
The sentiment is very similar today in Canada for cannabis investments. Below is the aggregate market capitalization of the top cannabis stocks in Canada. Collectively, they have a market value of forty-six billion dollars. However, these five emerging companies have less than two hundred million dollars in revenues, twenty million dollars in net income and do not pay any dividends. These translate into Price/Earnings and Price/Sales ratios of 2300x and 242x respectively. Dot.com bubble like valuations and extraordinary by any measure!
While Maida acknowledges that deep value funds tend to suffer through periods of underperformance, I note that Patient Capital has compounded returns since inception of 6.2% compared to 5.51% on the TSX and 5.03% on the S&P500.
The rest of the Patient Capital newsletters can be downloaded here.
Patient Capital Fall 2018 N… by on Scribd