Perceptive Advisors’ Neptune Wellness stake grew by 50% in Q3. The cannabis stock is now the hedge fund’s #20 position.

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Perceptive Advisors’ Neptune Wellness Solutions (NEPT) position increased by 50% during the 3rd quarter of 2019, to 4.5 million shares. The stake represents 14.53% of the Cannabis extraction company’s outstanding shares. NEPT was Perceptive Advisors’ #20 position at Q3 close.

The increase in Perceptive’ Advisors’ Neptune Wellness stake came amidst a terrible 2019 for Cannabis stocks in general. Since March, the North American Marijuana Index has lost nearly 2/3 of its value. The high water mark for speculation in the Cannabis sector came shortly after beverage giant Constellation Brands increased its stake in Canadian marijuana grower Canopy Growth by $4 billion in August of 2018.

Since then it’s become obvious that while the legal cannabis market is a huge growth industry — growing at 26.7% annually — it’s possible to lose lots of money speculating on public companies seeking to profit from the marijuana “boom,” and trading at dot-com-like valuations. The truth is, no one knows with any certainty what the cannabis landscape of the future will look like. When cannabis becomes legal at the federal level in the U.S., many, if not most, of the small public companies currently trading will probably be out of business. How does one pick winning companies in this sector given the uncertainty?

One way to zero-in on attractive publicly-traded cannabis stocks is to follow the investments made in the sector by well-informed fund managers. Presumably, professional investors who devote considerable resources researching the cannabis space will have insights into the best investments.

Joseph Edelman’s Perceptive Advisors in one of the leading hedge funds focused on the health care sector.

Perceptive Advisors, managed by Joseph Edelman, certainly qualifies as one of the top biotech hedge funds, if not one of the top hedge funds in general. Over the last decade an equal-weighted portfolio of Perceptive’s top 20 13F positions returned 22.50% annualized vs the S&P 500’s total return of 13.00% annualized. Year-to-date Perceptive’s long portfolio is up 37.21%

It’s significant that Perceptive Advisors’ Neptune Wellness stake is a top 20 holding. Edelman’s expertise is investing in risky small- and midcap biotech and medtech companies. These development stage companies’ fortunes often hinge on a single drug or technology that takes years to develop and can be crushed by a Food and Drug Administration rejection. 

From Perceptive Advisors ADV Part 2:

The Advisor’s portfolio manager, Joseph Edelman, and his team of analysts use their substantial scientific, technical and investment expertise to identify opportunities to exploit relative value disparities and inefficiencies that exist on both the long and short side of the market. While most other Wall Street biotechnology analysts typically cover only the largest 20-30 companies in this industry, the Advisor’s analysts also focus on the remaining smaller, more inefficiently priced 300 or more companies. In addition, an active risk management style, a low amount of leverage, and the team’s focus on original investment ideas and research, primarily sourced in-house, contribute significantly to the Client Accounts’ unique value.

Neptune Wellness Solutions has contracts to extract cannabinoids for some of the largest marijuana producers.

Neptune Wellness Solutions provides extraction services to purify cannabinoids and isolate cannabinoid-containing resins from the raw plants. Neptune’s core operations revolve around the extraction and purification of various cannabinoids — including cannabidiol (CBD) — from cannabis plants. CBD, derived from legal hemp plants, is one of the hottest segments of the cannabis market. Some estimate sales of CBD products will reach $20 billion by 2024.

However, Neptune’s cannabinoid extraction business has yet to turn a profit. The company posted a negative gross profit for its Q1 2020. Net loss was CA$6.4 million, slightly worse than the CA$4.8 million net loss it recorded in the previous quarter.

Neptune does have long-term contracts with some of the largest marijuana producers, which could drive substantial revenue growth in the coming years. The company is currently ramping up its extraction capacity in both the U.S. and Canada, and these efforts might pay dividends in the future. According to the company, “We estimate that, based on a conservative capacity utilization scenario of 50%, our two facilities could support in excess of $450 million in annual revenues.”

Perceptive Advisors’ Neptune Wellness stake ranks the company among the fund’s top positions. However, it should be noted that Edelman has only spent 1.3% of his long portfolio on NEPT stock. The takeaway for investors should be this: Don’t bet the farm on speculative cannabis investments. And diversify when investing in small cap companies.

Below are cannabis-related public companies with 13F holdings of at least $1 million. The data is from 13F filings as of Q3 end. NEPT’s 13F holdings rank third on the list, behind only GW Pharmaceuticals (GWH) and Innovative Industrial Properties (IIPR).

Cannabis-related stocks ranked by hedge fund holdings. Source: WhaleWisdom.com

SymbolCompanyRecent Price$ Market Cap Q3 13F shares  Q2 13F shares % ChangeHF $ Holdings
GWPHGW Pharmaceuticals Plc100.153.09B                     5,023,000                      3,893,000 29.03% $          503,053,450
IIPRInnovative Industrial Properties Inc.72.75854B                        566,075                         555,057 1.99% $            41,181,956
NEPTNeptune Wellness Solutions Inc.2.79257M                   14,049,000                      9,690,000 44.98% $            39,196,710
CGCCanopy Growth Corporation18.686.47B                     1,542,000                      2,434,000 -36.65% $            28,804,560
ACBAurora Cannabis Inc.3.222.55B                     5,978,000                      5,260,000 13.65% $            19,249,160
TLRYTilray Inc.18.251.83B                        958,223                         566,300 69.21% $            17,487,570
CRONCronos Group Inc.6.722.30B                     2,573,000                      2,819,000 -8.73% $            17,290,560
HEXOHEXO Corp.2.76529M                     2,640,000                      3,896,000 -32.24% $               7,286,400
APHAAphria Inc.4.691.18B                     1,377,000                      1,068,000 28.93% $               6,458,130
OGIOrganigram Holdings Inc.3.42405M                     1,776,000                      3,175,000 -44.06% $               6,073,920
CURLFCuraleaf Holdings Inc.7.652.06B                        180,203                         247,330 -27.14% $               1,378,553
GTBIFGreen Thumb Industries Inc111.07B                        122,340                         161,481 -24.24% $               1,345,740
HRVSFHarvest Health & Recreation Inc – Ordinary Shares (Sub Voting)3.29713M                        330,000                         401,541 -17.82% $               1,085,700

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