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James Simons: What Interests Him in the Cannabis Space?

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In an interview with Yahoo Finance in October 2018, Shark Tank host Kevin O’Leary stated that the DEA classified cannabis as Schedule 1 narcotic. As an institutional investor, he doesn’t have the option to invest in cannabis. He said that 99% of institutional investors avoid the sector. However, things are changing. Many institutional investors enter the cannabis space. One such investor is James Simons.

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James Simons invests in cannabis

In 1982, Simons founded the Renaissance Technologies hedge fund. He retired in 2009. However, Simons still serves as a non-executive chairman. In 2018, his wealth increased by $1.6 billion. Bloomberg estimated that his wealth was $16.6 billion in 2018. Simons is the world’s wealthiest hedge fund manager. He made significant investments in the cannabis sector this year. According to SEC filings, Simons bought 788,595 shares of Aurora Cannabis (ACB) for $6.3 million in the first quarter. In the second quarter, he added an additional 905,305 shares for $7.1 million. Also, he bought 241,500 shares of Aphria (APHA) for $1.7 million in the second quarter.

How have James Simons’ picks performed?

On August 6, Aurora Cannabis’s management provided guidance for the fourth quarter of fiscal 2019. The company’s management expects its revenues to be 100 million–107 million Canadian dollars. The guidance represents significant growth from 65.1 million Canadian dollars in the third quarter. The company expects the product availability to be at the higher end of its earlier guidance of 25,000–30,000 kilograms. On August 19, Aurora Cannabis completed the acquisition of Hempco Food and Fiber. The better-than-expected guidance appears to have increased Aurora Cannabis’s stock price. As of Wednesday, Aurora Cannabis has returned 11.1% YTD (year-to-date).

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On August 1, Aphria reported its fourth-quarter earnings. The company outperformed analysts’ sales expectation and posted a positive EBITDA. Very few cannabis companies have reported a positive EBITDA. For fiscal 2020, the company’s management expects it to report revenues of 650 million–700 million Canadian dollars. Aphria expects the EBITDA to be 88 million–95 million Canadian dollars. The strong fourth-quarter performance and impressive outlook caused the company’s stock price to rise. Aphria had returned 15.2% YTD.

Despite all of the positive news, Aurora Cannabis and Aphria have underperformed the broader equity market. The S&P 500 Index has increased 16.7% this year. Regulatory scandals in the cannabis sector and wider net losses in some of the cannabis companies have offset some of the gains in Aurora Cannabis and Aphria stock.

Analysts’ recommendations

Overall, analysts favor a “buy” rating for Aurora Cannabis. Among the 15 analysts that follow the company, 60% recommended a “buy,” while 40% recommended a “hold.” On average, analysts have given Aurora Cannabis a 12-month target price of 13.23 Canadian dollars with a potential upside of 69.4%.

Analysts favor a “buy” rating for Aphria. Notably, 75% of the 12 analysts that follow the stock recommended a “buy.” Analysts have given Aphria a target price of 14.94 Canadian dollars with a potential upside of 71.3%.

Jim Cramer, CNBC’s Mad Money host, is optimistic about the cannabis space. To learn more, read Jim Cramer Thinks Cannabis Is Back in Action. He also thinks that Cronos Group and Aphria have passed Canopy Growth. Read Jim Cramer: Cronos and Aphria Passed Canopy Growth to learn more.

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