A key factor that no one thinks about

I have been extremely vocal in the past about the destruction of shareholder value that occurred during the cannabis bubble that burst last year. I think the mood has now changed so dramatically that it requires further discussion and reflection.

Cannabis seizures

Companies operating in the Canadian cannabis sector have regularly paid premiums of 50-100% or more to acquire what are essentially shell companies. These companies had basically no sales or customer base. But somehow they managed to win the Health Canada licensing lottery and received a license to grow marijuana.

These takeovers were often done on a share-for-share basis. Indeed. in fact, little or no cash was traded. We later learned that in many cases insiders were profiting enormously from these transactions thanks to very questionable reporting standards associated with ownership.

The bubble is growing

These acquisitions inflated what was already a bubble to absolutely absurd proportions. The market seemed to cheer each acquisition accordingly. Many cannabis investors believed they were smart enough to get into an industry with parabolic growth so early.

Today, any company (cannabis industry or not) that dared to engage in an acquisition would undoubtedly now be hit by Mr. Market. Balance sheet/liquidity preservation outweighs growth in a similar but inverse proportion to the cannabis bubble that occurred not too long ago.

That’s what I’m trying to emphasize: market sentiment has gone from ridiculous at one end of the spectrum to equally ridiculous at the other.

Select companies making acquisitions

If you really stop to think about it, now is the perfect time to buy companies or make acquisitions. The long-term growth that everyone was talking about leading up to early 2020 is not going to evaporate. Theoretically, the only thing that has changed in the long run is the price a company must pay to acquire another. This price is a fraction of what it was a few months ago!

Therefore, investors should consider companies that are growing through acquisitions.

Brookfield business partners

With this in mind, various Brookfield companies such as Brookfield business partners, may be a good solution. Brookfield Business Partners, like many of its Brookfield siblings, operates as a private equity consolidator of sorts for various properties. Now is certainly the time for such a company to go on a buying spree. If you like this stock and like the trades this company offers, I recommend considering this company at this stage.

Having cash and knowing how to use it is the most important issue today. Companies making acquisitions now should be cheered on. This is usually a good thing if you’re in it for the long haul.

Stay stupid, my friends.

The post Investor Alert: The Key Factor No One Is Thinking About appeared first on The Motley Fool Canada.

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The stupid author, Chris MacDonald, does not own any of the stocks mentioned in this article.

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