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Forex is the short way of saying “
Foreign Exchange”. This means the global market for exchanging international currencies, also known as the FX market. When someone prices or exchanges a currency against another, the exchange rate is best on the particular forex trading pair (i.e., both currencies involved in the pair).
Currency pairs are typically priced out to four decimal places, depending on the currency denomination, where one ten-thousandth of
a unit of currency is known as a pip (i.e., 0.0001 unit), which is the smallest price increment (in addition to fractional-pips).
The EUUSD, which is the most widely-traded forex pair, is an example of the Euro (EUR) currency against the US dollars (USD) currency.
When trading one unit of EUUSD, you can calculate the price in USD (i.e., a price of EUUSD 1.3000 indicates $1.30 per euro). Conversely, when exchanging the USD/EUR, each unit of USD (i.e. each dollar) will have the prace of a specific number of euros (i.e., a USD/EUR price of 0.7700 indicates €0.77 per dollar).
A speculator expecting the price of the EUUSD to go up. He will buy the EUUSD pair long (buying a pair to open a trade can be a
bullish or long position). Whereas, a speculator anticipating a drop in the price of the EUUSD may sell the pair. (
bearish or short position: selling to open a trade).
Largest international market Globally
The
forex market is decentralized across the globe. It consists of dealers such as central banks, private and public banks, non-bank intermediaries,
brokerages, and large corporations such as insurance giants and other participants engaged in international finance.
The Foreign Exchange market is the largest globally, with nearly $6 trillion in average daily volume traded as of April 2019, according to the latest BIS Triennial Survey of Central Banks.
The FX market suffers the influence mainly by each government’s monetary policy, the supply, and demand of the global economy. As well as international trade agreements, and users and suppliers of currencies (hedgers), in addition to speculators.
Market integrity and progress
While there have been cases of
forex market manipulation by the biggest banks and dealers in the past, the amount of influence any one entity can have on the prices of major currencies is negligible. This resistance to serious manipulation risk is due to the enormous amount of trading and resulting liquidity available.
The
FX Market itself has high price integrity. Because it is an electronic market, efficient and with a certain size. Participants must still adhere to best practices.
Efforts such as the Global FX code were launched to encourage forex dealers to uphold the best-execution where the best price available is given to traders.
These efforts are why the spreads and trading commissions continued to improve over the years, as the FX market evolved. In addition, regulators have competed to increase local market integrity and efficiency by creating more strict regulations. These come from the top-tier financial centers such as the US, UK, Singapore, Japan, Australia, among other advanced economies.
Investing and trading in the forex market
As an asset class, Forex is well-established and offered by many
regulated brokerages from within a margin account.
The use of leverage is what makes forex trading more risky than non-margin investing.
Margin-based trading used by investors as well as self-directed traders and fund managers, thanks to the range of risk-management tools available within forex trading platforms (mobile, web, and desktop software).
Wiseinvest provides trading signals with risk-management.
Forex market research and analysis
There are two primary ways for traders to assess and identify trading opportunities in the forex market.
- One is through the use of fundamental analysis, which looks at economic news and data released by governmental agencies, as well as market sentiment data.
- The second is through technical analysis, which pertains to the historical and current market price of the underlying currency.
Advanced forex trading strategies and algorithms
The foundation of successful trading in the forex market is having a trading strategy. It’s based on a specific methodology that best suits your trading needs. Strategies could be manual, automated, or a combination of both.
Over the past decade, there has been a proliferation of automated trading strategies made available for retail traders.
And while there are many serious traders with established track records for their trading systems, there are many more low-quality trading systems falsely marketed as high-quality by overly eager affiliates, making it harder for investors to navigate the market for
trading signals.
There has also been an increase in the social copy trade. Where an operator can mimic other operators’ businesses in real time.
Whether using a
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Unlike other copy and social trading platforms, Wiseinvet’s AI has the ability to execute a huge set of market data. It does by combining technical and fundamental analysis. This strategy can increase the accuracy of
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Self-directed forex investors
Compared to investing in a managed fund, there is greater responsibility. Traders put it on self-directed traders who use trading systems. A self-directed trader should conduct more detailed due diligence. It can avoid falling for the countless low-quality trading systems that exist on the internet.
- Good quality trading systems will have established track records (historical results), and there will be other quantitative performance rankings, along with qualitative data about the strategy developers and any proprietary math used to operate the strategy.
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There are no guarantees that a strategy will perform well. But conducting proper due diligence can help traders assess various trading systems. They consider using them to aid their trading or investment strategy.
I wrote it all on my website with better formatting but here are my thoughts on the most recent joint venture announcement by Emerald Health, a licensed producer of cannabis in Canada. This $120 million market cap cannabis licensed producer now has the ability to net $40 million or more annually by 2019 (legalisation occurs Summer 2018). Emerald is both undervalued relative to intrinsic value and relative to peers. The industry economics are starting to unfold around the cannabis industry and it looks like there is a strong possibility of high FCF, high margins, price regulation (good for commodity), supply lagging demand for years (huge plus for investment merit), low reinvestment requirement and a few other major qualitative and quantitative variables that could lead to above average valuations as well but even at low-end estimates for net income there is still massive profit potential in Emerald.
I have a ton more info about the sector at felkerinvesting.com if you want some good primers on the industry, I keep an updated spreadsheet of the 12 bigger licensed producers as well with all of their current and planned production numbers and some metrics used to show relative value. I currently think there is investment merit in Aurora, Hydropothecary, Organigram, Aphria and Emerald. My allocations are on my site but i think theres a strong argument for Emerald trading significantly below its intrinsic value and the best value of its peer group, id be very surprised if this doesnt 10x over the next 5 years (the small peer group with investment merit, most of those licensed producers are smoke and mirrors and promises).
This is the fastball that Buffett says to swing at. Its being legalised, the industry economics are easy to understand and more importantly, there are a variety of qualitative and quantitative variables that could lead to very positive investment merit and above average valuations due to some legislative and industry factors. A brand new industry does not pop out of the ground every year, there are still some high quality companies that are significantly underpriced right now because cash flows from legalisation are a year away and because its such a small inefficient market (banks cant own this, its not legal yet and the companies are all 100-200m (minus the big 2) and arnt on anyones radar + there was a downturn).
Please trust me. Just do your own DD and read my primers and other thoughts on the industry, this is the only 300-500% youre going to see in 3-5 years and theres still a few companies that can 10x. Plus its still an extremely infant industry with a ton of room for growth as stigmas fade and the medicinal uses are more commonly known; there are non-psychoactive (dont get you high) ways to use cannabis in 1 drop of tasteless oil every day that will challenge billions in medicinal revenue.
http://www.felkerinvesting.com/2017/06/emerald-health-therapeutics-emc-and.html
Earlier this week we saw a game-changing move in the cannabis industry with Emerald Health Therapeutics ($EMH) entering into a joint venture with Village Farms ($VFF), a North American produce-growing company with 4.8 million sq ft of greenhouses in British Columbia, 30 years of operational experience and 750 years of combined "master grower" experience. In the joint venture, Emerald Health will pay $20 million (in tranches) for a 50% stake in the JV that will lease (with the option to buy) 1.1 million sq ft. of existing greenhouse and the option to lease or purchase an additional 3.7 million sq ft. of existing greenhouses owned by Village Farms (for 4.8 million sq ft total). The 1.1 million sq ft. greenhouse is projected for 75,000,000 grams annually and the 4.8 million sq ft. of total greenhouse space should yield over 300,000,000 grams. This puts Emerald Health at the best relative value in the industry by a large margin and also provides the largest margin of safety relative to intrinsic value.
This joint venture with Village Farms might be the best acquisition/partnership that we have seen in the industry so far. At $20 million for 50% of the JV-owned 1.1 million sq ft. and 75,000,000 grams annually, Emerald paid $36/sq ft. (1.1 mil / 2 = 550,000 sq ft. ; $20,000,000 / 550,000 sq ft) and $0.53/gram of annual production ($20,000,000 / 37,500,000 grams); this is comparable to Aphrias' greenhouse construction cost of $50/sq ft. and $0.66/gram of annual production, or to $250/sq ft. and $2.56/gram of annual production for Auroras' acquisition cost for Peleton Pharma (for acquisitions, there are comparable numbers in my article on the Mettrum acquisition HERE); it is even comparable to Emeralds' cost for their existing greenhouse that was projected to cost $10,000,000 per 10,000,000 grams of production. The cost for the retrofit of the greenhouse could exceed $20 million but it would have to double/triple before it becomes overpriced relative to other industry acquisitions/partnerships. The JV deal is also to be paid in tranches with only $2 million up front and $18 million to be paid out as milestones are reached, this saves Emerald on the back end if the deal falls through or isn't finished according to plan. Most importantly, in my opinion, is that Emerald just paid $20,000,000 for 37,500,000 grams of annual production, which should end up producing $30,000,000-40,000,000 net, annually.
Emerald will still need to retrofit the existing greenhouses for cannabis production, which according to Village Farms most recent investor presentation, should initiate the cultivation license process in June 2017, the greenhouse conversion process in Summer 2017 (completing March 2018), and the growing process in late 2018. It seems that an in-process tomato crop in the current greenhouse is delaying the process (tomato crop completed Nov 2017) but even with growing starting late 2018, I'm still optimistic. We obviously want production as soon as possible but this is an eternal industry with a lot of variables still left to play out, a 6 month delay from legalization does not ruin the investment merit of this company and the point still stands that they are priced at close to 2-3x net income for 2019 (without the addition 3.7 million sq ft from the JV and further expansion on their own facility). Emerald also has 10,000,000 grams planned for production by legalization from their current facility in British Columbia and up to 100,000,000 grams if the full footprint is built out.
A quick look at market caps and production across the sector show relative value for Emerald.
Market values, planned production, and price per gram of production as of June 8, 2017 Aurora - $680 million - 99.8 million grams - $6.5 per gram of production Canopy - $1.25 billion - 92 million grams - $13.5 per gram of production Aphria - $720 million - 75 million grams - $9.5 per gram of production Organigram - $230 million - 26 million grams - $9 per gram of production Hydropothecary - $150 million - 29 million grams - $5.1 per gram of production Emerald - $120 million - 47.5 million grams - $2.5 per gram of production
Price per gram of production is a metric that I created to show relative value between companies, based on their planned production relative to their market capitalization. Obviously some companies will deserve a better premium over others based on management, ancillary services, location, competitive advantage, etc.
We see here that Emerald is priced at almost 1/2 of Organigram while producing almost 2x more product. Emerald is also 17.5% the size of Aurora but is slated to produce 50% as much product, if Emerald was priced the same as Aurora (in terms of price per gram of planned production) it would be worth $308,750,000, obviously Aurora is going to be worth more per gram of production because they have a different management, different financing, different location, different medicinal patients, etc. but Emerald still has incredible value when looking at relative industry valuations and valuation relative to net income.
For a better relative valuation, Aphria has 75,000,000 grams projected from their 1,000,000 sq ft. greenhouse completing construction in July-August 2018 (growing starting just before or around the same time as Emerald); Emerald is projecting 47,500,000 grams annually (67% of Aphria production) and is priced at 17% of Aphria. Both of these companies use greenhouses and both are low-cost producers.
When looking at future potential production, Emerald has a maximum capacity now of 250,000,000 grams annually (at low-end production estimates, more than any other LP) which could net $250,000,000 annually (2x its current market cap). Aurora maximum production is 150,000,000 (50,000,000 of which is dependent on a facility that hasn't been started and is only in the planning/zoning stage, we also haven't heard about the additional facility in quite a few months), Canopy maximum production is 130,000,000 grams (with construction on a large portion of this incomplete/unstarted), this leaves Emerald with the largest potential production for the industry, by far. This is also extremely beneficial for Emerald because, unlike almost ever other LP, these production numbers are backed by actual completed greenhouses (retrofitting is still required, but doesn't require full bottom-up construction and planning like most other LPs). My biggest issue with this industry (and the reason I created this spreadsheet) is that the majority of the LPs have planned so much but have so little construction actually underway, Emerald benefits here by not having to plan and construct new facilities from the ground up.
Village Farms is located in one of the best climates in Canada for greenhouses, the coldest temperatures during the winter tend to stay above 0 degrees Celsius which should help with heating costs. Aurora, for example, experiences a "real" winter that will require higher heating costs that will cut into COGS during the winter months. Village Farms also owns a 7 MW power plant that is fueled by recycling landfill gas, it is unsure if this is going to be used for the JV.
Emerald Health also provides the highest margin of safety relative to intrinsic value out of any LP that I follow. Margin of safety is also most apparent for Emerald in the case of a production limit (something that is very possible in the future once supply overtakes demand); Aurora also provides a strong margin of safety in this case, not because of margin of safety relative to IV but because they own a supply chain in Germany that could take excess product that might not be allowed in Canada.
Risks
Emerald (and Village Farms) will still have to raise additional capital to build out the first facility and to retrofit the additional 3.7 million sq ft., this will lead to dilution. I dont have much of a disdain for necessary dilution (especially dilution that pays for itself 2x over within its first year or two of production).
There is risk of the retrofit being more costly than planned or lagging the proposed timeline. Although extra costs are possible (probable?), lagging the timeline is less possible because the $20 million funding from EMH is in tranches to be paid out based on completing milestones.
I would also like to know the leasing agreement for the facility and whether the power plant will be used to subsidize power costs. I would also like to see the costs for acquiring the additional facilities.
I am interested in how the 50% ownership will work for Village Farms, will they sell the product to Emerald? Will they receive their own cultivation/sales license and sell their 50% of production themselves? What prices will they be charging Emerald, if Emerald buys their product, or will they sell it to competing LPs? Are all profits from EMH sales from the facilities split in 50%? Will the JV sell under their own label, with 50% of profits funneling to each partner? Sell under Emerald, with 50% of profits going to each partner? Village Farms is definitely undervalued now, but there are so many questions when trying to determine just how undervalued they are.
It also seems like these acquired greenhouses are not as automated as the Aphria/Aurora greenhouses (although labeled "state of the art" in their investor presentation). Are these facilities going to have a long life? Is there significant capital spending required in the future for upkeep? Are the facilities going to produce significantly less per square foot as the automated facilities (projections are below-average but estimates are said to be conservative)?
Price Targets
Im writing an article on price targets across the industry so I wont go into extreme detail here. This is an extremely simplified price target and in no way represents my analysis on the industry, this company or this JV; this is a quick calculation based on net income for the growth phase on an industry that could very well end up completely different based on how various qualitative/quantitative variables play out.
In 2018, Emerald should net $0-10 million depending on how revenues play out from their 10,000,000 gram/100,000 sq ft. facility that is supposed to be finished by legalization. Emerald could net $40-50 million annually from this JV and their facilities combined for 2019 (depending on spending and operations; net incomes should be low for initial phases of legalization due to required spending for expansion). Emerald also has the opportunity to obtain the rest of the 4.8 million sq ft. available, which could push them over $150 million net (47.5 million current + 150 million if all 4.8 million sq ft. is utilized, minus margin of safety; also not including the rest of the 32 acres that Emerald owns that could add another 90 million grams annually if built out).
If this joint venture doesn't hit any major roadblocks, Emerald should be worth well over $800,000,000 by 2019. $800,000,000 represents a 20 PE on $40,000,000 (less than $1/net on 47.5 million grams, a low end projection w/ margin of safety), this disregards any additional expansion on their own 1.4 million sq ft. property or the acquisition of the 3.7 million sq ft. that Village Farms has remaining in the JV contract. I also believe that valuations for this industry could be higher than average because of a variety of reasons that I've listed HERE in my analysis on the industry.
I believe that Emerald now has the best potential to be the largest licensed producer in Canada, based on all current information. It is not crazy to think that Emerald could be worth $1.5-3 billion down the road if there is a market for the 300 million grams that the JV could potentially produce across its 4.8 million sq ft. of greenhouses, plus there is the 1.4 million sq ft. of land that Emerald leases in BC (from the CEO).
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