Jan 2, 2018 - The index, which was rebalanced as part of the regular quarterly process at the end of June and has 50 members, saw 5 double-digit and 24 double-digit percentage decliners, including 10 that lost more than 20%, during the month. The index decreased 8.2% to 58.90 during August and is up 3.0% in Q3 ...
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MONTH IN REVIEW & OUTLOOK Cannabis stocks reversed out most of the July gains, with both Canadian LPs and U.S. focused companies retreating:
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cannabis prohibition. The Attorney General's Task Force on Crime Reduction and Public Safety report supports the status quo. Zynerba's failed Phase 2 trial for its transdermal patch using synthetic CBD to treat seizures in patients suffering from epilepsy threw cold water, perhaps, on the efficacy of CBD, though the real issue was the mode of administration. CNBC's The Profit covered the California cannabis scene, creating a bit of a buzz. Several cannabis-related companies are pursuing cryptocurrency ICOs (initial coin offerings) Florida has added additional licenses, bringing the total to 12. Massachusetts is readying to allow not-for-profit license holders to convert to forprofit. New York continues to improve its program, and it is now going to add lozenges, ointments, patches and chewable tablets and to permit advertising. Washington will now permit producers to own up to three licenses rather than just one.
The index, which was rebalanced as part of the regular quarterly process at the end of June and has 50 members, saw 5 double-digit and 24 double-digit percentage decliners, including 10 that lost more than 20%, during the month. The index decreased 8.2% to 58.90 during August and is up 3.0% in Q3 but down 20.5% YTD. The 420 Opportunity model portfolio decreased 4.4% in August and is down 11.9% YTD, outperforming the index by 8.6% after a very strong relative performance in 2016 (+293.4% vs. 88.8%). The new 420 Quality model portfolio, which is intended to have lower turnover in its holdings than 420 Opportunity, was launched on March 2nd and decreased 4.0% in August. It is down just 4.3% since its debut despite the 27.2% decline in the index since the then. Senator Cory Booker introduced a new bill, the Marijuana Justice Act, which would take cannabis off of the controlled substances schedule and correct some of the social injustices related to
In Canada, the media has whipped up a frenzy about reporting Canadian companies doing business in the United States may face some challenges if the Canadian Depository for Securities, a unit of TSX parent TMX, follows through on a proposal. DOJA Cannabis became the twenty-first publicly-traded LP. Health Canada issued four additional licenses, bringing the total to 56. Pesticides continue to be an issue for the industry, with Broken Coast announcing a small recall. The big themes ahead are likely to be insight into the President's plans regarding the federal view on state-legal cannabis (especially in light of Jeff Sessions serving as Attorney General), hopeful extension of the Rohrabacher-Farr (now Rohrabacher-Blumenauer) Amendment (which is set to sunset at the end of September) to insulate state-legal medical cannabis businesses from DOJ intervention, better clarity from the federal government for banks and cannabis research (both part of the proposed CARERS Act and other
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proposed legislation), DEA pushback towards the CBD from industrial hemp industry, the inclusion of a broader range of extracts in Health Canada's ACMPR program and its continued growth in patient enrollment, likely legalization in Canada, the rollout of MMJ in Germany, Mexico and in Australia as well as continued advances in South America, progress with respect to the new legal cannabis implementations in CA, MA, ME, and NV and the new MMJ implementations in Arkansas, Florida, Hawaii, Illinois, Maryland, Minnesota, Montana, Nevada, North Dakota, Ohio, New York, Nevada, Massachusetts, Pennsylvania and Texas, the implementation of the new medical program in California and the possible legalizations via the legislatures in NM and RI. The slide, which began in March of 2014, reversed out the entire gains from early 2014, with the market currently near the summer 2013 lows after the rally since February 2016. Most valuations remain high. Positively, we are seeing some new entrants into the publicly-traded sector of higher quality, and hopefully we see more in 2017, especially with the number of legal states doubling. Please remember that it remains the case that most of the penny stocks will not succeed. I expect that there will be just a few winners among the 550+ companies that are currently on our Broad List.
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The Next Really Big Catalyst It was exactly a year ago that cannabis stocks took off, with trader interest sparked by what was then the upcoming elections that featured 5 states with voter initiatives on legalizing for adult-use and 4 on medical cannabis programs. I had discussed my bullish views in advance of the rally, which I had suggested would begin near Labor Day and likely persist into the election. In this newsletter a year ago, I stated: All year, I have been pointing to the election season as a potential catalyst for cannabis stocks, and it is now upon us in my view. As a reminder, this is just a trade in my view and not anything that will matter two or so months from now. The two-month trade proved to be the monster I expected, as is evident in this chart of the 420 Investor Cannabis Stock Index for all of 2016:
The index moved from 33.16 on 8/31 to a peak of 87.08 on 11/02, representing a market move of 162.6%. Many of the stocks I discussed in that issue of the newsletter as good ways to play the pending rally performed even better.
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While these types of big moves are infrequent, I believe that we could see another substantial twomonth rally beginning later this year due to the California legalization that is expected to take place in January. We can call it the "Cali Rally". California, with 39mm residents, is already de facto legal, and I understand that that the economic impact of the state going fully legal is likely to be less than it might be were that not the case, but my call is about the media attention that I expect. Oddly, Nevada's legalization didn't capture very much global attention in advance, but it generated significant focus afterwards, perhaps due to the pending shortages at the time. In any event, it was no coincidence, in my view, that the cannabis stocks snapped a multi-month correction in July, following Nevada's legalization, which is important because of its tourism industry. Timing this next potential trade is a bit challenging. Unlike the 2016 election trade, which was actually over by the time the elections took place, I think this rally starts closer to the event, which is presumably in early January, as the state anticipates the implementation date for commercial licenses as January 2, 2018. The media stories on cannabis initiatives on the state ballots and trader awareness of the catalyst, not surprisingly, started early. If there is a delay to the California green light, then the rally I expect, too, will be delayed! There are other factors to consider as well, including tax-loss selling that usually takes place in Q4. I think the best precedent for what I expect to unfold is late 2013, when Colorado was about to legalize. In that case, the stocks began to pick up in mid-December and peaked in mid-March, but it's important to consider that the market was very different at that time, with substantially fewer companies trading publicly.
Assuming early January is indeed the start date, I expect media focus to begin in the final two weeks of the months, especially as there isn't a lot going on otherwise at that time of the year. I anticipate that traders will be slightly in front of this, like they were in late 2013. So, I have penciled Monday 12/11 as the start of the rally. Calling the end is challenging too. In early 2013, after a doubling of cannabis stock prices, a move that caught my attention and brought me on my journey, stocks halted the rally in mid-February. This rally could perhaps run longer, and it will likely depend on the extent of the rally, as a slower less powerful rally could last longer than a sudden surge, but I am going with Friday 2/16 as the date I am penciling in for what I see as a 9-week trading opportunity. This mid-February date coincides not only with a long weekend but also the start of a protracted "earnings season" for cannabis stocks, as 10-Qs for companies with years ending in March, June or September are due on 2/14 with the ability to extend five business days and annual filings for companies with years ending in December, due by the end of March, begin to be released. Two months was the duration of last year's rally. Another smaller potential catalyst that fits well with what I have been discussing will be the High Times debut. The company plans to go public via reverse-merger into Origo Acquisition, perhaps by
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the end of the year. In addition to being one of the best known cannabis brands, it will be trading on the NASDAQ, where it will join GWPH and IIPR as the only cannabis-related stocks trading on a major U.S. exchange. I expect that this will compound media interest in the industry. Since launching 420 Investor four years ago, I have had few of these types of bullish calls. I actually downplayed the Colorado legalization and was very surprised by the extent of the rally that followed. I also dismissed potential "election" rallies in 2015 and 2016 as well as "4/20" rallies every year (they don't exist!). In fact, this is only the second time I have called for a big sector-wide rally. I will be following up with additional perspective as we get closer to the end of the year in order to try to pick the names that may benefit the most from the potential move. Initially, I think that investors will likely be especially interested in companies that are actually active in California, though there will likely be many other factors. On the Focus List, the names leveraged specifically to California include CannaRoyalty (especially its investment in distributor RVR), GB Sciences (nonbinding LOI at this point), GrowGeneration (two hydroponics stores), Kush Bottles (significant business and massive opportunity as state becomes more regulated), Solis Tek (not broken out but an obvious market for the company) and Terra Tech (operations in Northern California and IVXX brand). So, stay tuned. This is an early heads-up, and I will be refining my forecast as well as digging into a broader set of factors to help identify securities that may perform well during this time-frame. Again, California may not meet its deadline, so this discussion could prove premature. As exciting as it is to have a catalyst ahead, 2018 will also offer another one, with Massachusetts becoming the first legal state in July. Exciting stuff!
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Companies I am Watching Throughout my equity investing career, I have typically closely followed about 100 stocks at a time and then also monitored a secondary list of another 100 or so names less closely. This was from a potential universe of perhaps 3000 or more names. By closely follow, I mean check the charts at least once a week, run screens, follow news, review broker reports and read SEC filings and press releases. By the way, this is not easy for an individual who is working to do - it's part of a full-time job! At 420 Investor, I am now tracking about 550 companies that have claimed to be in the cannabis industry, the vast majority of which aren't ever going to be suitable long-term investments. Readers are familiar with my Focus List, which is designed to narrow the focus to names that either represent the cannabis sector or companies that look promising. This list has been anything but stagnant, as I am constantly reviewing the list for possible additions, deletions or substitutions. So far in 2017, I have added Canadian Bioceutical Corp, CannaRoyalty, DigiPath. General Cannabis, iAnthus Holdings, MedReleaf, Namaste Technologies and Solis Tek. I have also removed Heliospectra, Hemp, Inc., Indoor Harvest, MassRoots, Mettrum (acquired by Canopy Growth) and 22nd Century Group. It should be clear to any member of our community that I am tracking a lot of names beyond just those on the Focus List. All one has to do is visit the Forum to learn about many other companies, as I am regularly posting press releases and evaluating SEC filings and other news.
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The source of new additions to the Focus List, then, comes from new companies but also changes in companies that have been trading for a period of time. With this in mind, I wanted to share a few names that I am monitoring closely for addition to the Focus List. Canadian LPs are an obvious choice, but I am careful to limit the number. At present, there are six, including 4 of the 5 TSX-listed names (not CanniMed, which doesn't yet have a U.S. listing) as well as Supreme, which has a differentiated business model, and Organigram. Without getting into the details, the names I might add in the near future would include Maricann Group and CannTrust (when it gets a U.S. listing, which could take some time), as these companies seem more advanced in terms of current revenue as well as global opportunities for Maricann. In any event, I am following the entire LP space closely. Here are some from outside the Canadian LPs that are on my radar: AusCann (ASX: AC8) (OTC: ACNNF), a leading vertically integrated Australian MMJ company (along with Cann Group, which doesn't have a U.S. listing), is partnered with Canopy Growth, which also owns a stake. The company is licensed but isn't yet producing revenue. Australia may develop over time, but it is extremely limited for now. Golden Leaf Holdings (CSE: GLH) (OTC: GLDFF) is one that I have avoided adding due to my concerns about management and the capital structure. The company was initially focused on Oregon, and it made a very bad move in trying to expand into Washington. In advance of its former CEO departing abruptly, it went on a major acquisition spree, including the purchase of Chalice Farms in Oregon. Its CEO now leads the entire company, which funded the acquisitions, which also included ventures in Canada and Nevada, with convertible debt. The company is
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back in the market trying to raise money through convertible debt again. I expect the company to reprice existing debt and will take a look afterwards. to assess its prospects. Leafbuyer Technologies (OTC: LBUY) is a relatively new name . These guys have a much better business than the historical business model of MassRoots (OTC: MSRT). One major concern I have is a very shareholder-unfriendly convertible preferred in the capital structure that gives management a constant percentage ownership of the company. Outside shareholders get diluted over time, but management doesn't. This has terrible implications for the capital structure. Hopefully they will fix this. I pointed this issue out for another relatively new company, Helix TCS (OTC: HLIX), which recently fixed it. The company generates significant revenue from advertising, primarily in Colorado, and it is rapidly expanding geographically. In its fiscal Q3 ending in March, it reported sales of $231K and appears to be on track for over $1mm in annual sales. The 10-K for the year ending June 30th is due by the end of September. Until then, I am cautious given not only the capital structure and valuation but also the stock promotion that has been going on in the ticker. Liberty Health Sciences (CSE: LHS) (OTC: SCQBF) is Aphria's U.S. partner in which it has a major investment and from which it will earn royalties in Florida. The CEO, George Scorsis, spent many years at Red Bull Canada in senior management. While Florida has a limited number of producers, the program is very restrictive (low THC, no flower). The bet is that over time it will liberalize, giving first movers, each of which can operate up to 25 dispensaries, first-mover advantage. Liberty is also pursuing cultivation and dispensing licenses in Ohio, where it has partnered with the Schottenstein family (American Eagle, DSW). For now, the valuation keeps me unenthusiastic.
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Signal Bay (OTC: SGBY), which is changing its name and symbol to Evio (EVIO), has been struggling with a bad capital structure (lots of toxic convertible notes). The company has done several acquisitions in Oregon though is not yet profitable. It also has exposure to California as well as Florida and Massachusetts. Zoned Properties (OTC: ZDPY) has been trading publicly for a while and seems to be doing things the right way. Listed on the QX, the company is a real estate investor, with total assets of $9.6mm and stockholders' equity of $7.385mm. There are 17.3mm shares outstanding, suggesting a potential floor at about $0.43 per share (net asset value), and the stock bounced at $0.50 in late July. The company has generated modest positive cash flow this year ($121K) from its operations. Of pending issues, I am following Kalyx Development and High Times, both of which are in the process of reverse-merger transactions. High Street Capital, which may be the largest U.S. operator of licensed medical cannabis companies, is in the process of going public in Canada.
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July 17th. My first observation after reading it was that the company "had eight strains" but didn't mention where it was licensed. I knew it wasn't licensed in the state of its headquarters, Minnesota, which has just two licenses, and found it odd too that they were talking about "organic" cannabis (no one certifies cannabis as organic) and that it planned to launch "multiple clinical trials in 2018". Big stuff from an unknown cannabis stock! As I always do when I add a purported cannabis company to the Broad List, I checked its OTC status. Not surprisingly, it doesn't file with the SEC, which is a red flag. Given that I was in Colorado at the time, this was enough for me to just set it aside at the time. Several weeks later, I noticed that the stock had run up dramatically and then plunged. From 7/12, the last date before the press release, when it had closed at .50, the stock climbed as high as .765 and then crashed to .0206 on August 1st, a remarkable decline of 97% within just three days:
I am pretty excited about where the Focus List is headed. A few of the names on it now are likely to be replaced, as the quality of the new entrants is increasing in my view. I am expecting that the list will grow to 28-30 in total by year-end and 36 by the end of Q1-18.
Not-So-Solid Solid Controls I have been battling "canna-scams" for over four years now, but they just keep popping up. To be clear, not every cannabis stock that I don't like is an outright scam, but some are. One that popped up recently is Solid Controls (SLDC). I first learned of the company when it issued a press release "Solid Controls Inc. Positioned as Budding Organic Medical Cannabis Producer" on
With my curiosity piqued, I decided to dig in on SLDC. I started with the website, which provided a phone number (straight to CEO's personal voicemail) and an address (a virtual office). It repeated a lot of info from the press release, but it also said that "Eight strains of organic medical marijuana are available to Solid Controls patients. We don't just sell marijuana—we facilitate a conversation about a product we’ve all
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heard about but haven’t met intimately yet." Despite this claim, there was no info available for patients or for wholesale customers. The website also included a bio for the CEO, a John Stovers, that actually sounded reasonable: John Stovers, President and CEO of Solid Controls Inc., is a highly experienced horticulturist who has spent the past 30 years improving nursery production systems and greenhouse systems and growing quality seedlings in the field as bare-root and in containers. John is dedicated to providing pesticide-free, topgrade marijuana from contamination-free soil through strong quality assurance program. I couldn't find him on LinkedIn or even through Google search, so I turned to the OTC disclosures to learn more. The first thing I realized is that SLDC had filed financial reports dating from September 30, 2014 to December 31, 2016 all on March 7th. It had not filed previously since the March 31, 2004 quarter. It also posted its March 2017 year-end and June 2017 quarterly in July. So, the stock had gone dark for over 12 years! I found more info on Stovers and realized he had been with Solid Controls, which before entering the cannabis space was into injection molding, for quite some time. While the website described him as a "horticulturist who has spent the past 30 years...", the filings described him very differently:
Has been in the Injection Molding Machine business for approximately 25 years, including but not limited to, logic cards, thumb wheels, programmable cards and Pathfinder systems. Injection Molding has been steadily moving
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toward the 3-D printing technology sector and Has been specializing in the 3-D printing tech sector for the last 5 years. Has been with Solid Controls Inc. since 2014, before that he spent almost 20 years at 3M working in the field, becoming District Manager of Quality Control Automated Injection Molding.
I also read that he lives in Vancouver, which seemed odd for a veteran of 3M for two decades! Curious about him, I called the company and emailed as well, but I never received a response. I will share a secret DD tool now. While most OTC companies wait until the last day if not a bit longer (the extension), these guys managed to file their financials for the quarter ending 6/30/17 just 17 days later. Most NYSE or NASDAQ companies aren't able to get this done, so I found this to be literally unbelievable. It was already clear to me that this is a fake company, but I wanted to understand what was going on. Reading the filings, I learned that there were only about 1.467mm shares outstanding at 3/31, with Stover owning 34% and a Ronald Kodesh (unable to find any info) owning almost 25%. The float, then, was only about 600K shares. Today? 43.467mm! It gets worse, as there are now 4mm preferred shares (which convert at 4:1, meaning an additional 100mm shares ). How did this happen? First, the Board issued CEO Stovers the 4mm preferred shares as well as 22mm common shares. The other 20mm? This is the scam part: "20mm shares were issued for debt". So, 96% of the float (outstanding shares less shares held by insiders or affiliates) were in the hands of this former debt holder. The debt was issued to "Petou Financial
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Management Corp." Good luck figuring out who that is! Here is the scam: The debt was for $20K! This means that the 20mm shares cost just $0.001 per share. The scam part is that "Petou" was an affiliate and not able to just sell shares into the market, as the 20mm represented more than 10% of the outstanding. Petou was able to sell freely into the press release and clearly did so. Here is what this whole thing looked like:
The SLDC saga illustrates the perils of the OTC market. Scammers are still showing up regularly attempting to capitalize on trader interest in cannabis stocks. This one was very obvious, but many others are more difficult to detect.
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Cannabis Industry Calendar
09/13-15: Cannabis World Congress & Business Expo in Los Angeles, CA 09/21-22: California Cannabis Business Conference (NCIA) in Anaheim, CA 09/28-29: The State of Cannabis Conference in Long Beach, CA
SAVE 50% USING CODE "NEWCANNABISVENTURES" ($250 for full event through 9/15) OTC Disclosure , SEC and Canadian Reporting Deadlines*
Fiscal Year ending in June: Annual report due on or before 09/28 (9/28 TSX) Fiscal Year ending October, January or April: Quarterly due 09/14 (9/14 TSX) Canadian Venture Fiscal Year ending in May: Annual due 09/28 Canadian Venture Fiscal Year ending in October, January or April: Quarterly due 09/29
*Note that many U.S. companies take advantage of automatic extensions 9
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SPOTLIGHT ON THE FOCUS LIST 420 Investor maintains a "Broad List" that includes about 550 companies that purport to be in the cannabis sector. At the same time, it monitors a narrower group of 27 companies, the "Focus List", which consists of what we consider the most important companies among the publicly-traded stocks, including the most actively traded as well as several that are under-the-radar but that appear worthy of consideration. We provide numerical ratings to VIP subscribers on three different measures for each member of the Focus List, including relative valuation, technicals and relative quality. I removed Heliospectra (HLSPY) and MassRoots (MSRT) in August. Our relative quality rankings, which range from 1 (best) to 5 (worst) are a subjective assessment of each company relative to the entire Focus List and are based on management capability, corporate governance and transparency, execution and capital structure. The companies that we currently rank below average (4 or 5) include alphabetically by ticker American Cannabis (AMMJ), Cannabis Sciences (CBIS), CV Sciences (CVSI), Digipath (DIGP), GB Sciences (GBLX) and Medical Marijuana, Inc. (MJNA). Here were some of the key news items for Focus List companies in August:
American Cannabis Company (AMMJ) added a third Arkansas consulting client and a dispensary client in California. It posted a strong Q2, with consulting driving the results while product sales continued to contract. Former CEO Hollister, who owns over 12mm shares, reported over 100K shares in March and April. The company provided an extensive mid-year review Aphria (APHQF) announced a deal with Nuuvera, an ACMPR applicant, that will make it an investor, consultant, landlord, supplier and operator for the entity. It also will be selling four Tokyo Smokebranded strains. The company invested $12.5mm in to strategic partner Scientus Pharma. It responded publicly to the TMX Group with its sister company, Liberty Health Aurora Cannabis (ACBFF) promoted several executive to officer roles . The company provided an operational update that pointed to more than 19K active patients and sales in excess of $3mm in August Canadian Bioceutical Corp (CBICF) enlisted MJardin to help it scale its operations in Nevada and Massachusetts. It announced a JV with Israeli biotech Panaxia that will allow it to introduce pharmaceutical products similar to what Panaxia has done in New Mexico with Ultra Health. CannaRoyalty (CNNRF) closed the $12mm debt deal with Sprott and reported almost C$1mm in sales for Q2. Canopy Growth (TWMJF) reiterated its rationale for not entering the U.S. It named PheinMed as its 5th CraftGrow partner. It missed quarterly sales estimates as sales grew 8% sequentially in Q1. The company locked down its New Brunswick facility location and expect to be ready for inspection by year-end CV Sciences (CVSI) filed its 10-Q, with revenue growing 64% and gross margin expanding but still posting a large operating loss. Digipath (DIGP) snapped a string of three strong quarters, with a sequential decline in sales due to competitive pressures ahead of adult-use launching GB Sciences (GBLX) announced a nonbinding joint statement with some Native American tribes in California to create a joint venture
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General Cannabis (CANN) reported 19% sales growth as its security business remained weak but its "Operations" segment performed well. The company reported another big loss, and there are still over 5.8mm warrants with an average exercise price of .66 outstanding. It acquired security company Mile High Protection Services, adding a lot of revenue for just a small amount of stock (224K shares) GrowGeneration (GRWG) reported 116% sales growth in Q2 with better margins than in Q1. It signed a lease for a new store in Boulder, CO. The company will be a strategic distributor for LumiGrow LEDs GW Pharmaceuticals (GWPH) reported its fiscal Q3 and extended again the date for the full submission of its Epidiolex NDA to October, though it has partially submitted most of it. It gave guidance of a June 2018 PDUFA date, which mean that the drug, if approved, isn't likely to be on the market until Q4-18 at the earliest. iAnthus Capital (ITHUF) received approval to acquire NY licensed cannabis company, Valley Agriceuticals before it ended its deal to acquire Valley Agriceuticals and announced a new deal to buy the Citiva New York operations. It has loaned the company $500K in advance of the closing. iAnthus also addressed concerns about potential CDS policy changes with respect to securities settlement for companies with cannabis operations in the U.S. Q2 revenue improved over Q1, but it is mainly interest income Innovative Industrial Properties (IIPR) reported its Q2 and didn't report any new assets, maintaining the same "$100mm" pipeline it had previously discussed Kush Bottles (KSHB) upgraded its management team by replacing its CFO with an experienced veteran. It also announced that it has created special packaging for CannaKorps, the cPod Tower. CEO Nick Kovacevich sold 200K shares. Medicine Man Technologies (MDCL) reported sales of $883K and added 13 clients during Q2 MedReleaf (MEDFF) reported the export of cannabis oil to Brazil. It reported sequential sales growth of just 1% in Q1 as it dealt with veterans-related issues. The company has advanced to the final review stage in Germany. Namaste Technologies (NXTTF) reported sales of C$1.2mm for July, seasonal decline from June and 21% organic growth from a year ago. Organigram (OGRMF) introduced a new CBD oil. The company was accused by the Globe and Mail of having additional pesticides in its recalled products Solis Tek (SLTK) grew sales 15% from a year ago in Q1 Surna (SRNA) reported a sales decline and a revamped management team led by Director Chris Bechtel. The company is in a legal battle with Nevada-based customer NuLeaf. The company announced a key sales hire from Trane Terra Tech (TRTC) added an advisor, Alan Gladstone, to a newly created advisory board. It
reported its Q2, with sales growth in its cannabis division strong but margins depressed by price discounting in Nevada ahead of legalization. It issued a $5.5mm tranche of what could be $16.5mm convertible notes at .30 or 85% of the 15-day lowest VWAP. It also forced conversion of all of the B Preferred to common shares. The company announced an LOI t o acquire half of the production facilities owned by NuLeaf in Nevada
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FOCUS LIST - RETURNS FROM AUGUST:
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420 Investor Canadian Cannabis Model Portfolio I introduced this model portfolio at the end of 2015 that includes the licensed producers in Canada. I select from names in the index and can include a weighting of 0-200% of the company's representation in the index. The index includes companies that operate or own facilities approved by Health Canada to produce medical cannabis, with weights based upon holding a license with additional credit (a double-weight) given for sales in the most recent quarter in excess of $2mm (originally $1mm, changed 4/1/17). The criteria are likely to change over time. The initial index included seven companies and gave extra credit to three (now 5). Recent additions include THCX in April, HVST, IMH, MARI and WMD in May, ABCN and BE in June, HIP and LEAF (double-weight) in July TER in August and DOJA and TRST in September. There are no cash positions allowed. Here is the index weighting and the model portfolio exposure from last month with the month's results:
The sector declined after a strong July. The model underperformed the index, declining 7.0% compared to the 6.1% decrease in the index but maintains a 1.9% advantage YTD. From 12/31/15, the model has underperformed by 14.6%. Being underweight TER and overweight WEED helped July returns, while being overweight EMC and MARI and underweight THC hurt.
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August Returns - Big LPs
August Returns - All LPs
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This month, I made several changes, including new or increased positions in DOJA, TER and TRST and reduced positions in ABCN and CMED, both of which are still overweighted (posted at 3PM ET 8/31):
My rationale for the relative exposures: Tier I (Selling at scale)
Aurora Cannabis (ACB) has performed well on adding customers but has execution risk with its Aurora Sky and also has considerable convertible debt (fixed). Note that ACB is an advertising client of New Cannabis Ventures.
Aphria (APH) has strong management and has raised capital the best of all the LPs, but its focus on greenhouses and at only location is a risk, and it has some exposure to the Veterans reimbursement issue that cold hurt growth in the near-term. It is the one LP that has U.S. operations, which is a concern of mine that they are being too aggressive, though the large Liberty stake adds value to the company as well.
CanniMed (CMED) priced its IPO at a terrible time, and it flopped, and has performed poorly since then. The valuation relative to other LPs seems low, but this is due to the lack of non-medical strategy. The stock has the least exposure to potential delays in recreational and is well positioned for oils
MedReleaf (LEAF) is a premium company (with low cost of production) at a premium price, but one that is justified in my view. It is cheap to ACB and APH, with less execution risk. Very simple story.
CannTrust (TRST), which just began trading publicly, has very strong growth as oils are coming on. Great management, simple story, small premium valuation and justified
Canopy Growth (WEED) is the clear leader (platforms, geographies, global, oils, brands, size) that doesn't trade at a premium to most peers. Strong (built out) assets and brands will continue to attract investors. Note that WEED is an advertising client of New Cannabis Ventures.
Tier II (Selling but not at scale)
ABcann (ABCN) began trading publicly after several others, which has weighed on the stock, and seems somewhat differentiated in its growing methods. It looks more attractive than WeedMD from a valuation perspective and is leveraged to Germany. Note that ABCN is an advertising client of New Cannabis Ventures.
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Emblem (EMC), after the recent decline, is less overvalued relative to its capacity and assets and s getting closer to being able to sell oils. The early overvaluation, due to technical issues, is behind now. Note that Emblem is an advertising client of New Cannabis Ventures.
Emerald Health (EMH) did a good job of raising capital during the most recent rally and has seen an uptick in sales finally. Village Farms deal favors Village Farms over EMH.
Supreme Pharma (FIRE) is significantly leveraged to legalization and could emerge as one of the lowest-cost producers. In the near-term, the company seems a bit cheap compared to the nearest peer APH at ~65% discount. I am concerned about excessive debt as well if the convertible notes aren't converted.
Maricann (MARI) has an aggressive German expansion plan that keeps me interested despite some recent stumbles. I am concerned about their access to capital, and we could see the company sell equity. Note that MARI is an advertising client of New Cannabis Ventures.
Cronos Group (MJN) is improving but remains expensive in terms of valuation. It's not yet clear what the potential of the company is with its two LPs and stakes in several others, but its sales aren't yet significant at Peace Naturals. The stock is quite expensive on my metrics.
OrganiGram (OGI) has a market cap that seems to account for its many near-term challenges. The company has a near-term capacity issue it is addressing but is well positioned for legalization. It has some exposure to the Veterans reimbursement issue. Most concerning is the reputational hit it has taken from the recalls.
THC Biomed (THC) has a low market cap relative to peers, but it has weak financials and minimal assets. It needs to raise capital.
Hydropothecary (THCX) has used convertible debt , and I have concerns about management. The company finally has seen sales kick in, but a limited recall may impact it in the near-term.
WeedMD (WMD) has a low market cap, but the company is behind peers, with ABCN and EMC looking superior. The company is just now registering medical patients.
Tier III (Not selling)
Beleave (BE) has been trading as a pre-ACMPR for a while and received its license in May. The market cap is among the lowest in the sector, but the company needs to raise capital still (or through Cannabis Wheaton).
DOJA (DOJA) is differentiated and designed for the adult-use market. The stock trades slightly expensive to peers when measured against book value. Note that DOJA is an advertising client of New Cannabis Ventures.
HPI Holdings (HIP) is newly licensed and in need of capital. The stock is quite expensive in my view.
Harvest One (HVST) is the cheapest LP relative to its tangible book value. I like the B2B medical strategy ahead of legalization and the Europe CBD play. Note that HVST is an advertising client of New Cannabis Ventures.
Invictus MD Strategies (IMH) became an LP effectively following its closing of the Acreage Pharms acquisition and also owns 33% of AB Labs. I find management to be extremely promotional. Perhaps over time it proves out, but I find the story premature and difficult to justify the valuaton, with lots of overhead warrants.
TerrAscend (TER) has a differentiated business model and trades below recently completed financing. Management here is quite strong. Note that TER is an advertising client of New Cannabis Ventures
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September - 2017
VOLUME 4, EDITION 9
ABOUT THE 420 INVESTOR – ALAN BROCHSTEIN, CFA:
I have spent decades inside the investment industry. Prior to earning my CFA charter in 1997, I worked in NYC for Kidder, Peabody, & Co. in bonds from 1986 to 1992. In 1992, I joined First Boston’s investment management subsidiary before becoming a portfolio manager with Criterion Investment Management in 1994 —co-managing $10 billion in fixed-income investments. In 2000, I made the move to stocks, joining a small firm in Houston as an analyst and portfolio manager. I remained at the firm, which grew to $550mm in assets under management, until 2006, when I left to form my own business, AB Analytical Services—working as a research consultant for several investment advisors. In 2008, I began offering Invest By Model, a model portfolio service, to individual investors. I met Marketfy in 2013 and created The Analytical Trader, a service focused on providing swing-trading ideas. Both of these services delivered strong performance. I also became a leading contributor to Seeking Alpha. After seeing a strong need for more investor transparency among cannabis companies in early 2013, I launched 420 Investor— a service committed to providing real-time, objective information about the top cannabis companies in the market. 420 Investor has evolved into a collaborative due diligence platform, and I am proud to lead our efforts. I am also co-founder of New Cannabis Ventures, which provides curated content and other resources to help inform cannabis investors and entrepreneurs about the most exciting companies and the most influential investors in the rapidly changing cannabis industry. In the process of launching the 420 Investor, I became a much-needed ally to cannabis investors, being hailed as a leading authority in the industry as I developed a network of investors and industry professionals. In early 2014, I exited all of my other business in order to focus exclusively on the cannabis sector. I have supported marijuana legalization since 1980, when I became active in the Libertarian Party. I have recently sponsored Americans for Safe Access, the Drug Policy Alliance, the Marijuana Policy Project , the National Cannabis Industry Association, NORML, Students for Sensible Drug Policy, and Women Grow. Follow Alan on Twitter: Follow Alan on Facebook: Join Alan's LinkedIn Group:
http://www.twitter.com/Invest420 http://www.facebook.com/420investor Cannabis Investors & Entrepreneurs
The 420 Investor Newsletter is available via annual subscription ($149/yr) and is included as part of the monthly ($42/mo) or the annual ($420/yr) 420 Investor VIP subscription. Please see Alan's disclosure statement for a discussion of any potential conflicts of interest.
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