by Travis Johnson, Stock Gumshoe | May 18, 2018 7:42 pm
Hello, dearest Irregular friends! I’ve been spending part of my day working on our new “Ask A Stupid Question” project, but don’t worry, I wouldn’t forget about my favorite Friday File readers!
So what’s up this week? There are a few minor updates in the Real Money Portfolio that I’ll get to at the end, but nothing big — mostly I’m going to look at a marijuana teaser that lots of you have been asking about.
The teaser pitch in question is from Zachary Scheidt, who has flitted around a bunch of different Agora newsletters over the years — he’s currently helming a service called The Takeover Alert ($1,750/year) and promising that his “M.A.R.K.E.D. Money Signal System” can identify stocks that are primed to be taken over… starting, this time around, with a marijuana stock that he thinks will be bought by Anheuser-Busch InBev (BUD) — with, to get more ridiculously specific, an announcement of this acquisition coming on or around June 20.
Any caveats we should start with? Well, we could go with the old saying, “don’t buy anything just because you think it’s a takeover target.” I’ve heard that bit of wisdom many times over the years, and it certainly makes sense — buy stocks because you think they have great potential, or are trading at an attractive valuation, not because you think you’re about to get bailed out by a higher bidder. Takeovers are notoriously hard to predict or time.
It would be churlish, I suppose, to note that this ad coincidentally has a 30-Day “Golden Parachute” Refund Guarantee that, for today’s customers, would expire just before June 20… but mostly because that guarantee is without teeth in any event, offering no possibility of a refund but only a “you get credit for some other Agora newsletter” guarantee if you don’t like this one during your first 30 days. Sadly, that’s the case for most of the “premium” newsletters, many of them no longer any kind of refund (by “premium” I mean the upgrade letters you’ll be pitched once you sign up for a $49 newsletter, the premium price newsletters, which cost $1,000 and up… they’re not necessarily “premium performance” letters — I often hear from readers that they don’t find the pricier letters to be any better than the “entry level” publications from the same authors).
And, of course, I’d be remiss if I failed to note that any date added to a newsletter teaser has a strong likelihood of being there just to spur you into action — we’ll see if there’s any reason to think that June 20 means anything, but what it probably means is, “the copywriter thought this was a near-enough date that it would get you to cough up your credit card number without thinking too much about that $1,750 price or the lack of a money-back guarantee.”
OK, I know, I’m soapboxing a little there — what we want to know is, what’s this marijuana stock that Zach Scheidt thinks is going to soar once it gets a takeover offer from our Budweiser friends?
So let’s dig in… here’s a little taste of the ad:
“… according to my research (that I want to share with you as soon as humanly possible), Anheuser-Busch has their sights on one specific microcap marijuana company….
“In fact, we could be looking at turning every $2 share into as much as $179. That’s an exceptional 8,850% return!”
And, as you would probably expect, he uses the one public market comparison to get our attention — that investment that Constellation Brands (STZ… owner of Corona, among others) made in Canadian marijuana leader Canopy Growth (WEED.TO, TWMJF)…
“A recent telltale M&A transaction just set the bar for what’s to come…
“Constellation brands, distributors of Corona beer, snapped up an ownership share of the world’s largest weed company, Canopy Growth Corp…
“Investors in Canopy went on to collect a 176% profit – virtually overnight.”
That’s true — and the investment went a long way toward legitimizing marijuana in the minds of many investors. Constellation bought 10% of Canopy, and the stock (Canopy’s) did surge by about 180% between that announcement and the peak in early January — it has come down a bit since then.
More from the ad:
“But what I’m talking about today is a deal in the works that could send a penny stock soaring so high you could literally cash out after June 20th … collect your giant pile of money… walk into your boss’s office and tell him it’s the last day he’ll ever see your face.”
How’s that for manipulating someone’s emotions on a Friday, eh? Stop for a few beers after work, get good and mad at your boss after an awful week, storm over to the computer and say, “take that, boss, I’m spending a week’s salary to buy this marijuana idea and then you’ll be sorry!”
No? OK, let’s see what the stock is… more from the ad:
“There’s no way to sugarcoat this…
“If the beer industry doesn’t take control of the booming marijuana industry, they’re done for.
“It’s a fact already proven out in the states where weed has been legalized.”
Maybe Scheidt has a different definition for “proven out” or “done for” than I do. It’s certainly true that alcohol companies are thinking about marijuana… maybe even worrying about it as a “risk factor,” as Molson Coors has specifically noted. But it’s pretty early in the game to say that the beer industry is “done for” if they don’t take control of the marijuana business. There’s a more nuanced look at the story here from Draftmag… the upshot, as I read it? “Reports of beer’s demise at the hands of pot are grossly exaggerated.”
Of course, stories about the “death of beer” have been around for a while, and the alcohol business definitely fluctuates, from the craft beer craze to immigration trends, the micro-distilleries and the hipster cocktail bars to the up-and-down wine connoisseurship. I can’t keep track, but as far as I can tell people keep drinking beer, with relatively minor fluctuations and brand flip-flops year to year. In fact, as I put the finishing touches on this piece, I’m drinking a lovely Friday afternoon beer right now. It’s a little odd, a Vanilla Cream Ale that tastes a bit too much like candy, but it’s a far sight better than “bongwater flavor.”
Actually, I’d argue that the real revolution might come with some strong regulation so they finally have to stop labeling Bud Lite as a “beer.”
OK, I know, it’s the most popular “beer” in the country, and I just lost half my readers.
Sorry, you can drink what you want. Or smoke what you want, as long as you don’t stand too close to me.
So what’s going to happen with beer drinkers leaving the fold and going to smoke weed instead? The ad says that…
“BUD is Going to Buy These ‘Average-Joe’ Customers back by Becoming Their Weed Supplier
It’s the biggest no-brainer acquisition of the entire year.”
And we’re told that this deal will be much bigger, relatively speaking, than the Canopy deal…
“… that’s nothing compared to what I see coming for this $2 microcap.
“Because the stake we’re looking at is potentially 10 times bigger…
“See, the Constellation deal was a ‘fractional acquisition.’
“They bought just 1/10th of the marijuana company.
“On top of that, the share price impact we’re looking at is potentially 500 times greater, because our $2 microcap is that much smaller than Canopy.”
What other clues do we get? Apparently this is a company that has both some growing capacity and a consumer brand… more clues:
“… this company is already considered by insiders to be THE market leader in recreational marijuana.
“That’s important for two reasons:
“First, while most companies played it safe by focusing on the medical marijuana market, this company took a bigger risk by setting their business up to profit off legalization….
“Second, this benefits BUD because they don’t have to go through the work of establishing a brand from square one…. BUD simply has to apply its massive marketing machine to the hot brand they’ve already created.”
OK, I’m not exactly convinced about the economics for the marijuana business as a whole at the moment… but if there is going to be a winner from this group of pioneers, I’d guess that winner takes the prize because they’re able to build a genuinely differentiated product built around a well-marketed brand that drives steady market share gains in the early years of legalization. That’s a tough order, but, to be fair, both Anheuser-Busch and Constellation have done it before — and with products that are almost entirely driven by marketing and distribution, with strong followings but little-to-no real differentiating “quality” factor (I’m looking at you, Corona and Budweiser).
Other clues about this pot stock?
We get a quote from an outside source:
“Baystreet, a financial media partner of Bloomberg and CNNMoney, hit the nail on the head when they reported this marijuana company is “M&A Ready” and could be:
‘A perfect example of the type of company that the giants will eventually be compelled to take over’ — Baystreet Media Corp”
That is a real quote, though Baystreet, in addition to being a partner with Bloomberg and lots of other media distributors, also publishes sponsored content — and this particular quote is from a paid ad. The company noted, DOJA Cannabis, paid Baystreet $10,000 to say those nice things about it.
So is that the stock? DOJA Cannabis? It’s got the ticker DOJA on the Canadian Securities Exchange (that’s the rinky dink one, even smaller and less regulated than the Venture), or DJACF over the counter in the US.
Indeed it is… but they aren’t called that anymore, they did in fact merge with Tokyo Smoke and form a new company, in a deal that closed back in January — this is now Hiku Brands (HIKU on the CSX, still DJACF in the US).
So that’s the stock… but even though we’ve got the name, let’s look a little more at what Scheidt is saying about it…
“I can also divulge that this company is building a marijuana growing facility that will increase its production 8 times by the end of this year.
“And their retail footprint is expanding so quickly, you can now find their stores in iconic locations like Seattle’s Pike Place Market.”
OK, that’s true — Tokyo Smoke is opening up new wave “coffee shop” locations six in Canada so far and one opening about now in Seattle, and these shops combine coffee and weed… or, in their words…
“Each flagship marries third wave coffee with best in class smoking products, a carefully chosen selection that allows visitors to develop their perfect session.”
You can review the progress of this still-young company just by skimming their 2017 fiscal year press release here, if you like… as you might expect, there’s not much in the way of actual financials, most of the business is less than six months old and has yet to really get moving or generate any revenue… but they did get a strategic investment from Aphria, with whom they had been collaborating to supply and distribute some Tokyo Smoke-branded medical marijuana kits, and they also just acquired WeedMD to add more production capacity (and a medicinal brand).
More from the ad:
“So BUD gets product, branding and retail all in a single purchase.
“There is no other marijuana company in the entire world that could be considered a “triple-threat” like this.”
I don’t know about that — the notion that brands and distribution will be important is not lost on other marijuana industry pioneers, either in the US or in Canada, but I haven’t studied the businesses of all of them to see which focus on which aspects. I would say that I don’t have any interest in buying up a company that’s just focusing on marijuana cultivation — I expect there will be a lot of suppliers, and that pricing, at least in Canada, will be lower than they’re hoping (part of the aim, after all, is to squash the black market — you can’t do that if your price is high), and being in a commoditized business is tough… you need that brand, and, as we learned from Marlboro and Budweiser, in the end probably no one will care that much who grows the marijuana (or grain, or tobacco), as long as the blender, producer, manufacturer or distributor has a relatively consistent end product that’s well-marketed so that we know what to like.
In case you want to check the other clues:
“This small marijuana company has a market cap of just $77,100,000….
“Its proprietary strains are already being sold in California, Oregon, Washington and throughout Canada….
“What also sets this company apart is that it’s run by an ex-Google executive who has stated to the media he believes ‘cannabis is the next Internet’. And that his company that will ‘redefine the cannabis marketplace’.”
Again, all matches to Hiku, which was founded by Alan Gertner, who was a Google employee for a while before leaving to follow his dream and start a marijuana company (with his dad, Lorne Gertner, who started the first licensed medical cannabis company in Canada, Cannasat, way back in 2004).
More from the ad? We get more quotes to bolster the case from other financial pundits, like this:
“‘Anheuser-Busch has shown it can adapt to trends (see how it started snatching up small craft brewers left and right), so as marijuana legalization spreads to more states, having A-B partner …xxxxxx…. becomes more likely.’ – Rich Duprey”
Makes you feel like there’s a specific rumor, right? Here’s what Duprey actually wrote — he’s a Motley Fool writer:
“Anheuser-Busch has shown it can adapt to trends (see how it started snatching up small craft brewers left and right), so as marijuana legalization spreads to more states, having A-B partner with a grower or introducing its own infused beer becomes more likely.”
What does that mean going forward? Well, Hiku has a nice little slide deck if you’d like to get sucked into their prediction vortex — and you can tell that they’ve got some investment savvy in the house, because they use language like “Hiku is a premium cannabis
brand house with vertically integrated operations, positioned for leadership in the adult-use cannabis market.”
Though they also do include some justification for this brand/experience focus — including a note that whole sale prices in Washington have been cratering since legalization (down 80%). That makes the focus on experience-based dispensaries and brand stores seem worthwhile, with a focus on building a retail chain, and they include some appealing numbers about how those facilities will work… like this:
But, of course, they only have a few stores, and none of them are more than six months old at this point, so they’re certainly not making those “target margins” of 40% right now, and we’re all guessing.
Financially? It’s all guesswork at this point, but they have raised a fair amount of capital and should be in decent shape for at least a few months, as we wait to see how the retail experience is going to be phased in for recreational marijuana in Canada. I would be surprised to see a big takeover anytime soon, since they are really just getting started and there are lots of other competing emerging brands, but you never know.
There is a decent overhang of warrants that could be exercised, presumably from some of those early financings, and I don’t know what the share structure is going to look like when it all shakes out from the WeedMD merger. The Toronto Exchange thinks the market cap is C$215 million after the mergers, and they’re usually quicker to get those numbers right than the US websites, who list it with a $74 million market cap…and the company’s presentation says the Pro Forma capitalization is 377 million shares fully diluted, which would mean a US$450 million market cap… though they’ll also have $77 million in cash when that get through that dilution.
Being a slow-moving fuddy-duddy, I’d probably at least wait for an uplisting to the Venture exchange in Canada, and would try to get some clarity about how big the company can get even if they max out their retail experience as they’ve planned, before thinking about dabbling in this one.
Still, I confess, again, to having a soft spot for marijuana companies who are focusing on the retail experience and the brand, which I expect to be far more important, in the end, than the growing capacity or even the particular strains and varietals that any one company “controls.”
Anything up in the portfolio this week?
Qualcomm (QCOM) has been rejuvenated a bit by the tit-for-tat chatter about whether the Chinese will approve the NXPI takeover… or even review it… and that seems tied up with all kinds of reading the tea leaves over what happens with ZTE and what other trade posturing happens. I have no idea what will happen, but there’s no real reason to halt this acquisition for anticompetitive reasons, and Qualcomm has had some success in navigating the Chinese regulatory landscape in the last few years, so I’m assuming it will eventually go through — and if it does, I think the Qualcomm-NXPI combination will be a real cash flow powerhouse in a few years.
We’ll see — I have a small equity position, a small exposure to very speculative out-of-the-money 2020 options, and those puts I sold that would have me buying the stock at about $51.50 if the stock falls that far. Right now it doesn’t look like I’ll be buying at that price, so I’ll just pocket the $100 per contract, but we’ll see how it goes over the next month until my puts expire.
Estre Ambiental (ESTR) — As I tried to do last week, this week I was finally able to add that larger short position I was seeking, so my long warrant and short equity position is now in pretty good balance — if the stock falls by 40%, for example, then my short position will cover my full investment in the warrants… if it rises by 30%, then the leverage of the warrants will bring a huge return even with the drag of that short position. If the stock stays within the 10-20% band where it has been in recent months, the impact on my portfolio will be very limited… and I’ve got four years to go on those warrants, so plenty of time to see how it plays out. We’ll get the first annual report in a couple weeks, expected by the end of May, so we’ll know more soon.
This is, as I’ve noted before, such an illiquid investment that my writing about it doesn’t do you much good, sorry… not many of you would be able to trade the shares in any kind of volume, but there has been such a wave of SPACs over the past few years that other short equity/long warrant bargains might present themselves in companies that have done their qualifying transaction but not yet gotten any real market attention, so keep your eyes open.
And I’ve got some more question to answer over on our “Ask a Stupid Question” thread, so I’ll leave it there for you… please do let us know if you’ve got thoughts, particularly on Hiku or other marijuana stocks who are trying to build the first powerful brands in that business, or if you’ve got questions or comments about anything else. Have a wonderful weekend!
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