Cabot’s “Apple of Cannabis”

What's Timothy Lutts of Cabot calling "the strongest stock in the entire cannabis universe" in ads for Cabot Marijuana Investor?

By Travis Johnson, Stock Gumshoe, March 19, 2020

Where might we find opportunities these days? Perhaps in the beaten-down marijuana sector? It’s awfully hard to say, since every sector is really “beaten down” this month, but let’s look at the latest pitch from Cabot Marijuana Investor ($497/yr), since they’ve been touting a hot idea that editor Timothy Lutts is calling the “Apple of Cannabis.”

The big picture spiel is about finding companies who do things differently — like Apple did with the iPhone in getting rid of the buttons and the restrictive hardware, caring less about battery life and tradition and more about future functionality and ease of use… opening the world up to the potential flexibility of touchscreen controls and a heretofore unimaginable range of applications and uses for what we somehow still call “phones.” Here’s a taste of that reasoning from the ad:

“To identify these leaders we need to look for those that do the most important things differently.

“To do that, we should first understand what the industry norm is, so that we can tell what ‘different’ even looks like.

“What are the “long battery life” and “mechanical keyboards” of the marijuana industry today?”

And as that applies to the marijuana business…

“There are two things that are happening in the marijuana industry today that are considered to be the right way of doing business…

“Number one — nearly every sizable player wants to be everything and everywhere at the same time…

“And number two — which is really a consequence of number one — to fund their unrealistic growth plans, nearly all marijuana companies are issuing stocks as if they are Monopoly money….

“Most of the time when a marijuana company raises capital, it has to do it via a highly dilutive stock offering…which, to put simply, shrinks the wealth of existing shareholders.

“The SAFE Banking Act will certainly alleviate a lot of this issue once signed into law…
(Since it will give marijuana companies more options when it comes to getting growth capital)

“Until then — careful capital management is the cornerstone of shareholders’ wealth in this market…

“And the companies that do it well will reward their shareholders handsomely….

“The ‘long-battery life’ and ‘mechanical keyboard’ of the marijuana industry is being unprofitable and diluting your shareholders.”

I guess that makes some logical sense — it’s hard to say that being fiscally responsible is going to be an enduring advantage for a participant in a commodity business, but it’s certainly not a bad thing to be profitable and shareholder-friendly. Especially these days, when raising money via share sales is going to be a lot more dilutive for almost everybody than it was even a month ago.

And, of course, we then get to the point… more from the ad:

“There is one stock that fits the bill…

“In fact — after further analysis I’m confident in saying that today it’s the strongest stock in the entire cannabis universe!

“Not only does this company do things differently from the crowd, but it also checks off all the requirements of the All-Weather strategy…

“There’s tremendous revenue growth, healthy earnings, proven management, valuation, growing institutional support…”

All of those are good things, no complaints. But how about some actual clues? He does oblige, to some degree…

“The stock is currently trading above its 25- and 50-day moving averages, and the chart has a clear pattern of higher lows and higher highs since its most recent bottom….

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“In the latest quarter alone the company has booked over $70 million in revenue…

“This translates to over 150% growth from the year before and 20% from the preceding quarter.

“The triple-digit top-line growth is particularly impressive considering that this company is profitable…

“The operating profits came just under $40 million…”

The ad, which we started seeing on March 15 in our email, also includes a chart — so I can tell you that the data he’s using in this pitch is not from this week, it’s about six weeks old. The chart he uses in the ad goes from October 1 to just about the end of January. Which means that I’d guess this might have been a February recommendation from that newsletter, and they’ve repurposed that recommendation into a “special report” to sell the newsletter (that’s just a guess, of course, I don’t subscribe to these letters so never know exactly what subscribers see). That’s common practice, and usually it still results in interesting ideas that are still active, but given the past couple weeks of market turmoil it’s also worth noting that this stock could already have been “stopped out” of any portfolio Cabot might be recommending. I don’t know what stop-loss strategies they might follow in this letter, but my understanding is that Cabot is generally a growth-focused shop that does not hold on to positions whose charts begin to look bad.

But with that caveat, we do still want to ID this stock — the chart he shared will help us confirm our answer, but how about some other clues to feed to the Thinkolator?

“… the institutional ownership here is less than 10%!

“This means that even though the stock is heading up…

“(Rallying more than 65% since its bottom just a few months earlier)

“The overwhelming majority of the profit is yet to be made here as big money will potentially start buying out 20%, then 30%, and eventually 50%+ of all outstanding stock…

“Making this stock a great candidate to be what we call a ten-bagger! (stocks that go up at least 10X)”

And then a bit more about what this company does “differently” …

“This company has chosen to start by dominating only one highly lucrative geography and one highly attractive product category.

“The single market this company currently operates in is projected to grow to over $1.09 billion by 2020…

“And the best part is that they’re consistently selling 60% to 80% of the entire volume in that market.”

And a few other clues…

“… they are already in the top 3 of the highest volume U.S. producers today….

“This year the company is expected to book almost $250 million in revenue…

“And as much as $400 million the year after…

“All this while maintaining a fat 40% margin!

“Such high cash flows combined with a laser-focused market strategy allows this company to self-fund its growth…”

And a few more details that will help us get it right:

“When this company IPO’d just over a year ago, it had around 109 million shares outstanding…

“As of today, that count is around 110 million shares… less than 1% of new shares issued — very, very impressive!”

And though we might not know what optimism they’re holding about this stock even just four days after they sent the promo email, given the shifting stock price, this is what they said about it on March 15:

“This is a highly opportune time to buy into this stock…

“This is because this company is now preparing to expand into new markets!

“This is huge because unlike any other company in this industry — our “Apple of Marijuana” has a profitable business model and lots of cash on hand.

“That’s right — while almost every other company is petering out and desperately scrambling to find any cash to fund their unprofitable operations…

“Our cannabis “Apple” is only at the beginning of its growth cycle…

“And as one of the early investors getting in before big Wall Street — we expect to make as much as 500%+ here…”

Well, even if I don’t end up wanting to buy this stock, I must say that it’s refreshing to read a little optimistic language like that… I need a little of that “500% gains are coming” language to offset the emotional tsunami that’s washing up on the shores on Gumshoe Island this week.

So what’s the answer? Cabot is teasing Trulieve Cannabis (TRUL.CX in Canada, TCNNF OTC in the US), a large multi-state cannabis operator that is indeed profitable and fairly inexpensive at first glance, at least going by the trailing financials.

And in case you’re wondering what I mean by “maybe their opinion has changed” since this ad started running a few days ago, here’s my version of the October-January chart that they used in the ad: