Can you still “make a fortune on the marijuana boom of 2018?” The Casey folks are out with a pitch about the new wave of recreational pot sales, spurred by California’s legalization and Canada’s impending legalization.
Justin Spittler and Nick Giambruno are the analysts Casey had on the presentation, and their goal is to “get in early” and “become the next marijuana millionaire” during this marijuana investing mania. The offer they’re making is a two-year subscription to Crisis Investing, for which they’ve teased some marijuana stocks in the past, only this time around they’re selling it at $1,795 for two years with no refunds (and, presumably, no refunds for those renewals that come through at $1,795 a year after that).
The hook is that there’s a guarantee that you’ll have “the chance to make 500% gains” on each of the five stocks they’re teasing in this presentation… which is obviously irrational based on the actual financials of most pot stocks in the near future, so they must be either using a far-in-the-distance deadline for those 500% gains or betting that there will be another wild spike in the pot stocks. Which there has again been, to some degree, over the past couple months, largely thanks to the Canada and California anticipation.
Oh, and that “guarantee” about all five of them reaching 500% returns? That’s not a “refund” guarantee, it’s a “we’ll give you another year for free” guarantee — which, of course, costs them nothing and is a pretty standard kind of guarantee for these higher-dollar newsletters or late. (“If you’re disappointed enough in this service to call and complain, we’ll give you more of this thing that you didn’t like, free!”)
So, anyway, what stocks did they tease in their “presentation” yesterday? Let’s feed the clues to the Thinkolator and see what we find… I’ve pulled what quotes I could from the presentation, but they didn’t provide a transcript and I almost poked my eyes out a few times having to listen to it all, so it’s possible that my wording is off a little bit on some of the quoted clues… consider those to be paraphrasing, please, not direct quotes.
The first one is teased as a Real Estate Investment Trust and the “safest bet” …
“The safest bet in marijuana… a dividend paying stock that gives you ownership of some of the most valuable real estate”
This one must be a stock we’ve had on the watchlist for a while, Innovative Industrial Properties (IIPR). I put this on the watchlist because REITs that specialize can often be compelling — mostly because specialized REITs, who rent to tenants who are otherwise hard to serve or have facilities that are somehow difficult to replicate, can earn higher cap rates on their properties (that’s the term usually used for the cash earnings of a building or property — so a cookie cutter office building might have a cap rate of 5%, for example, indicating that cash earnings per year are about 5% of the purchase price, but a hospital might have a cap rate of 7% or a marijuana production facility might be at well over 10% (IIPR reported acquiring their earliest properties at a 13% cap rate, which is exceptional). That enables faster cash flow growth, and therefore faster dividend growth.
I still like the idea of this one, though it’s very early and they don’t have many properties yet — they haven’t been builders of properties, but have instead done “sale/leaseback” deals with a couple of growers to acquire properties as they begin to build the portfolio. They would get better scale if they could ramp up and buy a competitor like Kalyx Development, though I don’t know if that’s actually feasible (Kalyx is another marijuana landlord, they almost became a publicly traded REIT by merging with a SPAC last year but the deal fell through — so they’re private still).
Right now the valuation is a bit tough, since IIPR is trading at almost twice its book value — and that book value should be pretty fair, since it’s based on acquisitions they’ve made over the past year or so. But certainly they’re a far safer bet than most of the actual marijuana growers, since they don’t have a particular bet placed on marijuana prices, or even on legalization progress (so far, their facilities are rented by medical marijuana growing companies… which are probably less likely to face regulatory challenges than recreational pot companies).
IIPR is still quite small, roughly $120 million in market cap. If this were a normal sector, I’d suggest waiting it out for better prices… partly because to grow they’ll need to buy more properties, and to buy more properties they’ll need to raise more money, which probably means issuing more stock, and that has a tendency to depress the share price on dilution fears (even though almost all REITs have to sell shares to grow, and a 3% cost of capital — that’s their current dividend — is not so bad if your cap rate is in the low teens, that gives a lot of room for high cash margins, which can also help to fund growth).
But since there’s also the possibility that IIPR could just get a super-loopy valuation on marijuana enthusiasm (instead of just the “awfully expensive” valuation it’s at today), it might make sense to nibble now and hope for better prices later. After watching this for a bit and looking it over again as I was writing it up for you today, that’s what I decided to do today — I missed out on the chance to buy at the weakest part of the stock price fall after Attorney General Jeff Sessions put a scare into marijuana investors last week (it went from $36 to $26 in the space of about a day, but bounced back to the low $30s pretty quickly), but I’ll go ahead and enter a small position now and watch for other opportunities. I’ll be writing in more detail about that for the Irregulars later as I update my Real Money Portfolio.
This stock could easily fall 50%, which is unusually risky for a REIT, but pretty safe for a marijuana-related stock — that’s a lot better than the downside risk of 90%+ that many operating marijuana stocks might face during manic times like this. The upside, of course, is also far less dramatic — the stock is not going to rise 500% anytime soon, though there’s a chance that they can grow nicely for years if they’re able to buy more high-return properties… particularly if they’re able to use the debt markets to lever up their balance sheet in acquiring new properties, which can really boost REIT returns and dividends if done strategically. The real goal here is rapid dividend growth, since REITS that post high dividend growth rates tend to really get investors excited.
There’s also at least one other property-and-facility stock that gets some attention in the marijuana space, Americann (ACAN) — ACAN has talked about converting to REIT status, and they say they offer “a comprehensive, turnkey package of services that includes consulting, design, construction and financing to approved and licensed marijuana operators throughout the United States,” but there’s not actually any rental revenue or dividend payment to show for it yet, and I don’t believe they’ve done their REIT conversion (I could be wrong, but all the REIT chatter I saw from them talked up converting “someday,” and that was in 2016). They also indicate that they invest in other cannabis-related companies, but as of the last filing their balance sheet doesn’t indicate that they own anything of particular value just yet… perhaps that has changed since September, or they have “hidden assets” somewhere, but often the story gets well ahead of the business development with these kinds of stocks.
“Half of the marijuana patients in Canada as its customers… last year they started working on their recreational marijuana e-commerce site… an investment in this company is just like investing in Amazon when it was $20 a share.”
That’s almost certainly Canopy Growth (WEED in Toronto, TWMJF OTC in the US), the Canadian industry leader and probably the closest thing we have to a marijuana “blue chip” stock these days…. though it gets so much attention for this market-leading position that it’s again trading at a fully ludicrous valuation of well over 100X trailing sales, as investors anticipate a huge change with the recreational marijuana legalization in Canada that’s expected to go “live” this Summer (there are some other big players in Canada, too, like Aurora Cannabis… and Aurora is even more nutty at ~180X sales).
Canopy has always been the “real” marijuana stock I’d be most comfortable with, given its potential to develop the first really powerful brand in the consumer marijuana space, and the solid scale it has as it tries to grow the market, but I’ve never been willing to pay the steep premium price the shares have traded at for years now, and it’s hard to take a stock seriously that trades at this kind of valuation.
That said, your opinion could certainly differ. I’m perhaps too much of a fuddy-duddy on these stocks — and I said much the same thing about Canopy back when Giambruno was first pitching it as the “Amazon of Weed” back in October, so my caution there has resulted in missing a gain of about 150% in the past few months.
What else do they hint at? They pitch the “Home Depot of Pot” and a sort of “picks and shovels” supplier to the industry thusly…
“Sell the goods and services that every grower needs, they’re on their way to becoming the home depot of pot.”
That’s not a lot of clues, but we get a little more later in the presentation:
“This company is where Home Depot was back in 1981, when it was just going public with a few stores in Georgia.
“One stop shop for hydroponics, soils, pest control, ventilation fans, etc.
“Stores in four states, foothold in California. Proven model but small enough to grow off the charts.”
We’re also told that there’s little competition — products aren’t available at hardware stores or on Amazon, no major retailer competes. Sales have almost doubled every year since 2014. Top picks and shovels play in the green gold rush.
That’s not enough of a clue to be definitive, of course, but this is very likely the little retailer GrowGeneration (GRWG). They have a bunch of stores in Colorado selling hydroponic growing supplies, and have also begun to build a presence in California, Nevada and Washington State. You can see their investor presentation from November here, which details their expansion plans (most of the other legalization states) and their strategy to consolidate the hydroponics retail industry to become a major player and become a reliable supplier to the surging number of growers nationwide — but so far they have just 14 stores, so they’re quite tiny.
And, perhaps thanks largely to Casey’s attention, the stock jumped about 50% today. so that makes it a challenging one to buy, should you be interested, but I don’t know a lot else about them… they’re small, they’re not yet profitable, the goods they sell have pretty good gross margins so they ought to be able to achieve economies of scale at some point (though I don’t know when), and they do have impressive same store sales growth numbers — which you might expect, for a company that’s basically still a startup in a very fast-growing industry.
I like this a lot better than I like the growers, just because the valuation is not as nutty and it’s a much easier business to understand (for most growers, we still really have no idea what the pricing will be like for regulated recreational marijuana, or whether legalization will bring prices down enough to really do away with the black market), but I expect they’ll be raising money to do more acquisitions pretty soon — they only have about $2 million in cash as of the September report (assuming they haven’t raised any since, I haven’t checked), and hydroponics stores are not likely to be selling themselves at discount valuations right now.
If you like the general idea of supplying materials but don’t like such a small retailer, you might take a look, too, at Scott’s Miracle Gro (SMG), the fertilizer (and other stuff) maker and seller that most of us know from its Miracle Gro line… but which has also spent a fair amount of money building up a specialty indoor hydroponics product line over the past couple years, with the CEO expressly focusing on becoming a major supplier to the legal marijuana industry. This wasn’t hinted at in the ad, to be clear, it’s just a stock that comes to mind every now and again.
Hydroponics is still not the biggest part of SMG’s business, as you might guess, but it’s a larger portion of their business than I would have anticipated — they break out this hydroponics business under the Hawthorne name, and as of last quarter Hawthorne accounted for about 10% of revenues and is growing substantially faster (both organically and through acquisitions) than their core business, though the operating margins are currently lower than the rest of the business. But it is meaningful… with $35.5 million in operating profits last year on $287 million in sales… so even though it’s not as big a deal as sales of Miracle-Gro (the core business had $2.1 billion in sales), it’s still certainly meaningful.
The core business is also growing, so analysts expect roughly 10% earnings growth per year for the next few years — and at $110 a share, the stock is trading at about 25X next year’s earnings. So that’s a fairly steep price to pay for that level of growth, but if marijuana demand helps to drive earnings surprises perhaps they can do better than the analysts expect… and it’s not steep at all if you compare them to most companies that are more directly related to marijuana, which are, in the main, not even profitable, so it’s really just a matter of perception and what investors are looking for. Certainly we’ve seen plenty of financial sector stocks have minor interest in bitcoin or blockchain technologies and get a surprisingly rich valuation based on that almost immaterial connection to the hot bitcoin story, so far stranger things have happened.
The next one is cited on the order form as “the company supplying the product that every legal marijuana sale in the country requires” … what does that mean?
Well, in this case they’re talking about packaging. Which lends itself to a stock that has been pitched before, Kush Bottles (KSHB). I don’t know if that’s actually the match or not, but it’s a reasonable guess… and another stock that has roughly doubled over the past two weeks.
Here’s what else they say about it:
“One thing better than anyone else… packaging for marijuana. Every sale requires special containers, this company has quadrupled customer base and price is still near recent IPO price. This could shoot higher as California begins selling in quantity.”
Could be, I don’t know. They do have sales, and the stock is valued now at “only” 17X sales… and until a couple weeks ago it was still trading pretty close to the IPO price (it went public at a little over $2 a share two years ago).
My concern would be the sustainability of any advantage or pricing power they might have in the marijuana packaging business, since they certainly aren’t the only company selling packaging that’s approved for marijuana, and growing industries bring in growing competition from suppliers.
Kush was pitched by Ray Blanco about a year ago near $3 a share, and I was fairly skeptical of it back then, too — the stock was pretty quiet for most of 2017, but took off just recently and is now above $5… though it also did turn profitable, which cheered investors some (for the August quarter, they had their best numbers yet — $8.6 million in sales, $200,000 in profit).
That’s still a hard business to value at $300 million, but it is, at least, moving in the right direction — and who knows, if they turn out to have some kind of real “lock” on the market for some reason, either because of industry relationships or regulatory requirements, and competition doesn’t emerge (that could be a pretty big “if”), they might grow into that valuation if sales are as phenomenal as hoped for in California and elsewhere. Not my cup of tea, but perhaps it will appeal to you.
But wait, we’re not done! One more for you…
“This company is unlike anything ever seen in the marijuana business… they have the one thing that every single grower in the industry needs.
“90 cent penny pot stock seen having huge returns, like their inspiration in the mining industry.”
That “one thing every grower needs” must be either distribution or cash, I imagine… and the references to the mining industry give us the determinative clue that tells us, yes, we’re again seeing someone tease Cannabis Wheaton (CBW on the Venture Exchange in Canada, CBWTF OTC in the US).
Cannabis Wheaton is one where the story always appeals to me on the surface — their general strategy is “cannabis streaming”, sort of like the royalties and streaming deals that miners often use to fund development, and which were so lucrative for Wheaton Precious Metals (no relation, but their inspiration), Franco-Nevada and others. In this case, they help fund growers, get them distribution, and receive a share of production in return — but the financials have never made sense to me unless you assume that the price of marijuana is going to skyrocket and you’re convinced that Cannabis Wheaton will be able to easily raise nondilutive capital to fund all the “streaming” deals they’ve agreed to.
I wrote in more detail about this one over the Summer, when Giambruno was first pitching this stock for Casey’s Crisis Investing, so you can see my thoughts on it there… I’ve also commented on it in a few Friday Files as I keep getting tempted to look at the shares again, but the financials look worse each time I do so.
So, again, here’s one that I’ve missed as it has doubled — streaming companies are essentially financial firms, and valuing them at a massive premium to their book value seems to me to be a mistake.
There you have it, the answers for your top five Casey marijuana stocks, as best as the Thinkolator can figger ’em… and my largely conservative thoughts on those companies. I know a great many of you have been far more aggressive at investing in pot stocks, and have enjoyed massive returns (hopefully none of you have been stuck with the 90%+ losses that many of the juniors have had following those parabolic moves after the various legalization votes), so if you’d like to take the bullish side of that argument and share why you think any of these stocks (or other favorites you might have) are destined for greatness, well, feel free to opine with a comment below.
These are, in the main, real companies with real businesses, unlike some of the pot-themed or bitcoin-themed junk that gets promoted to the skies, so there are worse places to be if you like this general trend… they’re just not at “easy to buy valuations.” I might be wrong to be skeptical or conservative in this space, as I’ve been wrong many times before with past manias — only you can make that call for your portfolio.
Disclosure: Of the stocks mentioned above, I own shares of Innovative Industrial Properties, Amazon, and Franco-Nevada. I don’t own any of the other stocks mentioned in this article, and will not trade in any covered stocks for at least three days after publication, per Stock Gumshoe’s trading rules.