Pot Buyout Targets teased in Mengel’s “Who’s Buying Weed” pitch (part 1)

by Travis Johnson, Stock Gumshoe | May 7, 2019 5:30 pm

"Buyout Frenzy: The 5 Small Cannabis Stocks That Could Make You 1,000% In the Weeks Ahead.”

Everyone loves marijuana[1] stocks, perhaps even more than everyone loved bitcoin stocks a year and a half ago, and that fascination has been longer-lasting than I would have guessed… fed not only by the reminder of those spikes in penny pot stocks in the first few years of state legalization, then these first couple quarters of full legalization in Canada[2], but also by the continuing drumbeat for more state legalization in the United States (and the relaxation of federal laws)…

So it comes as no surprise that the teaser pitches about marijuana stocks are still running hot and heavy — most publishers have a pot-focused newsletter these days, and everyone wants to please and attract new readers.

This latest one that caught my eye is the “pot stock buyout” pitch from Jimmy Mengel[3], though, surprisingly enough, he’s making this teaser pitch for his Crow’s Nest newsletter, which is more of an all-sectors and intro-level letter ($99/yr), not for his more expensive Marijuana Manifesto[4] ($2,999/yr).

This is the intro to his recent ad:

“Who’s Buying Weed!?

“Warren Buffett[5]. Coca-Cola. Heineken.

“Mainstream companies are buying up cannabis stocks left and right — if you’re holding the right ones, you could make a fortune.

“I reveal the five buyout targets next up on the list…”

Those three names do generate attention — are they really buying cannabis stocks?

Heineken really is in the marijuana business, though on a very small scale so far with their Lagunitas subsidiary and its first THC-infused sparkling water[6].

Coca Cola has pulled back from the “get into pot!” rumors[7] of late, though I guess we should never say never.

And Warren Buffett is not, of course, “buying weed.”

Well, I shouldn’t say that — it’s not legal in Nebraska, though it’s possible they’ll have a medical marijuana question on the ballot next year, but I’m sure he travels a lot and maybe he has toked up from time to time… though it wouldn’t exactly match his public persona.

He’s definitely not buying marijuana stocks, however. That’s been teased in the past, and there’s no real basis for those claims — Berkshire Hathaway does own some companies who have tangential relationships to marijuana producers, whether they sell electricity to them or sell warehouse shelving that is used in grow houses or things like that, but marijuana legalization or production is not a likely reason for any of the investments Berkshire has made.

That’s not to say they won’t ever jump on the pot bandwagon, though I’d be shocked if they did. If Berkshire starts dabbling in marijuana stocks it would likely be Todd Combs[8] or Ted Weschler, their other two investment managers, who buy them… just like it was one of those guys who added some Amazon (AMZN)[9] shares to Berkshire’s portfolio and generated a little hullabaloo over the weekend. Buffett is a great investor, but he doesn’t like fads without established financials or strong brands or some other foreseeable market dominance, and he doesn’t chase small stocks — he wouldn’t be likely to invest in even a $10 billion company, let alone a $100 million one.

But anyway, what’s the story with this latest tease?

Mengel is pitching his newsletter by promising to reveal the next five great takeover candidates in the marijuana space, and since the big deals that mainstream companies have done in marijuana have driven the market to such a substantial degree over the years, that catches the eye (chief among those, of course, was Constellation Brands (STZ)[10] and their huge investment in Canopy Growth (CGC) over the past couple years — that served to legitimize the cannabis market for a lot of US companies and mainstream investors).

And we see rumors all the time about the “next Canopy” deal that might come, with almost every beer, liquor or soda companies (among others) either in some kind of deal or joint venture or investment or rumored to be making marijuana investments to “get in early” on whatever the North American (or global) cannabis market ends up being.

So without further ado, let’s jump in and see if we can name his stocks from the clues dropped….

“BUYOUT TARGET STOCK #1:

“Miracle Infusions: From New Sodas to Groundbreaking Medicines….

“This company has strategically positioned itself as the go-to expert for ‘infusion biosciences.’

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“It owns the first and only truly water-soluble cannabinoid.”

That narrows it down, and I think we’ve been asked about this stock a bunch of times, but let’s double check the other clues…

“The CEO of this company is a 35-year veteran of the pharmaceutical industry…

“He personally holds five patents, has researched cancer drugs at the National Cancer[11] Institute in Bethesda, Maryland, and the Scripps Research center in La Jolla, California, and has created his very own cancer diagnostic method.

“As a businessman, he helped a major Japanese company release specialty soft drinks…

“And he was a powerful executive at the billion-dollar Big Pharma company Novartis.”

This one is Sproutly Canada (SPR.CX on the CSE in Canada, SRUTF OTC in the US), which is quite small (market cap around $100 million) and went public just last summer in a reverse merger in Canada. Here’s how they describe themselves:

“Sproutly’s core mission is to become the leading supplier to the cannabis beverage and edibles market. Our Toronto based, ACMPR licensed facility was built to cultivate pharmaceutical grade cannabis to supply a technological breakthrough in producing and formulating the first natural, truly water-soluble cannabis solution. Our water-soluble ingredients and our bio-natural oils will deliver revolutionary brands to international markets that are clamouring for well-defined commercial products. Sproutly’s business focus is to execute on partnerships with local and globally established consumer brands to leverage[12] their existing customer bases, further expand brand loyalty, assist with marketing, and support distribution networks to deliver this scientific breakthrough with speed and efficiency worldwide.”

The big news is that they got themselves a partner, though it’s not a major US firm or Coca Cola or anyone with pockets that deep — just last week they announced a joint venture with Moosehead, the Canadian brewer, to make nonalcoholic cannabis beverages. Each of them will own 50% of the joint venture, and it sounds like Moosehead will do most of the heavy lifting but Sproutly will supply the technology and cannabis.

There’s still a bit of time before they can sell a product that gets you high, since it sounds like cannabis-infused drinks and edibles won’t start to get approved and put in the marketplace until early next year in Canada (they expect legalization in October, but no one is sure what the rollout will look like), but that’s probably not enough time to develop a whole new product so they may or may not be first. Whether or not the product ends up working as they hope, or tasting good, well, who knows? It’s early days.

And it’s an exclusive deal, with the Moosehead joint venture getting exclusive Canadian rights to the infusion technology, which they call Infuz20, so if there’s going to be a takeover it would presumably be from someone who wants to expand overseas… given the questionable legality of these products in the US, I wouldn’t be at all surprised to see them take it slow and see how the product development cycle goes in Canada before jumping in, but you never know… maybe Coca Cola will fall in love with them or something. They do mention the possibility of expanding into Europe with the joint venture, but don’t mention the US.

The real strength of the technology, it appears, is the ability to mimic the effects of smoking marijuana better than most edibles seem to do (“deliver the cannabis effect as early as five minutes after drinking, and last up to 90 minutes”)… which is, of course, an important part of consumption of alcohol or marijuana for those who want to be able to go about their day (or drive a car) at some point after imbibing, and drinking a cannabis-infused beverage is probably preferable to smoking or vaping for a lot of people.

Will it work? I don’t know. I didn’t even know Moosehead still existed, to be honest, they’ve been a fixture in Canada for 150 years but I guess their US business quieted down after they made their big push to export to US college students in the northeast in the 1970s and 80s. They’re apparently still a meaningful presence in the Canadian beer market just below the titans (Molson, Labatt, etc), and they do have the distinction of being the only big brewer left that’s family owned and controlled by Canadians. So that’s interesting, but I have no idea how much capital they have to put behind this Sproutly deal, or what the timeline for developing products will be. You can see the presentation deck they made for that deal here[13].

Sproutly does claim to have the only water-soluble cannabis solution for beverages, though that doesn’t mean other companies aren’t also planning to release cannabis-infused drinks and similar products — Heineken already has that Lagunitas THC drink available, though only in California dispensaries (and I don’t know what technology they use to infuse their sparkling water with THC)… and in Canada Hexo (HEXO) launched a Truss, a similar-sounding joint venture with Molson Coors last Fall[14], and Anheuser Busch is doing something similar with Tilray. I have no idea whether this “water soluble” notion will be key or not… there’s an interesting piece from the Financial Post here[15] if you’d like a bit of an overview on the race for cannabis drinkies.

Financially, it won’t make much difference right away — presumably it will be hard to start up a new beverage business, and we don’t even know if they’ll be allowed to use Moosehead’s established brands to get a little jump on brand recognition, or how these beverages might be distributed, or at what cost. This is really a bet on a technology and a joint venture, and the info about it is very limited so far… my main reason for pause, aside from the fact that this is a startup food ingredient company and we don’t know whether the product will be any good, would be that I question whether the water soluble technology is really as critical or unique as they believe — if so, then either Sproutly is a bad communicator, they didn’t try to sell this to larger and stronger companies than Moosehead, or there have been lots of beverage companies who passed on it. Or if you want to be an optimist and buy into the story, perhaps you can conclude that they held out for a true joint venture where they could get 50% ownership, maybe the bigger companies wouldn’t have given them that.

So I’m not likely to buy this one, but I can see why it would be interesting — a lot is riding on those expected beverage rules for cannabis drinks in Canada in October, and on who can come up with the most appealing drinks and the best branding. I’ll be watching, but probably not buying.

Argh! Ran out of time today in digging into his number one choice, but I do want to cover those other four “pot buyout” stocks for you… we’ll get to that tomorrow, thanks for your patience!

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