This article was originally published on December 17, it has not been edited or revised. The ad from Jimmy Mengel’s The Crow’s Nest is apparently circulating heavily again, because questions are percolating through to me about these “secret marijuana stocks” again… so we’re moving it to the top of the list today for your edutainment.
The current version of the ad teases exactly the same stocks as the original did, and the stocks mentioned below are still relatively close to where they were in December. We’ve left the original comments appended so you can follow the reader feedback if you’re interested.
It was just about a year ago that we looked into Jimmy Mengel’s “Delta-9” pitch about marijuana stocks, and today he’s got a new ad out that teases several marijuana stocks (different ones, it appears) that he likes today.
And in a delightful ploy to get our attention, he titles the ad “Warren Buffett’s Secret Marijuana Stash” … which, as we’ll explain in a moment, is highly misleading — but which does conjure up fantastic images of Uncle Warren firing up a bong with Charlie Munger at the Berkshire Hathaway Annual Meeting and giggling about Coke and peanut brittle. That I’d like to see, for sure — I’ll be headed to the meeting again next year, and I’ll sneak in a camera in case that happens.
So what’s Mengel teasing in trying to get us to subscribe to The Crow’s Nest? Let’s dig in and see what he’s saying.
Here’s the Warren Buffett bit…
“Exposed: Warren Buffett’s Secret Marijuana Stash
“Why is the ‘world’s greatest investor’ stockpiling barrels of weed?
“And could this daring move result in an explosive wave of $200 billion in marijuana profits for savvy investors?”
Really? No, not so much. Buffett’s not actively investing in Marijuana (more on that in a moment), and $200 billion is an absurdly huge number… that’s roughly the size of the alcoholic beverages market in the US — as in that’s how much beer, wine and spirits in total is sold here each year, not the profit generated.
There is an underlying reality of significant growth in the legal marijuana business, of course, as states gradually decriminalize both medical and recreational marijuana use and as the trend pretty clearly is headed toward increasing that liberalization and beginning to treat marijuana as a legally regulated drug. It’s not clear yet whether that will mean it gets treated like a pharmaceutical or like alcohol or cigarettes, but it’s moving in that direction.
Which means that there’s demand both for marijuana, and for the products and services that supply the marijuana production, distribution and retailing businesses. This is where most “marijuana stocks” come in, they’re either distributors or drug developers or facility financiers or developers or otherwise support the industry… a few of them even actually produce or sell marijuana, but most of them seem to draw at least a thin line between themselves and the actual product because of the continuing uncertainty of marijuana’s legal status, particularly at the federal level.
You’ve probably seen lots of articles about the “boom” potential in the marijuana business, and most of those articles will compare it to the end of prohibition and the fortunes that were made by those (like Joe Kennedy) who “got in early” as alcohol started legal trade again and those who had locked up distribution deals, production capacity, or control of important brands made barrels of money. It’s an appealing comparison, and it makes some sense, though I don’t know to what extent those predictions that compare marijuana legalization to the end of prohibition will come to pass — I think it’s still pretty unclear what the growth rate will be in legal marijuana outside the medical market, and it’s also unclear what brands or dominant companies might emerge (if any).
Which doesn’t stop newsletter pundits from dreaming, of course — predicting big markets and looking for the profit is what these folks do, so marijuana is a compelling sector in which to sniff around for big potential winners.
I won’t go through the whole ad from Mengel, you can see it here if you want more of his buildup and his comparison to prohibition and promise of riches, but we’ll see if we can identify the three “secret” stocks he picks for this “Green Rush” of marijuana profits.
“Green Rush Play #1: “Canada’s $1.3 Billion Marijuana Monopoly”
“Gains Potential: 2,900%
“My first pick is a Vancouver-based company I call the ‘New King of Pot Stocks’ because it’s positioned as the future monopoly of Canada’s marijuana industry.
“The Canadian market for medical marijuana is growing fast.
“Industry experts project the market will grow from 40,000 individuals to 1 million in just a few years.
“And this firm is THE number one way to cash in on Canada’s explosive market — hands down.”
OK, so how about some specific clues we can toss into the Thinkolator?
“… the company is Canada’s first licensed marijuana distributer and manufacturer, so it has considerable first-mover advantage.
“… a recent acquisition of its biggest competitor…
“A combination that analysts hail as “a cannabis superpower”….
“The company doubled its revenue each month in 2014.
“In 2015, its revenues have grown six-fold.
“In just two short years, its revenues are projected to explode 2,900%… even as expenses decline!
“No surprise, then, that it recently booked positive profits… AND free cash flow.
“I’m telling you… in an infant industry like this, where many of the companies are emerging players, it’s incredibly rare to find a company sitting on extra cash.
“In fact, right now it’s the ONLY player in the Canadian market to generate free cash flow….
“… this stock has more than doubled investors’ money in just ONE month. Take a look…”
OK, that’s pretty impressive — anything else? Mengel says there’s another catalyst for this stock:
“Recently, the Canadian government legalized cannabis oil and edibles — a law that takes effect near the end of the year… opening up a whole new billion-dollar space for this marijuana giant.
“Right now, its shares trade around $3…”
So who is it? There’s one decent company that’s a match: Canopy Growth (CGC on the Venture exchange in Canada, TWMJF OTC in the US). The heart of the company is the Canadian brand Tweed, which is a distributor of medical marijuana, and they recently acquired the more science-y Bedrocan, as I understand it, to beef up the size of the company and increase their offerings in more advanced or specific marijuana varieties or formulations. This is a big company for a marijuana stock, though still small for a publicly traded company with a market cap of about C$250 million.
But it may well not be a match for these hints — it’s primarily an Ontario and Quebec company, not based in Vancouver (though it trades there, the Venture exchange is what used to be called the Vancouver exchange, which specializes on small and generally more speculative stocks in Canada). And the shares are around $3, but they haven’t doubled in a month this year or last year as far as I can tell (not all charting systems track them consistently, since they changed names when they combined the companies… but there’s no obvious double along there as hinted at in the pitch.
So is it someone else? I don’t find any compelling matches that are anywhere close — Canopy Growth, particularly with the growing Tweed brand and their investment in expansion, is probably best situated IF Canada moves toward full legalization and some sort of regulated consumer market — though that’s a big if, it’s been seen as the sentiment of the new liberal government, but it would still take a year or two and passage of some new laws before that could happen. The medical marijuana business does not seem to be growing fast enough to justify the valuation of Canopy, but clearly pretty much all marijuana stocks are being valued by investors as bets on a possibly dramatically larger market in the future — that means it could quite easily, in retrospect, be an unsustainable bubble if that future large market doesn’t actually come… or if the company fails to scale up well.
Feel free to suggest a better match if you like, this one’s tenuous.
“Green Rush Play #2:
“Denver-based social media platform that some now dub… “The Facebook of Marijuana”
“Gains Potential: 1,500 percent
“It’s connecting thousands of legal weed users around America.
“The company’s subscriber base has soared from 25,000 last year to 500,000 now.
“That’s an astronomic surge of 2,000%….
“Right now, 1,000 marijuana companies are hosted on the social platform.
“Locked out by Google, Facebook, and Twitter, these business owners are just happy to have a space for Internet marketing.
“And with competition heating up in the market, they’ll pay whatever it takes to reach customers.
“Let me be clear: Online marketing for cannabis is a HUGE untapped space. And when prohibition ends, this company is lined up to be the leader — not other social media firms that snubbed the industry….
“So far, it’s attracted $25 million in venture capital this year….
“Between August and September, the stock surged 129%….
“If everything goes right (and there’s no reason it shouldn’t), this will be the first cannabis tech company to be listed on a major exchange…
“A significant milestone event that could attract dozens of big-name institutions and send investors piling into the stock.
“This is just weeks away, so I urge you to move quickly.
“While it only trades at $2…
“It has all the potential of Facebook or Twitter, if you had invested pre-IPO.”
Oh, come on now. No it doesn’t. It may have great potential, that remains to be seen, but a niche social network focused on marijuana strains and services is never going to have the potential to grow into a broad network with a billion users.
Now, it’s also probably at least a thousand times smaller than Facebook and Twitter were “pre-IPO”, so perhaps you can make that argument about the growth potential. But don’t get your head into the clouds just yet dreaming of the possible riches… let’s see who the company is first, shall we?
Thinkolator says it must be MassRoots (MSRT), which is a fledgling social network started about two years ago, and which has grown pretty quickly to have more than 650,000 users — their basic reason for being is that they can accept ads from marijuana companies, while Facebook or Twitter won’t, and help connect people with other smokers and talk about places to smoke, varieties, dispensaries, etc. (and so you don’t have to let your boss know you’re smoking by posting a picture on Facebook, but can still have the pleasure of sharing a selfie of yourself sucking on a giant bong if you like).
Seems pretty tenuous to me, and they have not raised anywhere near $25 million — they got funding at a $25 million valuation in their final venture funding round before going public, but that means the company was valued at $25 million, not that anyone gave them that much cash — the venture funders have given them a total of about $1.5 million.
The stock did surge 129% from the August lows to the September high, getting over $2 for a while, but it’s now back below a dollar (93 cents at the close today). They have posted fantastic revenue growth, but that’s not unusual for a company that has just started to generate revenue — growth means they went from $900 in revenue in the March quarter to $2,100 in June and a huge jump to $60,900 in September. That doesn’t mean $900 thousand or $900 million, it’s Nine Hundred Dollars. This company is just getting started, and there’s no way to put a fundamental valuation on them.
The risk? Well, aside from the regulatory risk — they had to fight to get marijuana apps enabled on the Apple App Store, and they could always be cut off from that marketplace again, particularly if the legalization trend turns the other direction — there’s also the competitive risk and the performance risk. They are probably the leading social network for marijuana right now, but there are lots of others… and it doesn’t take much funding to develop a social network — particularly if you’re only scaling up to a few hundred thousand users to prove your concept or attract users, advertisers or investors. At this point, you’re putting a lot of stake on their “first mover” advantage, which may or may not end up meaning much.
I haven’t looked at recent news on MassRoots to see if they’ve done any capital raises, but so far it looks like they’ve been raising a couple million dollars each quarter and spending it all, as of September they don’t have any cash — so probably they’ll have raised some by now if you look into the filings. I wish them well, but I have no particular affinity for choosing the best of the marijuana websites (there’s also Weedmaps, the “Yelp of Pot”, and Leafly, both of which are private but have received substantial funding, and there are lots of other little startups marketing apps or social tools for marijuana customers or suppliers). Frankly, it might be that it’s not in MassRoots best interest to be publicly traded at this point, they’re nowhere near having a real revenue focus and that means they may have to rely on raising small amounts of money every quarter — which sets you up for real investment risk if they have trouble raising money at some point.
So geez, we’re not running into a lot of stocks I’m excited about given the nascent revenue picture and uncertain future landscape for their industry — but they are, at least, marijuana stocks that have proven themselves to be very volatile when news or promotional articles come out about them, so if you’re into trying to track that kind of thing and play off the passions of other investors they might be fun to watch.
How about one more?
“Green Rush Play #3: The Company Banking on Marijuana’s $3.6 Billion Energy Shift
“Gains Potential: 1,000%
“It’s a Swedish-based LED light technology firm.
“The energy costs for marijuana growers are astronomical, to say the least.
“One study estimates that weed growers consume 1% of total U.S. energy output.
“That’s the equivalent of 2 million American homes…
“The entire country of Israel…
“And as many as 150 countries!
“The total tab has been estimated at $5 billion a year.”
That’s likely using data from this source or something similar, The numbers immediately make me skeptical of their assumptions but I haven’t studied the matter at all.
More of the pitch:
“Industrial growers, like Denver-based Medicine Men, pay as much as $40,000 per month for electricity.
“So LED lights are a no-brainer.
“They can cut energy costs by as much as 66% in some cases.
“They’re also eco-friendly and produce more diverse, potent, and higher yields of cannabis.
“And this Swedish firm is on the cutting edge of new LED technology customized for the marijuana industry.
“Over the last year, in fact, sales of its patented LED technology have doubled….
“… considering its disruptive technology… growing client base… and surging sales growth…
“This company is shaping up to be a major player in this emerging billion-dollar space.
“Right now it trades around $1.30, but $10 is not out of the question moving forward.”
We’ve seen LED lighting pitches before — even for indoor agriculture for urban vegetable production, but not, I don’t think, specifically for marijuana production. So which one is this?
Well, I hesitate to even mention the stock given it’s tiny size and lack of trading volume — it’s way too small for even a dozen of Mengel’s subscribers to open positions in it quickly without dramatically impacting the share price, and here I am mentioning it in a free article… but, well, I have to assume that folks are adults and won’t go chasing after teensy crazy stuff without thinking. So I’ll tell you that this is very likely Heliospectra, a Swedish company that trades at HELIO in Stockholm and OTC in the U.S. at HLSPY. Though “Trades” is probably an exaggeration — it only trades about $30,000 worth of shares a day at its home listing in Sweden, and often doesn’t trade at all in the US… today only 3,040 shares were traded in the US.
It is “right around $1.30”, the shares traded today at $1.16 in the US and closed in Sweden at about $1.18 at the current exchange rate, so that’s a match… and they did double their revenue in the first three quarters of this year according to their most recent management report. They also say that they see sales accelerating, and that they have supportive major shareholders who have continued to fund them (most recently through warrant exercises), so they anticipate that their sales push with their US partners Dixie Brands and American Cannabis will help to boost revenue. American Cannabis was part of their biggest order to date, for $672,000 — which itself is almost twice what the company had in revenues in all of 2014.
So we’re talking very small numbers here — the company has a market capitalization of under $20 million, they’ve not yet had a year when they’ve generated even $1 million in sales, and they’re trying to get traction with their new product — which is, they say, a big hit with the folks who’ve tested it, and which will specifically help increase yield or otherwise tailor output from cannabis plants. Again, not really the kind of company that should be public — if you do ever decide to tinker around with trading nanocaps like this, please do keep in mind that there isn’t necessarily always a market for the shares: You might not be able to sell if you decide to one day, or at least you might not be able to sell within 10% of the price in Stockholm… particularly if you’re talking about a position of more than a couple hundred dollars (and really, why would you bother researching this stuff, understanding the different Swedish filings, and understanding the industry if you’re not going to invest more than that?).
Ugh. Not a lot to excite yours truly in this trio of marijuana picks — and the clues don’t allow me to be 100% certain that I’ve identified all of Mengel’s stocks correctly, so this is just terribly unsatisfying. If I had to buy one of these, it would certainly be the big fella Canopy Growth — but I’m quite pleased that I don’t have to buy one of these. Too much uncertainty, too much big talk about companies with minimal revenues in a rapidly-evolving and very uncertain market.
I know some of you are eager speculators in marijuana stocks, whether these three or others, so if you have some good rationale for picking one over another, or a vision for what the future of the industry might be, please do feel free to share your thoughts with a comment below — these stocks might make manic profits for nimble traders if there’s another crazy bubble in marijuana stocks in the runup to the election next year (with other states considering legalization, or with chatter about it at the federal level), but it’s really all about news and dreams for these kinds of companies right now. And I’m anything but nimble.
Oh, but wait, I forgot to mention that Warren Buffett connection. Yes, there is a Berkshire Hathaway company that is marginally involved in the business of expanding growing facilities in Colorado — but it’s vanishingly small as a part of the business at MiTek (that’s the Berkshire subsidiary). MiTek is an engineered building products company, and one of their small subsidiaries, Cubic Systems, makes mezzanine structures to add floor space to warehouses and factories — which some marijuana growers are using to maximize growing space.
Presumably the folks at Berkshire headquarters have nothing to do with that (they don’t get involved in managing the subsidiaries as a rule), and it’s far from being a major business initiative or a “secret marijuana stash” for Buffett, but it did, naturally, get some attention (everything even loosely connected to Buffett does)… so there was a Bloomberg piece about it last year. Maybe that’s what caught Jimmy Mengel’s eye as he was looking for a hook for his latest ad.
So no, Buffett’s likely not “stockpiling barrels of weed” … and I have no particular interest in these companies… but, well, maybe you do — head off to the comment section below and let us know.