Eddy Elfenbein is out with a teaser pitch for his Growth Stock Advisor newsletter, and, like so many other pot-focused touts we’ve seen in years past, it’s essentially all about the fact that you need to get in today on a once-in-a-generation opportunity in the crazy-fast-growth of the legal marijuana industry.
I don’t think I’ve ever written about Elfenbein’s stuff before, but I’ve certainly seen it around from time to time — he was an early investment blogger and had a micro-cap newsletter 20 or so years ago, and he’s a fun follow on Twitter (it’s hard to be sure of the machinations of the industry, but it looks like he took over Growth Stock Advisor from Tony Daltorio, who now runs Growth Stock Confidential for the same publisher).
And, of course, as the hook to get you to subscribe he dangles out one particular stock that he thinks is the big winner…
“The $6 Under-the-Radar Stock Staking Its Claim on a… $160 BILLION PRIZE!
“NYSE Listed (not a shady penny stock)
“Sales Up 133.7% in the Past Year
“Patents in The U.S., Canada, and Australia”
And he positions it as the “Merck of Marijuana,” giving some extra air of legitimacy — helpful in an industry that has seen more than its share of charlatans, and which (probably rightly) still frightens lots of “mom and pop” investors.
What’s the story of this “Merck of Marijuana?” Here’s a bit from the ad:
“It all started back in 2013 with… that’s right you guessed it, a team of pharmacists.
“From day one, this company has used advanced methods to create some of the highest quality cannabis-derived products in the world.
“Staying true to the Hippocratic Oath of ‘Do No Harm’ they are laser-focused on the well-being of its patients.
“They even have a Chief Medical Officer on the Executive team, leading research programs, medical education initiatives and product innovation.
“It’s Chairman is a Pharmacist with over 40 years of healthcare experience under his belt.”
OK, so right away that sounds better than the crazy startups that got in trouble for hosting huge parties with Snoop Dogg and scanily-clad marijuana “nurses” … but that’s not saying much. What else do we learn about this “secret” stock?
Well, it’s got a market cap somewhere in the sub-$1 billion range… which we learn when he shows a little bar graph, comparing this company’s sub-$1 billion valuation to the larger Tilray, Aurora Cannabis and other leaders…
“If Wall Street knew what I know… the jig would be up…
“And it’s share price would be 3X, 5X, 10X or more its current level….
“To a valuation similar to Tilray or Canopy Growth.”
And he compares this pot boom to the internet boom of the 1990s, but also notes that some of these pot stocks are too richly valued today…
“… you’re in the first innings of the Marijuana Boom.
“And I’ve found the perfect stock to own as this industry blossoms.
“You see, the problem with Tilray is that it’s already made investors rich.
“It’s got a market capitalization of almost $5 billion… despite having made total sales last year of just $43 million.
“Aurora Cannabis is even worse at almost $10 billion in valuation on just $55 million in 2018 sales.”
So the implication is that this smaller company is a better value in some way, though he doesn’t throw any numbers out for us just yet. What else do we learn?
“It’s already a leader in the race to create Patented, High-quality, Medical-grade drugs from the cannabis plant….
“This company has a whopping 12 full-time PhD’s on staff.
“It even has a nanotechnologist working to make their offerings more effective….
“To date, this company has helped over 68,000 patients… 1/6 of the entire Canadian Medical Marijuana Market.”
And apparently there’s a catalyst — they are expected to complete a new facility in 2020, in Ontario — with a 430,000 square foot giant greenhouse, which helps the company to produce at a low cost of 75 cents per gram. And the tease says they’re also going to expand into Phase 2 after that, adding another 300,000 sq. ft., getting their production capacity up to “as much as 300,000 kg of cannabis starting in 2020.”
More from the ad:
“This massive production jump is coming faster than anyone imagined.
“And when it arrives, investors will start piling into the newest Marijuana production powerhouse.
“There’s no telling how high the stock could go once the market realizes what’s going on.
“As we’ve already learned, this company has almost 70,000 active medical patients – 1/6 of the entire Canadian market.
“These patients have come to count on the Merck of Marijuana through the 2,400 physicians in its network.”
What other clues do we get? Apparently they’re also working on some joint ventures…
“Late last year, it scored an enormous win…
“An exclusive partnership with Apotex, Canada’s largest generic drug producer, to jointly create and distribute generic medical cannabis products….
“Together, the two companies plan to develop proprietary dosage formats for medicinal marijuana products.”
And they’re apparently expanding overseas as well, like some of the other big Canadian producers…
“It just inked a deal to gain a foothold in Australia via an investment in a local producer and distributor.”
And, again, acting like a pharmaceutical company:
“To solidify its commitment, they are also moving full steam ahead on a slew of Australian clinical trials.
“One such trial, being conducted at Australia’s Gold Coast University Hospital, is verifying the impact and efficiency of it’s CBD Oil on Lateral Sclerosis and Motor Neuron Disease.
“Paving the way for eventually regulatory approvals…”
And apparently they have at least a toe in the “recreational” water as well…
“Back in 2015, it had the foresight to partner up with one of Canada’s largest coffee roasters to create a brand of cannabis-infused coffee.
“They know the science behind Marijuana, and their partner knows coffee — a win-win scenario.
“The final product works just like a coffee pod that fits into any Keurig – and it’s patented in the US, Canada, and Australia!”
And finally, some hints about recent financials:
“It’s Q1 2019 results revealed:
“A 400% increase in cannabis production.
“Revenues rising 115%.
“Total Medical Patients served up another 70%.”
So who is it? This, sez the Thinkolator, is CannTrust Holdings (CTST), which uplisted to the New York Stock Exchange earlier this year and enjoyed a little surge in its share price as a result… though now it’s back to trading near a new low for the year.
And yes, the valuation is clearly nutty — though arguably a little less so than some of the other producers — they’re trading at about 14X sales at the moment, and presumably will be ramping up those sales a bit as production increases over the next year or so with their new facility. They aren’t profitable — even on a unit basis (the gross margin is negative 50%) — so you’d have to have some insight into how they’re going to get to scale and also get a lot more efficient, but it’s certainly not the worst income statement I’ve seen in marijuana land.
Still “relative value” is a tough argument to make in a sector when no stocks are rationally valued — if there’s no real foundation for any of the stocks, since no one knows what the Canadian market will bear in terms of pricing or production once everything settles down, then the stocks are probably trading not on their financials… but on their brand value and perceived growth potential. Since CannTrust has been one of the worst performers among the larger Canadian cannabis companies, that indicates the “momentum” and sentiment trade isn’t headed their way. Maybe the relative undervaluation on current financials, compared to Canopy or Aurora, means that there’s slightly less downside if the market gets ugly — but when you’re thinking about upside for large-cap growth stocks it’s often safer and more sensible to go with the brand names that attract money when things are going well.
That’s hard for me to even type, since I’m much more comfortable analyzing fundamentals — but bubblicious sectors like marijuana don’t seem to trade much on fundamentals… one reason I’ve avoided most of the stocks.
Part of the problem seems to be delays with CannTrust’s expansion project, which has led to delays in revenue growth and a bad fourth quarter that drove the shares down just as they threw in a $200 million equity raise. So a lot of bad news is, at least, in the shares, and it might be that they’ll recover at some point over the next year if the expansion goes well…. I guess that’s the possible catalyst to get CannTrust back into the good graces of the growth-focused pot investors. But beyond that, I can’t see enough to make me want to jump in with both feet.
That doesn’t mean you have to be as cautious as me on this one, of course, I know plenty of people have happily been dabbling in marijuana investment for several years and enjoyed gains that I’ve missed out on. It takes all kinds.
If you want to dig into CannTrust and don’t know the story, Elfenbein is on target with the “pharmaceutical” background — though not, just yet, with the “blue chip” financials you might expect given the “Merck of Marijuana” tagline. I’d start with their Investor Presentation here.
And I’m sure plenty of eager readers out in Gumshoe land have looked at CannTrust before — see anything you like? Excited for that expansion potential? Burned and angry after an ugly few months? Let us know with a comment below.
Disclosure: I do not own any of the companies mentioned above, and will not trade in any stock covered for at least three days (per Stock Gumshoe’s trading rules).