Jimmy Mengel has pitched pot stocks several times before, but now he’s upped the ante and is launching a marijuana-only newsletter service called The Marijuana Manifesto… which is probably as good a sign of a market top as we could hope for, but we’ll see.
In launching this service, which he’s selling for about $2,000 a year, he’s promising great riches starting with the impending legalization of marijuana in Canada… and he’s hinting at three specific stocks that he calls “Green Rush” plays.
So… what’s the deal? Well, he starts with that April 20 assertion:
“On April 20, leading government officials are set to make an explosive announcement.
“A legal move that will singlehandedly…
“Unleash a $150 BILLION untapped market…
“And send three tiny pot stocks surging for historic 1,000% gains or higher, virtually overnight.
“Forbes writes this one event ‘will make investors extremely wealthy.’
“Troy Dayton, CEO of the hedge fund ArcView Group, says ‘new millionaires and potential billionaires are about to be made.’
“And in anticipation of this fast-approaching event…Are you getting our free Daily Update
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“Government Insiders Are Moving Their Money Into Cannabis… And Seeing Bigger Profits Than Their Salaries”
And yes, that April 20 date refers to Canada… so this is what’s really enticing folks to subscribe to Mengel’s service:
“On April 20, The Doors to the $200 Billion Pot Market Will Be Blown Off The Hinges…
“On that Thursday, the Canadian Parliament will convene for its first spring session…
“Prime Minister Justin Trudeau will walk to the podium… calmly approach the mic…
“And in one fell swoop he’ll declare the end of marijuana prohibition throughout Canada.
“Sparking a 17,400% sales surge that will mint all-new millionaires.
“Within 24 hours…
“200 marijuana stores will open
“$2 million in taxes will be generated
“And certain well-positioned pot stocks will explode for 1,000% gains or higher virtually overnight.”
All this based on the estimate that the Canadian cannabis market could grow from the current $126 million in sales to $22 billion over the next three or four years. Which, of course, would be a lot of growth.
And yes, the liberal government in Canada will almost certainly introduce new marijuana legislation fairly early in the legislative session this year — April 20 is, of course, the annual cannabis “holiday” inspired by the “420” codeword popularized by the weed counterculture in California in the 1970s. Canada did announce to the UN that it intended to pursue changing its marijuana laws on April 20 of 2016, but there’s certainly no guarantee that the legislation will be either introduced or voted on on April 20 this year.
It’s certainly big news both in Canada and in the cannabis community — and among marijuana investors, who have the same verve and vigor of rare earth metals and 3D printing investors from a decade ago, and rather more than the stevia investors of three years ago. There’s a relatively sober article here on the likely timeline for changes to the Canadian law (summary: it is likely to change, but it’s not clear whether it will be regulatory or legislative and it will probably include lots of details that could easily take a year or more to go “live”).
So what are the stocks that Mengel thinks can bring huge profits your way? Let’s check the clues…
“Green Rush Play #1: “Canada’s $5.5 Billion Marijuana Monopoly”
“If there’s one play I recommend you own for Canada’s imminent legalization, this is it.
“It’s the undisputed monopoly of their legal pot market, yet I doubt most investors have ever heard of it.
“The Financial Post calls it ‘Canada’s first cannabis unicorn.’ And it has a $1 billion valuation, yet still trades for cheap.
“In fact, I consider it the single best marijuana opportunity in all of North America.”
OK, some of you will already know the name of this one — need a few more clues? Here’s a little bit:
“It’s Canada’s first licensed cannabis distributor and manufacturer
“Its revenue surged 453% in just 12 months, even with the Canada cannabis market still very limited…
“It’s the first marijuana producer to be listed on a major stock exchange
“And it controls one-quarter of the Canada cannabis market, with potential to only get bigger.
“Right now, the company’s revenues are tiny — a mere $12 million.”
The “$5.5 billion giant” part of the spiel comes from doing simple math — they say that Canada’s pot market will grow to $22 billion, and that this company currently has roughly a quarter of the market, so naturally in 2020 it will have a quarter of that market… that’s $5.5 billion.
That’s some very precise logic for an imprecise world — and even on that front the numbers don’t quite match up, since they say the stock has a $12 million revenue number out of the current $126 million Canadian cannabis market, which is about 10%, not 25%.
But, to be fair, that $12 million number stopped being accurate about a year ago — here Mengel is teasing Canopy Growth, which moved up to the main Toronto exchange and now has the ticker WEED (the US OTC ticker is still TWMJF). This is a conglomerate that primarily includes the big Tweed marijuana brand in Canada, as well as several established medical marijuana growing and selling operations.
It’s generally appealing because it has some brand power, and because Canada seems likely to be a regulated environment for cannabis, with some sort of control over the amount that can be produced and sold, and that favors the established players. That doesn’t mean the financials make sense — this is still a growth story that’s based on a regulatory regime and a consumer demand picture and marketplace that we don’t really know much about yet, so there’s lots of guessing to be done.
Currently, most of the guessing is on the optimistic side, which is why this is referred to as the first “unicorn” in Canadian marijuana even though that term doesn’t really apply here (“unicorn” is the now not-so-appropriate term that is used to refer to venture capital-funded companies that reach a billion-dollar valuation, because such things were so rare as to be mythical… but there are dozens of them now, in these days of easier access to startup capital, and, as you might have noticed, Canopy Growth is no longer venture-funded and has been public for a while, it was a $100 million company when it IPO’d last Summer).
So this has certainly been one of the big winners of the medical marijuana business in Canada so far, and it may well have a powerful brand name if and when recreational marijuana becomes a very large business North of the Border, and it also just bought one of its larger competitors (Mettrum).
But right now, of course, the financials are ridiculous — as they are for essentially all marijuana companies. WEED trades at about 40X trailing sales, and will require substantial capital investment to grow ten times more marijuana than they’re growing today (it’s a regulated agricultural product, so it has some economies of scale — but not the way that a software company is easily scaleable), so they’ll presumably keep selling a lot of shares to raise capital for that growth.
In their favor, they are more or less profitable — the new growing capacity and their acquisitions are capitalized, and the major asset (their marijuana plants) goes through the somewhat confusing cycle of “change in fair value of biological assets” like farm products do, but under those accounting procedures they did report a small net profit for the last nine months of last year and a relatively small (compared to their market cap) cash burn of about $30 million. You can see their latest financials here if you’re curious.
I’m not particularly interested in owning this stock, but that’s because I can’t get a handle on valuations or long-term potential for any of the marijuana stocks and because I don’t have a good understanding of the market, or who or why would have a competitive edge in the end in what is fundamentally an agricultural commodity that has very uncertain pricing as it moves further toward full recreational legality in more place — that doesn’t mean they mightn’t be good trades, as many of them have been in the past, but it means the sector worries me enough that I haven’t ever dipped my toe in. I’ve missed out on some windfall gains that many traders in the sector have enjoyed, but I don’t have to sleep with one eye open wondering which of these stocks will be the next to fall 80%.
If I were going to dip my toe into the sector, I expect I’d find an established and brand-owning company like Canopy to be the most sensible first purchase– you just have to have clear in your head that there’s no rational reason to be confident that the price should be at $6 or $12, either one is a wild premium to the current business operations so you’re just making guesses about the future. That’s true of many stocks, and it doesn’t mean it won’t work out… just know that sentiment can turn, and don’t talk yourself into believing the fundamental argument for these kinds of stocks.
There’s no fundamental argument you can make rationally for Tesla (TSLA) stock either, for example, I’m not just picking in marijuana. That doesn’t mean people aren’t making money on Tesla, it just means that you should giggle a little when people try to justify a Tesla investment by talking about gross margins and sales and 2025 earnings estimates — sometimes a story is enough to drive even a $40 billion automaker, so the notion that it can easily drive a $1 billion weedgrower is not so shocking.
So… there’s one growth idea for you. And yes, you can feel free to pile on and chide me for missing out on the marijuana stocks — that happens pretty much every time I write about these kinds of stocks, and I wish all the pot investors the best… I just can’t wrap my head around the financials and think about these stocks as long-term investments, and I know that I’m no more informed on their trading potential than thousands of other folks, so I see no particular edge for myself and I stay away. It’s OK to wait for pitches that are in your strike zone.
But I got off on a tangent talking about the sector again… what are the other stocks Mengel is excited about?
“Green Rush Play #2: CEO Behind OxyContin Bucks Big Pharma to Sell a More Effective Painkiller: Medical Marijuana….
“Big Pharma execs are flooding to medical marijuana.
“And they’re rushing to one tiny Canada pot play in particular.
“The CEO and founder has successfully overseen 11 painkillers to market, including several versions of OxyContin.
“So he knows a profitable thing when he sees it.”
That should be pretty easy to find, then, not many marijuana companies are run by former big Pharma execs. Other clues?
“The firm operates a state-of-the-art 23,500-square-foot facility that was licensed by the Canadian government last year….
“Just in November, this company IPO’d for over $2 a share.
“That makes it the single biggest marijuana IPO yet.
“But it looks like the very beginning of a historic growth story.
“When you consider that the pain market alone is over half-a-billion dollars…
“This company is much like buying Pfizer, Merck, or Bristol Myers-Squib when they first went public in 1942.”
This is the relatively young company (OK, most marijuana companies are not yet old enough for kindergarten… but still, this is a newby) Emblem (EMC on the Venture exchange in Canada, EMMBF OTC in the US). It is both a medical marijuana supplier with ambitions of scaling up to be in competition with Canopy and the other large players, and a medical marijuana product developer that’s trying to create precision-dosing products for marijuana and cannabis oil.
The market cap is somewhere in the $120 million range, but they’ve been doing fast and furious financings so I’m not sure that’s precisely accurate… and other than that, and the fact that there are some early funders and insiders with substantial stakes, I don’t know much about them. There’s a strongly positive SeekingAlpha blog about them that came out around the time of the IPO and includes quite a bit of data if you’d like to use that to get up to speed. The price spiked up to $3 on the first day of trading in Canada, and reached $4.50 briefly in the first month or so, but is now back down to the $2 neighborhood as, it appears, enthusiasm has been slightly diminished by follow-on financings. Don’t know much else about them, they are essentially “pre-revenue” still, but but they do have real facilities and are trying to grow production.
And one more?
“Green Rush Play #3: “Canada’s Ultimate Cannabis VC Firm”
“Gains Potential: 4,000%
“…. it’s a group of Manhattan VC investors who bucked Wall Street and moved to the remote wilderness of Canada.
“Get in on the world’s $200 billion legal cannabis market while it’s still early.”
OK, so this is presumably some kind of “roll up” company that’s acquiring other companies in the cannabis space. More clues?
“The handful of licensed firms will be the real winners when cannabis becomes 100% legal in April.
“And here’s the thing…
“This venture capital group has scooped up SEVEN of these licensed firms.
“That’s 20% of Canada’s hottest marijuana assets — all bought at fire-sale prices…
“And they did it by aiming at these undervalued firms… BEFORE 100% legalization takes place.
“They bought one firm for $6 million, even though its assets were valued at $65 million.
“That’s an instant 1,000% return.
“One of their latest acquisitions includes what’s perhaps Canada’s best cannabis asset.”
Other clues about the investment?
“The company still trades for $1, with room for immediate 10-fold returns ahead.”
There are a couple US-focused firms that are essentially publicly-traded venture capital funders in marijuana that I’m aware of, iAnthus Capital and CannaRoyalty, but if we’re talking Canada this is most likely PharmaCan Holdings, which recently renamed itself the Cronos Group (MJN on the Venture exchange in Canada, PRMCF OTC in the US)… the shares were down near $1 earlier this year, at least in US terms, but are now at about C$2.74.
Like most of the marijuana companies, they just did another financing, so they have plenty of cash, and they’ve continued to invest in their portfolio — they do have a stake in seven different licensed marijuana growers in Canada, though some of those stakes are very small (they do have 100% control of a couple of them as well).
And that’s about all I know about those guys, and my day is coming rapidly to a close… so I’ll leave you to it. Interested in those marijuana plays, all of which were teensy penny stocks and microcaps a year ago but are now far larger? You already know I’m missing this marijuana train personally, so let us know what you think with a comment below — favorites, flops, or forecasts welcome.
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