The folks at Crowdability are pitching their Micro-Cap Advantage newsletter ($1,495/year “on sale,” renews at $1,995) by using one of those oh-so-special video ad presentations that’s touted as a “live event” …

… and as luck would have it, I didn’t feel like sitting through a live sales pitch last week, so I waited to check out the transcript of that “presentation” so I could sniff out the stock for you. Since, of course, the big presentation about the single best stock, which they refer to with terms like “The No. 1 ‘Weed’ Retirement Stock” is bereft of the name or ticker for that particular stock.

What’s in there, though, is plenty of enticement — the dangling of huge returns in front of our eyes as they talk about “How to become a marijuana millionaire this year” and compare the opportunity to buying Microsoft stock back in 1986….

“If you’d gotten into Microsoft at the right stage of the Personal Computer trend, you could have made 1,624x your money.

“That’s enough to $1,000 into $1.6 million!

“And today, similar opportunities are right in front of you…

“As you’re about to learn, now is the perfect time to invest in the marijuana market…

“And we believe we’ve identified the perfect company to invest in.

“You see, This company’s sales are on the verge of exploding…

“And when that happens, the price of its stock could go through the roof.”

The big picture argument that they trot out is very similar to the argument that newsletter pitchmen make for pretty much any emerging product or technology — they show official-looking charts that illustrate the growth of a new market, though, of course, we know that just drawing a line on a chart that says that each market goes through phases like “speculation, foundation and mass market” doesn’t actually mean that you can predict these things in the context of a single company. Still, the newsletters must have focus groups or something that tell them they get more signups if they just include more official-looking charts that move up and to the right.

Here’s a bit of the extrapolation magic trick that they throw into the presentation:

“… let’s look at the third and final step, Stage 3 — The ‘Mass Market Adoption’ Stage:

“Remember, Stage 1 companies only cater to a small number of people…

“And Stage 2 companies cater to businesses…

“Companies at Stage 3, however, cater to a mass market of customers like you and me.

“These companies generate most of the sales and profits for this new sector — for example, in the Internet sector, think about Google or Facebook…

“Combined, they own 80% of the online advertising market!”

Of course, we were all seeing ads online and the growth of ad-supported online businesses for years before Google even released its first beta version (and thankfully changed the name from the original idea, “Backrub”), and before Mark Zuckerberg even got accepted to Harvard… and the notion that Google and Facebook would be the two major winners is obvious only in retrospect.

Predicting that online advertising would grow was pretty easy 20 years ago, but predicting who would reap the rewards or that the industry would become incredibly concentrated in two unknown (and in the case of Facebook, not yet founded) companies would have been silly. Likewise, it seems logical that marijuana will grow as legalization continues… but do you really think you can guess, at this point, who the Google or Microsoft or Facebook of marijuana will be? Which brands will emerge?

Marijuana/hemp is an industry of health-related products and agricultural production and distribution, with production and distribution providing some economies of scale but the products being more or less commoditized in the absence of very strong brands… it’s not an industry like technology or internet advertising/search or social networking where there’s a natural “winner take all” or even a natural oligopoly that should presumably emerge, particularly at these early stages where the available products are determined either by distribution contracts (like CBD deals for the big drugstore chains) or strict regulations (local dispensaries, many of which are required to grow and process their own products in state).

So who will win? Who’s the dominant company in tea? Natural supplements? Vitamins? If there are huge leaders in those markets, how many companies and brands rose and fell in those categories to get to some type of dominance? Without strong consumer brands or huge network effects, monopolies or oligopolies don’t often occur, and consumer brands are extremely expensive to build… particularly as each generation seems to get a bit less “brand loyal” than its elders.

Sorry, that’s just a little soapbox speech I’m working on for cannabis-related stocks… the main concern is that there are hundreds of these little CBD or cannabis or marijuana companies, some private and some public, and it’s far too easy to let your imagination skip over the chaotic early years of an industry and assume that the little company you’re looking at will be among the huge winners.

The ad gets around this by saying their their secret stock is a “stage 2” business that will build the infrastructure for the marijuana-friendly world to come. Here’s how they put it:

“… fast-growing markets tend to create big revenues and profits, and that attracts investors…

“But once investors jump in and start bidding up stock prices, earning big returns becomes impossible. Too many people are chasing the same nickel.

“And that’s why, if you’re looking for a predictable way to earn life-changing returns, you should avoid investing in Stage 3 companies…

“Instead, you should invest in Stage 2 companies.

“You see, Stage 2 companies have the same upside potential as Stage 3 companies… but almost none of the downside risk.”

They cite Cisco and Microsoft as “Stage 2” winners from the late 1980s/early 90s, by the way — Cisco because they supplied the routers and switches that every internet company would need, Microsoft because they supplied the operating system that all non-Apple computers adopted… so I guess the general idea there is that “stage 2” businesses serve other businesses and help a technology or product to go mainstream.

OK, fine, there’s some logic to it — but remember, Cisco and Microsoft were far from being the only technology companies in the 1980s and early 90s, and they also enjoyed the technology advantages of economies of scale, particularly for Microsoft’s software, and network effects. Those were some of the first winners of the natural “winner take most” market that technology became, but there aren’t a lot of markets like that.

But anyway, now that I’ve done some lecturing, what’s our stock for the day? We do get some clues…

“You see, as hundreds of Stage 3 marijuana companies fight tooth and nail to attract consumers, the company you have a chance to invest in tonight will be collecting money from all of them.

“No matter which Stage 3 companies end up ‘winning,’ this company stands to make a fortune — and so do its investors!”

So we’re dealing with a narrative that’s familiar to many investors, the “picks and shovels” idea — that is, instead of taking a chance on bankrolling the best gold prospector, open up the shop that sells equipment to all the prospectors. It’s a popular narrative because it’s nice and clean and it sometimes works, with generally less risk than some other kinds of companies… but, of course, just because we know about some of the “picks and shovels” winners from the California gold rush (like Levi Strauss and his denim pants for miners), doesn’t mean that there weren’t plenty of companies selling picks and shovels that never became more than a neighborhood hardware store.

And the promised returns are, of course, enormous and enticing:

“As soon as you join our newest service, Micro-Cap Advantage, you’ll get immediate access to your first micro-cap trade…

“Again, this investment revolves around a breakthrough marijuana company. This company’s patented technology could mean enormous profits… for the company and for you!

“This single trade could help you turn every $5,000 you invest into $1.2 million — and possibly far more!”

That’s the 25,073% gain they keep touting, by the way, so you know what that return looks like. And, of course, we know from our limited backtesting that gains of 25,000% happen… um, never.

OK, I should never say never… but in 12 years, after covering 2,500 or so teaser stocks from every newsletter publisher we can think of, we’ve seen far more stocks go to zero in bankruptcy than we’ve seen increase by even 1,000% (we have to double check some of our older spreadsheets, but it looks like the best performer to date is still the 15,000% or so from one of the Motley Fool touts of Netflix in our first year, 2007). So that’s OK, I’ll stick with “never.”

And yes, we all probably intuitively know that 25,000% is a ridiculous and impossible goal… but it also sticks in the head, and sometimes it’s those ridiculous promises that your intelligent self doesn’t believe that are what push you over the edge to type in your credit card number on the order form. And, of course, once you’ve bought something you often become emotionally committed to it, and your ego is tied up in that decision, so you’re not very likely to take advantage of their 30-day refund period… after all, these are speculative long-term ideas, the story of the stock probably won’t change in a month, anyway.

Then, finally, we get to some actual clues…

“You see, just like the Windows operating system helped fuel the explosive growth we saw in the Personal Computing market…

“This tiny company’s patented technology is set to do the same thing for the cannabis market.

“That’s because it supplies this industry with a critical piece of technology…

“And without it, the marijuana market would come to a screeching halt.

“You see, this company focuses on what’s called ‘Extraction’ technologies.”

Ah, OK — so this is probably a company that makes cannabis oils or similar extracts, or the equipment to process those products. Other clues?

“In mature cannabis markets like Colorado and California, extracts already account for about 60% of total marijuana demand…

“And in a few years, industry experts predict that figure will reach 80%.

“Which is why, by 2022, it’s estimated that the extracts market will be worth more than $22 billion in North America alone.”

And, of course, this secret little company is somehow poised to dominate that $22 billion market. What else do we learn about them?

“This company owns and operates some of the largest and most sophisticated cannabis extraction facilities in North America….

“… because of this company’s unique background and technology, we believe it will become the country’s top producer of cannabis extracts.”

That’s a big distinction, “will become” is not the same as “is,” so keep that process of “becoming” in mind. What else do we learn that we can toss into the Thinkolator’s clue hopper?

“Even though this company just got into marijuana extraction, it’s not really a ‘startup’…

“It’s been in business for over twenty years, and it’s grown to become one of the largest companies in its industry.

“For decades, it focused on the extraction of oils for the healthcare and supplements markets. But two years ago, it made a big decision:

“It decided to apply its expertise and technology to cannabis extraction.”

No surprise there. Market forces work… companies in ancillary industries are getting into pot because it gets investors attention and holds out the promise of growth… pretty much the same reason every newsletter publisher has started up a pot stock service in the past couple years, no?

What else?

“… this company holds key patents on not one, but two extraction technologies.

“These technologies enable the company to produce a higher quantity and a higher quality of extract.

“And secondly, since this company has already created one of the largest extraction operations in the country…

“It can operate at an enormous scale.”

And, finally, some details…

“… already has regulatory approval to process 200,000 kg of cannabis every year…

“… it’ll soon be able to process over 6 million kg of cannabis annually.”

They do note, also, that this is more than half of the current level of US/Canadian cannabis production… and they say that “operating at this scale will keep away competitors” and give them a dominant market position… more from the ad:

“… if a new company wants to break into this market, it would have to spend years — and literally tens of millions of dollars — building out its own facilities and processing technologies.

“This explains why the company you’re learning about is expected to become the dominant player in the extraction market…”

Which would be lovely if true. Other clues?

They say that if they get to six million kilograms, that would bring them roughly $1.36 billion in revenue. In case you’re unaware, that would dwarf all of the marijuana companies currently in existence put together… though, of course, we don’t know what the numbers might be once the markets mature.

And they tell us where they get the 25,074% profit number from, so that’s amusing… apparently they looked at “comparable public cannabis companies” and decided that they trade at a 50X price/sales ratio, so therefore if they have $1.36 billion in annual sales the stock should be valued at $67 billion.

Yes, the big Canadian marijuana companies do trade at nosebleed price/sales numbers… but that’s because the revenue level is essentially trivial right now as legalization has been in place in Canada for just a few months. Canopy Growth (CGC), for example, is also expected to get to $1 billion in revenue soon, analysts have it penciled in for 2021, so although they’re trading at 84X sales the sales number is almost irrelevant to investors. They’re not looking at the $120 million CGC had last year, they’re looking at the anticipated $1 billion+ in two or three years. And CGC trades at just under $15 billion, so even that is a wildly high valuation of 15X sales.

Ever wonder what the valuation universe looks like? It gets nutty sometimes with tiny companies, but once you get to a billion-plus dollar valuation it tends to shake out a lot of that — there are 2,872 companies with market capitalizations of over $5 billion, and 27 of them trade at a forward Price/Sales ratio of more than 20 (you get to 47 if you use price/trailing sales, just because some of the companies don’t have forward estimates in the data set). There are a dozen or so “hot” tech stocks, and most of the rest are either, yes, big established marijuana stocks or biotech stocks. They are the hot stories and the outliers, not the average on which you wisely base your valuation assumptions (and if you’re curious, pretty much none of them trade at a PE ratio of less than 50).

So… will this secret stock reach those heights? I assume that’s probably lower odds even than a spin on the roulette wheel even before I name it for you, but let’s check for any other clues first… and we’re also told that there’s a short-term opportunity before that brain-spinningly-unlikely 25,000% return…

“… as revenues start flowing from this company’s extraction operations, its stock price should quickly start moving higher.

“Based on fundamentals alone, we believe this company’s share price could jump by 400% within the next six months.”

Well, sure, fundamentals. That’s usually what’s behind a 400% six-month price jump. Other clues?

“… because of this company’s legacy business operations, its scale, and the strength of its technology and patents…

“We believe this opportunity offers you significant downside protection.”

And apparently there are big appealing investors already in the stock:

“… one of this company’s largest shareholders is the legendary investor, George Haywood….

“several years ago, he took a big position in Sarepta Therapeutics (SRPT) when it was worth just $150 million…

“And just a few years later, he cashed out when it was trading for $10 billion.

“That’s a 6,660% profit….

“Then there’s Perceptive Advisors, one of the best-performing early-stage hedge funds in history…

“And Perceptive owns 11.1% of this company’s stock.”

So what is this “Trillion dollar marijuana monopoly” they’re touting? The only other clue is that the stock “currently trades at about $3 per share”… so it’s time to get the Thinkolator chugging away.

And it’s not too long before we get an answer… This is Neptune Wellness Solutions (NEPT in both NY and Toronto), a company that used to be in the krill oil omega-3 supplement business but is now trying to transition to cannabis extracts.

Why? Well, perhaps it’s because they didn’t make any money on krill oil. They developed what they say is a proprietary extraction process that produces a superior product, and even merged with another company to supply omega-3 and other nutraceutical ingredients in 2016, but 16 years after introducing their “flagship” Neptune Krill Oil in 2003 they have yet to post an operating profit. They’ve now gotten out of the bulk krill oil business, though they still sell their brand in partnership with another firm, and just a couple months ago, after an 18 month process that included some capex to upgrade their facilities, they did get their license to process cannabis from Health Canada.

Does that give great confidence that they will be able to emerge from the pack as a superior producer of cannabis-derived oils? Not to me, but I don’t really know the business.

Here’s what they say they’re doing: They’re building up to have capacity to process 30,000 kilograms of marijuana right about now, using CO2 extraction technology, and as of last week they had finished their testing for that and were selling the first production, but have a plan for the next phase to get to 200,000 kilograms using an ethanol solvent for extraction. They say they think, with necessary regulatory approvals, that they can be EBITDA and cash flow positive in a year or two… though that probably depends quite a bit on what the regulations are for edibles, topicals and concentrates in Canada (they say the draft regulations came out in December but aren’t finalized, and that the new regime is expected to be implemented in October — right now there’s still debate over whether to allow very popular but arguably too “kid friendly” cannabis products like chocolate or gummy bears, though from what I can tell such products seem to be widely available online).

And while they say that they have a “current cash position sufficient to execute existing business plan,” they also make a point of highlighting the “flexibility” offered by their base shelf prospectus that will allow them to raise money quickly if they decide to do so over the next couple years.

The company does say that their immediate coal is to get to commercialization through “business to business” sales, which I guess means mostly selling ingredients or products that won’t carry a Neptune consumer brand (they have a supply agreement with Canopy Growth to provide extraction capacity, for example), though they also have ambitions of building a global wellness brand. I don’t know what the financials are likely to look like, but I assume there will be more press releases along the way, and they’ll get into some more detail in their next quarterly call (that probably won’t be for about two months).

The ad does cite that “there’s a major shortage of extract products today,” and there have certainly been reports of such in the Canadian press during the first few months of legalization, particularly as demand for CBD oil seemed to be higher than anticipated, but there’s also some press coverage that implies it’s just a shakeout period, with distribution networks and particularly product demand surprises that are being straightened out now, with no shortage of inventory. I have no idea whether there’s going to be a long-term a structural shortage of CBD, but it’s not a miraculous product that only one company can make — which would lead, one assumes, to increased production to meet the demand.

And there are lots of producers of CBD oils now, with a lot of different types of equipment available to do that extraction, so while yes, Neptune does have one patented process, you’ll have to decide for yourself whether or not theirs will be the best or the market leader one day, or whether you think the odds are good enough to warrant an investment. They certainly don’t have a patent on the technology of extracting CBD from hemp or marijuana using either the C02 method or the ethanol method, both of which are in widespread use, but perhaps their technique is somehow better than others, I don’t know. You can see their original “pivot to Cannabis” presentation here from late 2017, and the most recently quarterly conference call presentation from February here.

I’m not inclined to be immediately convinced that an extraction company will end up winning a huge share of the profit margin for CBD products, though it does seem likely that oils and other extracts will be a larger market in the end than dried marijuana flowers… I just don’t really know how the profit is likely to be divided among the extraction companies, the growers, the consumer brands and the retailers. There is certainly room for Neptune to have a sharp increase in sales if they get their production underway, but there’s also room for all of the massively-capitalized pot companies to expand their own CBD extraction projects, and lots of them seem to be doing so.

Which means now it’s time to hand it back to you, dear friends. No, there won’t be a 25,000% return in the foreseeable future with this one, I can pretty much promise that… but that doesn’t mean the stock can’t do well if they succeed in completing this transition from krill oil to cannabis and develop a new customer base. If you’ve got a sense of where this is going or think the odds of success for Neptune are particularly good or bad, please share your thoughts with a comment below.