The Money Map folks have decided that it’s time to go “all in” on cannabis, and for them that means starting a new investment research business that they call the National Institute for Cannabis Investors, and selling memberships in that group by teasing their favorite “special reports” on some appealing marijuana stocks that they’ll give you once your credit card payment goes through.
It’s not a terribly expensive membership, as these things go, so we should consider this to be their “entry level” deal — their real goal, I imagine, is to build up their list of people who are interested in pot stocks so they can sell a “bigger, better” super-premium service next time around… but that’s just how the newsletter marketing business works, “entry level” $39 or $79 subscriptions that get funneled into $2,000 or $4,999 subscriptions where the real profits are. Nothing different here, except that instead of selling Dr. Kent Moors oil stocks or Ernie Tremblays biotech ideas, they’re selling someone’s cannabis picks.
And whose are they? Well, Michael Robinson and Ernie Tremblay are both on the “advisory board” of this group, and I would assume they’ll headline the stock selection since they’re both newsletter pundits with Money Map already (and have both written about marijuana plenty in the past), but the name they’re using most aggressively to sell the service is John Boehner, the former Speaker of the House of Representatives who famously changed tack on marijuana after leaving office and now favors legalization (and, not coincidentally, works for a marijuana investment fund called Acreage Holdings) — along with Danny Brody, who is an “industry representative” on the board (he runs Investor Relations for The Green Organic Dutchman and had a similar role at Emblem, both fairly large Canadian cannabis companies).
The “Cannabis Summit” is mostly John Boehner, Mike Ward and Danny Brody talking up the huge potential of cannabis in general, but they do also flog four “special reports” on particular companies that they think will be good investments… so that’s what I was interested in, the teases and hints about those four companies. I’ll skip over the big picture stuff about removing Marijuana from the DEA’s Schedule 1, changing tax laws, opening up banking to pot companies, pushing more legalization, etc, but if you want to see all that chatter you can check out the transcript of the “Summit” here.
For us, we’re interested in stocks — so let’s see if we can name the ones they’re teasing, shall we?
They open this part of the “summit” by saying that…
“… we’re also going to examine the three cannabis investment opportunities our viewers should consider immediately….
“The next generation of billion-dollar cannabis companies are ripe for the picking.”
And then the clues for our first stock:
“SPEAKER JOHN BOEHNER: We believe we’ve got somebody who is ready to capture a big piece of the $1.1 trillion pharmaceutical industry.
“Cannabis is just starting to break into this market.
“The FDA approving GW Pharmaceutical’s epilepsy treatment was only a sign of things to come.
“Cannabis drugs for epilepsy could be a $5 billion opportunity….
“We believe the company we’re recommending has an even better treatment.
“And it’s not just for epilepsy….
“The guys we’re looking at were one of the first to prove CBD could be used to stop epileptic seizures.
“Now, if you’re taking cannabis purely for medical reasons, you are going to want something with as little THC as possible – but the purest dose of CBD you can get.”
THC is the psychoactive stuff, the fun part of marijuana — CBD is, many folks believe, the potential health-altering stuff, and the stuff that people seem to be a lot more comfortable giving to their children. And you’ve probably seen hemp or CBD supplements, for sale in health food stores or online, so you know it’s not nearly as controlled as the stuff that gives you a high (even if a lot of that stuff in health food stores is in a bit of a grey area and might technically be illegal, more on that in a moment).
“The firm we’re targeting has created:
- 12 liquid versions of their CBD treatment at different strengths.
- Four pill-based products.
- Four topical creams and lotions.
- They even have two different CBD treatments for dogs.
“And here’s an enormous competitive advantage.
“You need a prescription for GW’s drug.Are you getting our free Daily Update
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“All of our firm’s products are available over the counter.”
And also a lot cheaper than prescription drugs, we’re told, at $99 a month. We get a bit more talk about how CBD oil and/or marijuana are also important to helping fight the opioid epidemic, both because they can work on pain and because they’re helpful in addiction treatment, and that they also have a huge potential market in non-prescription sleep aids that don’t have the side effects of Ambien and other sleeping pills.
“… the firm we’ve identified is set to capture the lion’s share of this market.
“I think we should stress again that they can sell their products over-the-counter, without a prescription.
“They’re already on the shelves at 2,700 retail stores across the country.
“And year-over-year, their revenue has jumped 172%.
“But there is a great deal of room for growth still.
“We’ve learned they’ve been talking to Target.”
Other clues? They went public recently, with an IPO “a couple months ago” … and that’s about it. They call the “special report” on this one “Prescription-Free CBD:
The Firm Set to Disrupt the $1.1 Trillion Pharmaceutical Industry.” Ready?
The Thinkolator was a little slow to start up this morning, with a bit of frost on the dust ruffle, but a few sharp pulls got us going… and a few shovels full of those clues got our answer, hot and fresh: This is Charlotte’s Web Holdings (CWEB.CX on the CSE in Canada, CWBHF OTC in the US), a Colorado maker of CBD oil and similar extract products that was founded by the Stanley brothers a few years ago.
The Charlotte name is an important part of their branding, but she’s also a real person — they have lots of background info on their website, which is very branding-focused, including the back story of how the Stanley Brothers developed this low-THC strain of cannabis that became widely used in alternative remedies. Charlotte Figi was a girl who was treated for her Dravet syndrome using this strain, apparently, and saw her seizures improve dramatically, and her story was a high-profile part of the legalization of medical marijuana starting about five years ago (she was in a CNN documentary). Charlotte’s Web is both the name of the company now, and the name of the cannabis strain that was developed to be high in cannabidiol (CBD) and low in tetrahydrocannabinol (THC). There may well be other strains that are similar now, I have no idea, but there’s certainly a lot of marketing now behind this Charlotte’s Web product.
And it’s pretty impressive, particularly for those of us who think that marketing and branding will be the most important thing to watch for the next several years of “normalization” of marijuana and cannabis in the US (and Canada, though Canada is obviously a few jumps ahead of us with full recreational legalization). They do say they have their hemp extract oil product in 2,700 stores now, with lots more distribution planned, and their products were briefly in Target stores before Target was contacted by the DEA and stopped selling them last year… which is probably the largest risk here, that their hemp extract oil is in a legal and regulatory grey area — they’d like to market it as a dietary supplement, which means they can sell it almost anywhere as long as they don’t make specific medical claims, but there seems to be some pushback that this should be part of the marijuana legalization/distribution industry, which would add a lot more friction to the sales process.
I don’t know how it will turn out, but according to their Q2 filing they do at least have an impressive ramp-up of revenues so far, with sales almost doubling year over year going into the IPO, and they have been profitable for over a year. Earnings for the first six months of 2018 came in at 73 cents/share, diluted — but that was on 9.4 million shares, and according to this article about the IPO the new total, including both the IPO shares (which were sold at C$7 each) and the promotional super-voting shares, should be about 92.8 million shares.
So with that, the current market cap at C$15.70/share would be about C$1.5 billion — with roughly $100 million in cash. They’re on pace for something like US$15 million of net income this year, so that means we’re looking at a company that’s expected to roughly double revenue and income next year but is trading at at PE of just a bit under 100. That’s pretty expensive, but you can justify paying that kind of multiple if they’re likely to be able to keep doubling revenue each year… and particularly if the business is at all scalable (meaning that they get economies of scale, so profit margins to up as revenues climb).
The company looks pretty appealing if they can keep building market share in their CBD oil business and build a bigger presence for the brand. There are lots and lots of companies out there who sell CBD oil supplements that look very similar to me, both online and in stores, and I’m not really in a position where I can make a call on whether they will be able to exert leadership in that segment… but having $100 million in the bank to spend on marketing and distribution is a good step, and the marketing looks pretty compelling to me, so perhaps it will work.
I haven’t invested myself, but the growth and the profitability to this point are impressive. They’re not at all secret or hidden as a stock, they’ve even been on CNBC, but they are also not really a “marijuana explosion” stock because there won’t be any direct impact from marijuana legalization — they already sell almost exclusively in the US, and are trying to avoid being regulated like THC-focused marijuana and marijuana extracts, so regulatory changes for the industry as a whole could very likely help them, particularly if it clarifies their legal and non-prescription status for wide distribution as a dietary supplement, but they aren’t really directly impacted by Canadian or US legalization of recreational or medicinal marijuana… but so far they are impacted enough by the uncertainty that they had to list on the Canadian Stock Exchange instead of Vancouver or the Nasdaq, just like marijuana stocks that have illegal (on the federal level) US businesses, so clearly there’s still some grey area, which means risk.
Next? Clues for another stock that they call “The Innovator” …
“… time-and-time again what makes money in tech is a basic proposition: ‘You’ve got a big problem – I’ve got a simple solution for it’….
“a regular old, prescription pill bottle.
“Some folks making these bottles refused to work with cannabis companies.
“But you walk into a dispensary and every product you buy is required to come in child-resistant packaging.
“This young man, just out of college, says, ‘I can do that.’
“Some years back, he invents a child-resistant top for a bottle.
“He goes around to all the companies in California and Colorado that are selling cannabis and tells them, ‘Hey, I hear you need this.’
“And he can’t make these bottles fast enough. Everybody is buying them.”
You can probably already guess where this is going if you’ve followed the pot stocks over the past few years, but let’s check a couple other clues:
“They have a wide assortment of products.
“Pre-roll containers. Child-proof, pop-top bottles. You name it….
“They have sold over a billion units….
“In 2014, they sold $1.71 million worth of product.
“This year, they’re at $51 million….
“They count 5,000 cannabis companies as customers.
“And seizing on that opportunity, they bought a digital creative agency that helps their clients with branding.”
Well, they’re not quite at $51 million yet… but they’ve guided to $51 million for their fiscal year ending August 31, so presumably they’ll hit or beat that number. This is, as you might have guessed, KushCo (KSHB), which used to be called Kush Bottles and has been a “picks and shovels” stock tip in marijuana for years. I’ve been too skeptical on this one in the past, mostly because I didn’t think they’d be able to be the only real player in this space over a long period of time, given the huge variety of childproof packaging suppliers that exist and could quickly hit the marijuana market, but perhaps they’re enough of a “first mover” that they can get a strong and loyal customer base and hold off whatever competition arrives. Dunno. There are estimates (by only two analysts) that they’ll be growing revenue at an 80-90% pace over the next two years, which would certainly give them the opportunity to be profitable if that’s their focus — they’ve been doing acquisitions and growing the business instead of looking for earnings thus far, it appears, using stock and a little debt to fuel that growth.
So… KushCo is not necessarily cheap for an unprofitable packaging company, trading at a price/sales ratio of about 7, but they’re cheap for a marijuana company, and probably pretty rationally valued if they can keep up their rapid revenue growth rate and leverage their “first mover” status to keep a strong market share in packaging and branding for cannabis products. I don’t know what other players exist in this space, or how competitive it might become, so that’s where I’d put in my research time if I were considering this stock.
“SPEAKER JOHN BOEHNER: At Acreage, we’re betting brands are the future of cannabis.
“So what makes a great brand?
“Molson Coors Brewing is a $14 billion company.
“Not because they just sell beer.
“No, they sell brands of beer.
“Brands people like.
“Miller, Coors, and Molson.”
OK, preaching to the choir here — yes, I think brands are likely to be the winners in the marijuana space… but sadly, I don’t know which brands, so I’ve resisted paying crazy valuations for companies that might end up being worthless.
So what’s this brand that they like?
“DANNY BRODY: We believe we’ve identified the next big brand in cannabis.
“They have a lot going for them.
“First, obviously you need a good product.
“They have developed a line of high-quality cannabis oils….
“They’ve recruited top executives from Philip Morris, Coca-Cola, Kraft Foods, and Eli Lilly.
“All major brand builders from the tobacco, beverage, packaged goods, and pharmaceutical industries.
“And these guys developed a workaround to the advertising problem.
“They launched a separate line of nutritional supplements.
“No cannabis in them whatsoever.
“They can advertise and sell them anywhere.”
OK… so they use the same brand to sell both “legal anywhere” nutritional supplements (CBD ones, maybe?), and intoxicating marijuana products. What else?
“Over the last two years, their sales have multiplied 19X.
“To this point, only a couple of cannabis companies have established any brand traction.”
As one example of the power of brands, they note that one of the other appealing brands that was developed, Tokyo Smoke, which was built by Hiku, was acquired by Canopy Growth (CGC, WEED.TO), which is focusing a lot on brands as they try to build on their leadership in Canada… and I should note, as a reminder that “price matters,” that Hiku was teased back in May by a different newsletter and acquired by Canopy Growth just a month or two later at pretty much the same price it was at when Zach Scheidt was teasing it in May. You could have either come out of it with a 50% gain or a 10% loss or anywhere in between, just based on what price you chose to pay over a period of about six weeks.
So which company are they talking about here? Thinkotor sez their pick for “Cannabis’ First Household Name” must be: Emerald Health Therapeutics (EMH.V, EMHTF), which is a Canadian marijuana grower and extract/oil producer that, yes, also has a “nutraceutical” line of products that they’re trying to use to establish a brand presence (particularly the “Endo” line — EndoCalm, EndoBliss, EndoSleep, etc.).
And their revenues have climbed 19X in two years, though that’s largely a meaningless number because the revenue was so close to zero two years ago — they report C$2.1 million in revenue for the past four quarters, which is also almost a meaningless number for a company with a market cap of C$500 million, so it’s clearly all about the future with these guys… as with so many Canadian pot stocks… and I just don’t have a real sense of what the future is going to be when it comes to consumption and consumer preferences.
We’ve seen Emerald before recently, too, they were part of our look at the tease for Village Farms International (VFF.TO, VFFIF) because the two companies have a 50/50 joint venture for the large planned Pure Sunfarms greenhouse complex for low-cost cannabis production. That’s one of half a dozen subsidiaries, including other growers and the Emerald Health Naturals and Northern Vine Labs businesses, you can get a pretty decent picture of their strategy and current business from their latest investor presentation here.
So… the business is barely moving the needle, but they do have an interesting strategy of brand building, some substantial production that should be coming online right now and could boost the revenue up to something measurable over the next couple quarters, and they have $72 million in cash that they will presumably need as they try to continue to invest in their brands and their grow facilities (they’re on the hook for much of that Village Farms project, for example), so… is it worth $500 million today? More? Less? We’d both be guessing at this point, so, since it’s your money, you should probably go with your guess.
And with that, dear friends, I’ll leave you to cogitate on those three “cannabis summit” stocks… I’d guess that Emerald is going to be driven by Canadian production, KushCo by their ability to keep market share in packaging, and Charlotte’s Web by their marketing prowess and the adoption (or lack thereof) of CBD oil as a mass market nutritional supplement. If you’ve got an opinion on any of them, or a forecast you’d like to share (or, for that matter, your preferred three cannabis stocks that you think will outplay that trio), please let us know with a comment below.