Sniffing out “America’s Top 4 Marijuana Moonshot Stocks”

by Travis Johnson, Stock Gumshoe | September 16, 2019 1:08 am

What's been teased by Matt McCall? Thinkolating on hints about "Walmart of Weed," a big royalty payer, an operator of one of the largest greenhouses, and more...

Those of you who’ve been aboard the good ship Gumshoe for a while know that I’m not exactly a marijuana[1] stock enthusiast… but still, when folks keep asking me to ID the pot stocks being teased by various newsletters, I do aim to please.

So this time we’re looking at Matt McCall[2]’s pitch, which looks like it’s probably a few months old but is still in very heavy circulation (I get questions every day)… and it’s headlined with the exiting news:

“U.S. Government Expected to Legalize Marijuana NATIONALLY by December 31!?!”

I guess we can expect anything we like, but no, I don’t expect that. I expect gradual legalization to move state by state, and the Feds will probably decriminalize it or remove it from the DEA’s Schedule 1 at some point, but expecting the federal government to lead in anything, or agree on anything at all controversial, seems quite foolish at the moment.

The ad is a pitch for Matt McCall’s Investment Opportunities[3] ($99/yr), and the big picture promise is that “The Trump administration is gearing up to finally end the decades-long war on pot!”

What I’m interested in, though, is not the political forecasting… it’s the investment he pitches for those seeking marijuana riches.

Here’s mroe from McCall…

“…all you need to potentially amass a small fortune are two things:

“No. 1: A single $20 bill.

“No. 2: The unprecedented December 31 announcement from the Trump administration that could easily deliver legalized pot on the national level….

“Once the federal government publicly announces plans for nationwide legalization (which could potentially happen anytime between today and December 31), America’s marijuana penny stocks could easily turn into big, expensive stocks like Walmart or Coca-Cola….”

So which stocks are we looking for? McCall starts with a few generic hints…

“I’m looking for the ‘blue chip’ stocks of tomorrow.

“In other words, I’m looking for companies with an economic moat around their business….

“They must offer a unique form of innovation… with a true leader (like Bill Gates[4] or Elon Musk[5]).”

OK, that’s a tough criteria for a sector that has been (though it’s improving, to be fair) replete with scam artists and fiscal incompetence.

What else?

“I need to be sure that the stock is still cheap enough to have 1,000% or more upside potential…

“I also need to determine that the momentum of the stock is headed in a positive direction…

“Are share prices starting to heat up, or are they in a downward spiral?”

That’s part of the reason I assume the ad is a few months old, because there aren’t many marijuana stocks that are “heating up” these days.

I’m getting a bit bored with those big picture points, though, so let’s jump straight to the actual investments he hints at… as usual, he starts with his favorite:

“… this small, publicly traded marijuana firm is my top recommendation right now.

“It’s quickly becoming the leader in U.S. cannabis extraction…

“It dominated the extraction markets in its home state of Oregon… and is planning on expanding into California, Nevada, and other “pot friendly” states.

“And its profits have been off-the-charts amazing.

“In fact, in January 2019, it announced record revenue figures with roughly $2.4 million in sales.

“That’s just one month…”

OK, so someone needs to remember that “revenue” and “profit” are two different things. “Revenue” is sales, the amount of cash coming in the door… “profit” is how much of that you get to keep after covering all your expenses. Almost no pot companies are profitable, and I’m sure this one is no exception.

Other hints?

“You can pick up shares of my favorite American pot stock today for just $0.51!

“I fully expect shares to explode by 300% or more in the short term.

“And when the U.S. government announces nationwide legalization, this company is perfectly positioned to dominate the extraction market across the entire country.”

I wouldn’t hold your breath on “nationwide legalization” being right around the corner, but Thinkolator sez this favorite pick is… Halo Labs (HALO on the NEO exchange in Canada[6], AGEEF on the OTCQX in the US).

You can see their Investor Presentation from last month here[7], but this is how they describe themselves:

“Halo is a cannabis extraction company that develops and manufactures quality cannabis oils and concentrates, which are the fastest growing segments in the cannabis industry. Halo is a global leader in cannabis oil and concentrates, having produced over 4 million grams of oils and concentrates since inception. The Company has expertise across all major cannabis manufacturing processes, leveraging a variety of proprietary processes and products. The forward-thinking company is led by a strong management team with deep industry knowledge and blue-chip experience. The Company is currently operating in California and Oregon, as well as in Nevada with our partner Just Quality, LLC, and in Lesotho with the Bophelo strategic partnership. With a consumer-centric focus, Halo will continue to market innovative, branded, and private label products across multiple product categories.”

The stock has made a round trip this year (doubling and then halving, so the price is about where it was in January), is really tiny (market cap around $40 million now), and is listed on the almost invisible NEO exchange in Canada.

The positive? It’s cheap on a price/sales basis, and it’s in what is likely to be the most profitable part of the cannabis business, the extracts that can command higher pricing than regular old dried flower and will probably be the basis for whatever large-volume branded products are eventually developed (I’m guessing that the eventual national brands in marijuana will be edibles or beverages, not cigarettes or vaping products, given the growing social distaste for smoke and vapor… though that’s a guess). They seem to specialize in extract oil, which is used for vaping and edibles and all kinds of other stuff, but also in resins.

The negative? They have plenty of revenue but are not anywhere near profitable, the resin business is arguably more attractive than dried flower but is still competitive, and they seem to be mostly supplying white label products so they aren’t necessarily building strong brands themselves.

And, of course, the capital structure is a little frightening… as is often the case with little marijuana startups. Lots of promissory notes, convertible debt, and warrants[8] outstanding, though there do not appear to be any private shares like you see with some others (MedMen and Charlotte’s Web, for example), so it really is a $40 million company… it’s just that a huge tranche of warrants means that the share could could could just about double from warrant exercises if the stock does really well (ie, rises 200% in the next year and a half). That would also bring in some cash, most likely.

Other than that, there’s not much I can tell you about Halo… this is tiny enough that you’d want to look into it and understand their competitive positioning really well, and have some sense of whether they have an edge over other makers of extracts, or have some visibility into their products eventually becoming profitable.

What’s next?

“… a penny pot company that could easily become “The Walmart of Weed!”

“It’s based in Nevada, and has already established the premier dispensary on the Las Vegas strip…

“Dubbed the ‘Cannabis Superstore,’ this company operates the largest dispensary anywhere in the world… and they’re expanding rapidly.

“Not only that, but they currently hold six licenses that span the entirety of the marijuana markets… from growing and cultivation to production and marketing….

“In just the past few months, share prices have skyrocketed by 328%….

“Once nationwide legalization becomes reality, this company can use its highly profitable business model to expand all over the country.”

That’s Planet 13, which I mentioned to the Irregulars as the most high-profile marijuana retailer in Las Vegas (following my fact-finding mission a few weeks ago). Here’s what I wrote, in part:

“… the new scent of the Strip is “skunky.” But other than the pleasure palace of Planet 13, the marijuana megastore that’s just off the Strip, no brand is really taking hold in any obvious way. MedMen talks up their big Las Vegas location, a little off the strip by the Hard Rock Cafe casino, but I didn’t notice any marketing by them, and there seem to be plenty of other competing outlets around the city for locals or those who want to make the effort to get more than a block away from the big casinos. I don’t know if Planet13 is going to try to expand beyond their superstore location in Vegas, which is truly massive, but they are certainly the leading brand in that city (and they’re public (PLTH.CX in Canada, PLNHF OTC in the US), though it probably won’t surprise you to learn that I’m not a shareholder.

“Scale is one of so many challenges for those trying to guess at the ‘winners’ in pot — dispensaries are all different, with no one company having a real national presence, and most locations that are particularly notable or popular are in that situation primarily because of scarcity or, like Planet 13, a unique location or experience… which gives little confidence that early local brands will hold serve as the industry matures.

“If you’re a smoker or a consumer of cannabis, you might have an edge on knowing which actual products are the best or most appealing, so if you know the word of mouth in an area or a community and feel confident in trusting that you might do well… but for the rest of us who aren’t participating as knowledgeable consumers in this market, advertising is how brands are built… and there’s not much advertising yet (though every other taxi in Vegas is emblazoned with the Planet 13 logo, so local advertising is at least making a small impact). Without national advertising and without national product distribution on the pot side yet, picking the winners is fun and interesting but probably has a low probability of success.”

A huge marijuana “superstore” makes sense on the Las Vegas strip… but my bet would be that’s one of the few places on earth that such a massive investment would be worthwhile. Your bet may be different — it’s Las Vegas, after all, guessing at the probabilities is the most important local business — but, despite Planet 13’s clear leadership in the Las Vegas tourist district and the impressive nature of its “Marijuana Superstore” just off the Strip, I haven’t personally bought shares.

Next!

“Another incredible penny pot stock just crossed my radar…

“It’s already one of the fastest-growing dispensary operations in the entire country… and is on the verge of completing an enormous, 180,000-square-foot facility.

“It’s extremely profitable too… on track to generating $400 million in annual sales.

“…yet it trades for well under $1!

“Not only that, but it’s expanding into Ohio AHEAD of legalization… which will give it a huge leg up on the competition.

“It has a great business model… and I wouldn’t be shocked to see this company with a storefront in every state in the country once nationwide legalization is implemented in America.

“This is truly a ground-floor opportunity… the kind that can easily turn pocket change into a massive fortune.”

Ohio is not actually legalizing recreational marijuana just yet, though some hoped that it might be on the ballot this year, but they do have medical marijuana and many of the large marijuana companies who have operations in other states have either applied for licenses over the past year or two or actually opened dispensaries.

And on this one, well, the Thinkolator does not yet have an easy answer… there are several stocks that are pretty good matches, like leading national expansion firms Curaleaf (CURA.CX, CURLF), Harvest Health & Recreation (HARV.CX, HRVSF) and Trulieve (TRUL.CX, TCNNF)… but none of them trade below a dollar (or particularly close). MariMed (MRMD) is reasonably close to a dollar and expanding in Ohio and has a 180,000 square foot facility, but isn’t going to generate anywhere near $400 million in revenue in the near future. I expect there’s a better match out there, but in the interest of time (and lack of personal interest in cultivators, frankly), I’ll leave it to you to dither over this one. Of those, I’d say Trulieve is probably the most impressive operator I’ve seen… and MariMed is the most interesting story given their transition from consultant to operator, but I’ve not been tempted to buy either.

One more?

“Even though few have heard of this company before, it is set to become one of the largest marijuana grow operations in all of North America.

“In fact, it is in the final stages of finishing one of the largest greenhouses in all of America.

“Once completed, this small firm will be cranking out an unprecedented 140,000 POUNDS of cannabis.

“Not only that, but it has compiled a “dream team” of marijuana cultivation experts… and has access to over 50 different strains of pot…. shares currently trade for right around two dollars”

Best match here is Flower One Holdings (FONE.CX, FLOOF), which is actually fairly large compared to some (market cap is over C$300 million). This is a big Nevada bet, for the most part, with a very large greenhouse (450,000 square feet) and processing facility that they will use to supply products, often growing or making them for other brands, in Nevada dispensaries (you can’t transport marijuana across state lines, legally, so even if you have a national brand you have to grow and make the stuff in each state). I don’t know whether the leaders are really a “dream team,” so perhaps there’s a better match out there that the Thinkolator didn’t identify… but they do believe they’ll be able to produce 140,000 pounds of cannabis a year from their greenhouses.

You can see a recent presentation from Flower One here[9], but it’s basically a waiting game to see how their launch goes — the mega-greenhouse started production late in the second quarter, and had some minimal impact on the income statement when they reported that quarter,[10] but any real assessment of profitability (or lack thereof) will have to wait until they reach a real “run rate” of harvesting and their production facility opens up (which is supposed to be happening right now).

And McCall does also include some “bonus reports,” so we’ll take a quick look-see at one of those:

“The Government-Authorized Way to Collect American Marijuana Royalties

“Most Americans don’t know this… but there’s a legal and reliable way to collect lucrative royalties on American marijuana profits, which normally go straight to the government.

“You see, while the government gouges most pot companies on corporate taxes…

“I found a company that doesn’t pay a cent. In fact, it pays ZERO corporate taxes on any of the profits it earns from its cannabis-rich properties in Arizona, Massachusetts, Minnesota, New York, Maryland, and Pennsylvania.

“Instead, this company sends dividend checks to shareholders.”

Sound familiar? Give it a minute…

“Thanks to an obscure government regulation written into a cigar tax act, this company avoids huge taxes on certain cannabis properties… as long as it gives the majority of its profits from those properties to shareholders.

“If you look at the Internal Revenue Code, you’ll see this agreement is even guaranteed by U.S. law .

“Dozens of companies in other industries — like oil, gas, and timber[11] — have taken advantage of this law to send out billions of dollars in income to regular Americans like you and me.

“Now for the FIRST time ever it’s happening in the cannabis industry…

“It just recently went public and has already mailed out seven huge checks . Which have already more than DOUBLED in value.

“The way I see it, you can take a portion of your safe money… invest in this company… and use the huge payouts to play the rest of the marijuana market….”

That also ages this whole report a bit, since the clues are a little old… but this is clearly yet another tease of the marijuana REIT Innovative Industrial Properties (IIPR)[12]. That’s been my favorite marijuana stock for a long time now, and is one of my larger holdings, so I can’t argue much with the premise even if the hints are really from about six months ago (IIPR has now “mailed out” nine checks in the form of quarterly dividends[13], and as of the last one they’ve quadrupled in size from 15 cents to 60 cents).

I added to my IIPR position after they announced yet another dividend increase on Thursday evening last week, but the rest of the world was not quite as enthusiastic as I was (the price did not really move up much). Here’s part of what I wrote to the Irregulars on Friday regarding that news from IIPR:

“Innovative Industrial Properties (IIPR) completed another relatively small sale/leaseback deal in California (with Vertical) and boosted their commitment to one of their Illinois tenants (Ascend Wellness), meaning that they have now built a portfolio that should generate rent of about $56 million a year. If you take away the corporate overhead costs and other cash expenses (preferred dividends, interest on the small amount of convertible debt they have), then that means this portfolio should generate something in the neighborhood of $44 million in FFO per year, or $3.89 per share (there are 11.3 million shares outstanding at the moment), so if they target 70% of FFO as the dividend payment that would be a dividend of roughly $2.73. The dividend as of yesterday was $2.40, so they are on track and reasonably conservative. That “as of yesterday” is key, stay with me for a moment.

“That’s all based on the future, though, not all of that FFO is flowing yet — some of it is in deals that have recently been signed or facilities that are under construction, some of it is from customers who are still in their early “abatement” period when they don’t have to pay the rent, or pay all the rent, for a period of time (I would assume it’s usually about six months, but it probably varies). The current trailing FFO is about $16 million for the past year, growing very fast (130% in just the past year — that’s the benefit of starting from almost nothing, growth can be ludicrous).

“So what the decision really is for investors, is whether the growth, which should continue but will slow a bit in a year or two as the “law of large numbers” kicks in, makes the valuation reasonable. They will continue to issue new shares and fund additional growth, assuming that they continue to sign deals as quickly as they have been, and they should have a little less than $100 million in capital that is not yet committed. What kind of Price/FFO valuation should a company like this receive?

“I’d argue that if you’re willing to take the risk of participating in the marijuana sector in any way at all, then this kind of growth earns a premium valuation — I’d say that paying a price/FFO valuation of roughly 20 would be reasonable, or that a dividend of 2% would be the minimum to expect given the continuing rapid (though probably decelerating) dividend growth potential (you might choose a different number, that’s fairly aggressive, but I think 2% is likely to be pretty appealing to US investors as bonds dip further below that mark… if rates really start to rise, as some folks anticipate with the little pick up in inflation we saw this week, then perhaps that story changes). That doesn’t mean those prices would be the “bottom” or represent “deep value,” it just means I think prices at those valuations would be reasonable for buying if you like the business and its longer-term potential.

“So where would that put us? Well, if you use my assumption for future FFO based on the current portfolio (that $44 million annual run rate, which they probably won’t actually hit on a trailing basis for a year or so), then 20X that is $880 million. Add in the net uncommitted cash of roughly $100 million, and you get a valuation of $980 million for a reasonable buy. That would be a share price just below $87.

“Using the dividend method, if you insist on a 2% yield given the expectation of future dividend growth above 20% for many years, which is what I think is likely if they can keep signing 10-20 year lease deals with cap rates in the 12-14% neighborhood and annual increases, then $2.40 means that a share price of $120 would be reasonable. That feels pretty aggressive right now, with the stock closing around $90 yesterday, but the point of this exercise is not to react to the market — it’s to decide what price makes sense to us as buyers of the business. If you insist on a 3% dividend yield, that’s a share price of about $80… 2.5% is $96. You can make your own call, but right here in the high $80s/low $90s, buying the stock makes sense to me (for those who didn’t read my earlier missives, I sold a chunk of my position in the $130s and bought it back at about $90).

“But wait, those were yesterday’s numbers… this morning they came out with a surprise dividend increase! This increase, the third quarter in a row that they have increased the dividend (so maybe we should stop being surprised?), was to 78 cents per quarter per share, a 30% increase over last quarter’s dividend (and more than 100% over last year’s 35 cent dividend). So where does that put us?

“Well, it doesn’t change the FFO outlook — though another aggressive dividend increase does tell us that they have confidence in their portfolio companies ramping up lease payments, and that they are confident they can close more deals to grow the portfolio… and it probably also tells us that they’re thinking about raising more capital before the end of the year to buy more properties (raising the dividend is good for the stock price, which makes selling equity easier). Dividend raises are among the best signals of confidence in the market, and three big ones in a row is pretty amazing for a startup that is only a few years old.

“It does, of course, change the dividend yield — so if you’re looking at a dividend yield valuation, as many retail REIT investors do, then at 78 cents that’s an expected annual dividend of $3.12 (though if past is prologue, odds seem pretty good that they’ll raise it again at some point in the next four quarters). If you insist on a 3% yield, that would be $103 a share… a 2.5% yield would be just shy of $125… a 2% yield would get to $156. The high reached after the last big dividend increase was $138 or so, for whatever that’s worth.”

So that’s what we’ve got for you… yet another IIPR tease, a bit stale but I happen to think the stock is a pretty compelling buy at the moment, and a probably also dated pitch for four smaller pot stocks, which may or may not be appealing for you following the fallback in the market for almost all weed stocks in the past few months.

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