by Travis Johnson, Stock Gumshoe | September 20, 2018 4:43 pm
Michael Robinson runs the technology/venture newsletters for Money Map Press, and he’s out with yet another marijuana promo — after all, any newsletter that doesn’t jump on board the marijuana stock rocket is deemed pretty much irrelevant these days, just like any newsletter without a “crypto expert” was ignored in January.
So yes, now Michael Robinson is being touted as “America’s leading Cannabis Investment Expert” (the capital letters make it real, right?) And they’re selling Radical Technology Profits ($1,950, nonrefundable — though there is a “after a year, if none of these stocks went up 10X, you can call to request a refund” promise) by offering to reveal three “Cannabis Kings” that might turn your small investment into millions.
Which, of course, is the dream every speculator has today, after watching the crazy gains that we’ve seen in several of the big marijuana stocks over the past few months and, most recently, the news coverage of the ludicrous Tilray (TLRY) stock spike.
Did you see that one? Tilray is the newly US-listed Canadian medical marijuana company that went from a $2 billion valuation to a $20 billion valuation over the past month on the strength of a tiny float and a huge surge of investor enthusiasm, with intra-day $5-10 billion moves earlier this week and a crazy up-100% down-50% day on Wednesday. Completely nutty and divorced from reality, of course… but still, if you traded the stock and sold to book those gains, your cash is real.
So what is it that Robinson is promising? He talks up three “Cannabis Kings” in the ad…
“There Are Three Companies in Particular I Want to Highlight for You Right Now.
“These Are the Ones I Think Will Hand You a Massive Chunk of That Money.”
And, in what seems to have caught the eye of Gumshoe readers…
“… the first company could make $1 billion before New Year’s Day.”
Presumably that’s $1 billion for them, not for us, but still… that’s a lotta money, right?
So what do we get in the way of clues about this first “Cannabis King?”
The ad says this company is an existing greenhouse operator, they sell bell peppers and other produce that they grow in their greenhouses across Canada. Including, apparently, one that’s poised to be switched over to marijuana cultivation…
“… state-of-the-art, 10.5 million square-foot hydroponic greenhouse in Western Canada.
“It’s roughly the size of 95 football stadiums.”
And part of Robinson’s spiel is that the company already has these greenhouses, and is ready to go, and can make much higher profit margins just by switching from peppers to pot…
“… last year, the company sold $155 million worth of its vegetables to grocery stores across the U.S. and Canada….
“They Are Moving from $2-a-Pound Peppers to Growing Cannabis That’s Worth More Than $2,000 a Plant.”
A few other clues:
“… they’ll be able to grow 75,000 kilograms a year.
“At a government-approved retail price of $8 per gram for recreational marijuana, that’s $600 million worth of marijuana.
“But that’s just the beginning.
“Because in anticipation of the October 17 date, they’ve earmarked another 3.7 million square feet of greenhouse space for cannabis cultivation.
“When it’s all said and done, they’ll be able to grow as much as 300,000 kilograms of marijuana every year.”
OK, so that’s $2.4 million worth of pot at retail prices, assuming that $8/gram is what we’re working with in Canada. That is pretty close to what people are paying now, according to Statistics Canada (average for the country is C$6.82 right now), though much of that is still black market so who knows how good the data is (it’s crowdsourced). Pricing will be regulated and licensing and distribution will be controlled on the provincial level, apparently, and the goal is to gut the black market so presumably prices will not climb too much higher than that. If US states are any indication, maybe more money will be made by those who can charge more — creators of value added stuff, special strains, edibles, or things like that, but we won’t know much about the economics of the business in Canada for a while.
But anyway… who is this? Will they “be in a prime spot to own the market” on October 17? Are they really going to, as Robinson suggests, “Make Just Over $1 Billion This Year from the Sale of Marijuana (and turn $525 million of that into profit?)” That’s what he bases his dreams of 46,000% returns on.
So to sum up, here’s a bit from the order form:
“Cannabis King #1: The Billion-Dollar Greenhouse.
“This company currently sells peppers and other vegetables at $2 a pound.
“But in preparation for October 17, they’re moving from $2-per-pound peppers to growing cannabis that’s worth more than $2,000 a pound.
“That’s because they’re turning a 10.5-million square foot vegetable greenhouse into a billion-dollar-a-year cannabis farm.
“Virtually overnight, they’ll become the largest marijuana greenhouse in the world.
“And with distribution networks already established all over Canada, nobody else will be able to touch them.
“It’s trading for a mere $5 a share right now. But not for long.”
So… it’s not at $5 a share anymore, but that’s probably not so surprising — nothing stays put for very long in this crazy little sector. This is, sez the Thinkolator, Village Farms International (VFF.TO VFFIF), which is indeed a vegetable grower that’s getting into the cannabis space. And it was at C$5 a share a month ago and close to US$5 just a few days ago, though it’s now in the C$7-8 range (or US$6, should you do your calculating south of the border).
They’re doing this with a joint venture — they’ve teamed up with Emerald Health Therapeutics (EMH.TO, EMHTF) in something that they call Pure Sunfarms, which has bene licensed to grow marijuana in now 550,000 square feet of their huge 1.1 million square foot Delta 3 greenhouse complex. They say it will be in full production within a month, and that they’ll get the other half of the complex growing pot by the end of the year.
I have no idea whether Village Farms will be better at scaling up massive pot production than the big indoor growers, but they will probably have lower costs than many of them — so that’s somewhat appealing, since one substantial risk is that the massive number of growers (and the continuing existence of the black market) could mean that marijuana margins in Canada will be destroyed by overproduction and the competitive attempts to establish brands in the early years. And they do have the vegetable business going for them, so if marijuana doesn’t work out they could get back to growing peppers, which was a profitable business for them in the past… not necessarily enough to support a $250 million valuation, but that puts a floor under the stock.
They do only own half of this business, but what they’re contributing is growing space, not cash, so they are taking a relatively small risk. Emerald is putting C$20 million in to build the growing capacity and set up the business.
You can see the presentation here if you’re interested — all the numbers Robinson cites are there. And one that jumped out at me really served to highlight why I haven’t been a big investor in the Canadian cannabis giants:
“Canadian Cannabis demand estimated to grow to ~734,000 kg by 2021”
That number is from the 2016 estimates made by the Canadian government, though earlier this year Health Canada also estimated 1 million kilograms by the end of 2018. Those numbers have been driving the massive investment in capacity that these marijuana growers have been making with their stock market millions, everyone wants to be ready and many of these companies have large stockpiles of dried flowers and other products set aside to meet the initial demand.
But think about those numbers: 1 million kilograms? That’s less than the capacity already planned or in production from just two of the largest companies, Canopy Growth and Aurora. If there’s really a million kilograms of demand when the gun is fired for legalization to begin there will indeed be a shortfall, most likely, but there doesn’t seem to be any likelihood of the government allowing windfall gains by price gouging… and capacity will ramp up fast.
That means I have no confidence at all in what the market dynamics might be, whether there will be oversupply like in many of the US states who have legalized, or rampant unmet demand that keeps the black market in clover (legalization will make illegal pot more appealing, too… the cops wouldn’t pull you aside and ask for a receipt proving that you bought your joint from a legal retail location instead of from the neighborhood dealer).
But yes, if you’re confident that supply and demand will not squash the industry, Pure SunFarms, half owned by Village Farms, is likely to be more successful than most of the smaller upstarts — if only because growing in greenhouses is likely to be cheaper, per gram, than growing in urban warehouses like some other producers.
So I’d grudgingly say that this one is less scary than most pot growers I’ve looked at, even though I’d guess that the eventual winners in the Canadian (and American) pot businesses to probably be whichever of the gigantic players (maybe Canopy, maybe someone else) who are able to build consumer brands or value-added products and differentiate themselves in what is likely to be a competitive agricultural business with commodity pricing. At least they’re successful low-cost farmers, and have the capacity already mostly built.
And let’s take a quicker look at the other two…
“Cannabis King #2: Winning the $100 Billion Medical Marijuana Race.
“My second pick is another tiny Canadian cannabis firm on the cusp of a historic revenue surge.
“Leading up to full legalization, this company made a brilliant move: They established medical marijuana footholds in 11 different countries, including Germany, Italy, and the U.K. all while maintaining 74% profit margins and doubling its revenues every year….
“… once the October 17 legalization goes live, this tiny company is primed to become the leading exporter of marijuana throughout the globe. Meaning their sales are about to skyrocket.
“In fact, just days ago, this firm signed an exclusive $22.8 million sole-supplier contract with one of Canada’s biggest medical marijuana firms.”
That’s almost certainly (Aphria APH.TO, APHQF), which has been touted in the past as a high-margin producer and which expects to have about 250,000 kilograms of production underway within the next year. They have been expanding overseas, which might turn out to be important if Canada really becomes an overproducing country, though other major players have done so as well. And they’re only tiny in the context of the bloated crazy stocks, they do have a $4 billion valuation — which is plenty rich. If they produce 250,000 kilograms and sell it at $8 a gram, which they won’t (they’re wholesale, not retail), then that’s $2 billion… so they’re trading at 2X prospective sales. If they could generate a 75% profit margin at that point they’d be in heaven, but that’s not particularly likely — I’ll let you make y our own guesses on how it will go, I haven’t dug into this one enough to make any educated guesses.
And one more…
“Cannabis King #3: The Backdoor into the Canadian Pot Boom.
“Now, the third company in my dossier is really small – currently trading for under $2… it’s a tech startup on the verge of becoming the exclusive provider of cannabis breathalyzers to all 1.4 million law enforcement officers in North America.
“And with their recently filed patent, they could completely corner the market for a device that is critical to the public safety of citizens all over the world.
“This is the kind of stock you can turn every $1 into $30, $50, or even $75….”
That is almost certainly little Cannabix Technologies (BLOW.CX, BLOZF), which is trying to develop a breathalyzer that will detect THC in the breath. There are others trying to do this, including private Hound Labs, but no one has yet created a working prototype that has been tried in real life as far as I can tell… and it’s not necessarily an easy task or a guaranteed win, since THC is not as clearly identifiable in the breath as alcohol. THC does show up in the breathalzyers models they’ve been developing for a couple hours after smoking, but we’re a ways from having evidence that would be likely to work in court that tells you a certain level constitutes “impairment.”
It’s surely intriguing, and driver safety is a major aspect of dealing with recreational marijuana, but I don’t know that science has solved things yet and I have no idea whether one of the emerging companies really has the “killer” patent for this technology. The company itself is indeed very small, trading at about $1.50 OTC in the US and with a $150 million market cap, but it’s really an R&D firm trying to develop a product at this point. I would not assume that the fact that there’s only one publicly traded company that’s a pure play on a particular attempt at a THC breathalyzer means that there’s only one company that can develop a breathalyzer (or similar instant test for marijuana intoxication). I imagine there are lots of folks working on this in labs elsewhere, and have no idea whether Cannabix has a meaningful scientific or product development lead over anyone else.
So there you have it — yes, I’m still skeptical about pot stock valuations… but that doesn’t mean you can’t go forth and make lotsa money if you’re lucky and nimble. I avoid most of the space because I don’t have any clear view of the economics of the industry, but it’s certainly been fun for speculators so far… just please make sure you’re not betting more than you can afford to lose on these exciting speculations, and keep your risk level and your exit in mind. In markets like this it has historically been important to keep at least half an eye on making sure that if it gets ugly, you want to be able to turn off the course before the lemming in front of you leaps off the cliff… and set up your portfolio so you don’t end up living in a cardboard box if you aren’t able to make that turn.
OK, boring old guy lecture over. What do you think? Like Aphria and Village Farms and Cannabix? Or do you prefer the biggies like Canopy or Aurora, or even the terrifying Tilray? Think it’s the small guys who will win in the end? Let us know with a comment below.
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