The Weekly Weed Report The Weekly Weed Report (MMJ) w/ Dyro – September 29, 2016
September/YTD Performance
With just a week to go in September it has been quite a month to remember for those following the Canadian cannabis stocks as closely as I have. If you are ‘NEW’ to the scene, fear not, for Dwight has asked me to do a bit of a ‘run-down’ on the Canadian pot scene. Allow me to catch you up briefly on what has happened in September and YTD with some of the private Licensed Producers (LPs) and prospective LPs that I follow before I give a brief analysis on why I’m so bullish on the industry as a whole:
As you can see, the “Dot Bong Bubble” as I like to call it, has had quite a run up since Mr. Trudeau was elected close to this time last year (note the YTD in the table is as of end of Dec 2015, not that glorious day on Oct 19, 2015).
“Ok Great For You”
If you’re like me, it’s not always the most enticing thing entering a new position that is up more than 100% in the last year, or in some cases, as we see above, the last month! I also know that many of the people who may read this article are likely to be short term traders. However, if you’re anything like me, having the ease of mind of knowing that this new setup is for a company/ industry who’s prospects are as bullish as the technicals then I can enter that position knowing I won’t be caught holding a total bag if the price does temporarily drop. Allow me to very briefly explain the industry.
The Industry
I’ll save everyone the time in running through all of the legal shenanigans that went into developing the current medical marijuana structure (soon to be rec) into the manner in which we see it today and simply post this picture which I think will probably do a better job of emphasizing why Canadian LPs have won the lotto in my opinion, and we as investors. Here is a picture of a quote taken from the following article about Supreme Pharmaceuticals (SL.C) which really speaks to the industry as a whole:
“https://www.kincardinenews.com/2016/08/24/kincardines-7-acres-hybrid-greenhouse-marks-first-harvest-of-medical-cannabis“
Although I don’t necessarily agree with everything he’s saying here, the first paragraph is really what’s important. Whether you morally agree with the fact that these “30 LPs” (only around 22 of whom actually currently have a license to sell) are the only ones who are allowed to grow, it is looking like come the time legality hits, which is truly anyone’s guess as to when, that these companies will exist in an oligopoly for an industry that already flourishes in the black market.
If you’re sort of knowledgeable on the pot space you might point out the new ACMPR regulations Health Canada put into place last month which gave the right to patients to have sort of a “home grower” to grow on their behalf. Although I do acknowledge it is a thing, the below quote speaks to how insignificant they will be compared to the multi million dollar companies I’ve listed in the table above. Here is a quote to the volume that the “home growers” are allowed:
“In general, every one (1) gram of dried marijuana authorized will result in the production of five (5) plants indoors or two (2) plants outdoors. Individuals must indicate in their application whether they intend to produce marijuana plants indoors, outdoors, or partial indoors/partial outdoors. Individuals seeking to produce outdoors must confirm that the production site is not adjacent to a school, public playground, daycare or other public place mainly frequented by children.”
That type of growing capacity is just not going to matter compared to the big guys like CGC, APH, OGI, MT, SL, ACB, MJN who have all just completed recent multi million dollar financing’s seen here:
“https://business.financialpost.com/investing/investing-pro/marijuana-company-financings-hit-new-high-in-canada“
That ACMPR decision came after an incredible run up for a lot of these companies and was in my opinion one of the last negative catalysts on the long path to a legal Canadian weed market.
What to do Today
If you’re a long term trader then let me be the first to say that I believe all of the companies that I’ve listed in the table will net you huge gains in comparing today’s share price to the next 1-3 years (or perhaps even more). They have been handed the golden ticket to be able to grow cannabis in a country where the inhabitants love to smoke pot. I have seen all kinds of figures thrown as to the size of both the medicinal and rec market in Canada but let’s just say it’s ‘high’ (anywhere from 1 to 7 billion). Here is a quote from the Financial Post:
“The opportunity is obvious. There are currently about 35,000 to 40,000 patients enrolled in Health Canada’s medical marijuana program. The total market is worth perhaps $80 million to $100 million. If recreational pot becomes legal, the potential customer base suddenly runs in the millions. Dundee Capital Markets analyst Aaron Salz figures the market would then be worth up to $5 billion.”
Given the growth we’ve seen in the Medicinal Market alone I am quite confident these companies can continue to keep up with the pressure that is the constant need to increase revenues for a publicly traded company leading up to rec. (see below for just Veteran’s MMJ claims)
I have many friends who are medical marijuana patients and often complain that some of the licensed producers are out of stock and that they cannot provide them with the appropriate amount of their “medicine”. If the licensed producers (who are all rapidly expanding) can’t provide enough for the 40,000 patients then they are in an absolute dream land when their clientele becomes in the millions.
Some things you might want to consider when going long:
-How much capacity do they have?
-Do they have a sell and grow license?
-Do they have an oil license?
-How much do their licenses allow them to grow annually?
-What is their COGS per gram?
-What are their margins?
As you begin to dig into these factors to choose which companies you want to trust with your $ I think you’ll find some clear ‘winners’ and some others who are ‘lagging behind’. Here is the beginning of a model I’ve begun working on with some friends to try and gauge which companies are most undervalued and let the market come to us.
Short Term Picks
As far as taking positions I have been constantly re-positioning to the stocks that I think are most undervalued at that point in time while continuously holding most of them unless they’ve ran up too much, too fast. Currently, I believe those to be OGI.V, MT.V and CGC.T. (please note that fundamentally speaking these companies are very overvalued and only APH.V, and OGI.V are cash flow positive but you’re obviously buying for the rec market). I will note that APH.V is my favourite long term play for a number of reasons that I might get to in another post
Here are my ‘short term play’ charts:
(TSX:CGC)
The darlings of the industry (kind of). They own 2 LPs in Tweed and Bedrocan. They have shown to have the most ambition when it comes to their vision of their place in the worldwide cannabis market which is probably why they spend by far the most on R&D and marketing and have failed to show a profit yet as a result (which has probably lagged their share price a bit). They are likely a great long term bet. I could see them paying a dividend some day.
(TSXV:OGI)
I think Organigram has been a lagger because the industry is still waiting on them to announce some type of “branding” strategy like the other big 4 in APH.V, CGC.Tand MT.V recently have. From a chart’s perspective they look a lot less like you are chasing than some of the other names that I follow which is always a good feeling. Them and Aphria are the only companies that have reported cash flow positive financials (albeit very little profit).
(TSXV:MT)
MT.V Showed great revenue and patient # growth in their latest financials. They are much cheaper than comparable LPs like APH.V and CGC.T despite the fact that they currently have more revenue than Aphria. This is coming from a guy who is currently 100% naming my first-born daughter’s middle name “Aphria” so know how much I like Mettrum’s future prospects.
Here are some highlights from their recent financials:
Summary
Overall, I think the pot scene is the best and safest investment opportunity I’ve ever had the fortune of running into. It’s an industry that I find easy to understand and already totally flourishes in the black market. This isn’t some “maybe they’ll use my graphite play to make batteries for Tesla cars” kind of speculative emerging market. People LOVE to smoke pot. And people are also finding more and more medicinal ways to use pot to help people.
I look forward to potentially writing more articles that go more into depth on specific companies than the brief write-ups I just gave. I’m also working on a model as I stated above so as to play the most undervalued companies at that point in time, so stay tuned to see if that actually ends up doing anything of substance lol.
Feel free to follow me on twitter @dyro01676 and don’t hesitate to school me on how much more you know! I wanna be as much of a sponge as I can. – Dyro
Please feel free to subscribe below to receive future updates from SetYourStop.com.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.