New Cannabis Ventures and 420Investor CFA Alan Brochstein joins to talk about the emerging opportunities in the Cannabis space such as MedReleaf Corp (TSE:LEAF) (OTCMKTS:MEDFF), Canopy Growth Corp (TSE:WEED) (OTCMKTS:TWMJF) (FRA:11L1), and Cannabis Wheaton Income Corporation (CVE:CBW) (OTCMKTS:KWFLF) (FRA:3KF)

Transcript:

James West: Alan, thanks for joining us today.

Alan Brochstein: I’m so excited to be here. thank you, James.

James West: Alan, let’s start off with an overview: what is it that New Cannabis Ventures does, and what’s your revenue model?

Alan Brochstein: Sure. So New Cannabis Ventures is actually my second cannabis effort, and the goal is to better connect cannabis investors and operators. We’re a content source; a lot of it is aggregated content, and there’s some original content as well. But what we do, James, is we save people time. We’re really focused on the cannabis industry.

James West: Okay, and how did you get involved in the marijuana business?

Alan Brochstein: So I kind of stumbled into it in 2013. I was a prolific blogger over at Seeking Alpha; I had a large audience there, and I just stumbled into it. This was actually something that resonated with me, not from a consumption background but just from an individual liberties background. I really didn’t know that much; this was right after Colorado and Washington had legalized, and I didn’t know that they’d even legalized, to be perfectly frank.

It all kind of came together when I realized that there were investments out there that they were terrible. So I quickly became the first CFA to be focused on publicly traded cannabis stocks, and ended up launching a subscription service in September of 2013, 420Investor, which is still active today.

James West: Mm-hmm. Okay, so how many – what’s your audience size there?

Alan Brochstein: Well, it was funny: I started from zero at the end of 2013; I think I ended that year at maybe 162? So it was actually pretty – I think we were charging less then than now, but the price was $42 a month pretty early in 2014 and we ran it up to 2000. Of course, the markets crumbled, and it came all the way down to about 300, which really is not that great. We’re more than double that right now, things are rocking and rolling.

You asked earlier about the revenue model of New Cannabis Ventures. So on 420Investor, obviously, it’s subscriptions and that’s it. On New Cannabis Ventures, it’s an advertising model. We have, I think, about 15 companies now that are using what we call our premier services. Some of them are publicly traded. We don’t really say good things or bad things about our clients, but we do share information and help promote their awareness.

James West: Mm-hmm. All right. So then, tell me: what is it you look for in a marijuana company that makes it most attractive to you as an investment?

Alan Brochstein: Sure. Well, so any of your listeners that are already involved in the space, they’re well aware that, especially in the United States, but even to some degree in Canada, that a lot of these companies are not that real. So I’m really trying to establish, in the public markets, which companies are real or not. And looking a little bit deeper than that, really focused on things like the capital structure, the management team, valuation, and increasingly, revenue and cash flow, because these are actually today in 2017 real things to discuss. In 2014, not so much.

James West: Yeah. So do you think that the valuations of Canadian marijuana companies have sort of run away from reality relative to their balance sheets?

Alan Brochstein: You’re talking to somebody who never has owned Amazon and worries probably too much about valuation. People can make a lot of money buying overpriced or expensive stocks, and stocks that are expensive that have a good future ahead of them are different from stocks that are expensive that don’t. So I was very bullish on the price levels of the Canadian LPs last summer; I published, actually, on New Cannabis Ventures, a very bullish piece about now’s the time to buy Canadian stocks. Of course they quadrupled, not because I said they were going to, but it just played out very well. I got that one right.

So it leaves me in an awkward position now. I really like the industry long term, and Canada is a huge focus of mine and ours at New Cannabis Ventures. With that said, I think it’s a tough time right now. We’re at least a year away from legalization, which is really what’s driving things right now, and I’m sure we’ll talk more about some of the things that could go wrong. Everybody’s been focused on how great everything’s going to be, and I tend to balance that, James, with two things: one, the execution risk for a lot of these companies that they just may not get to what they say they’re going to do. It’s not easy to scale a cannabis operation.

And I balance that with, on the other hand, there are some tremendous international opportunities, particularly in Germany, ahead that could help some of the LPs. So I think it’s a tough question. The valuations have come down for a lot of these. There are a few names that I actually like right here in terms of their absolute valuation, and I can also appreciate that some of the stocks may pull back some more.

James West: Mm-hmm. Interesting. Now, how do you see the difference between investing in Canadian marijuana stocks and US-listed stocks generally?

Alan Brochstein: This is a great question, because it’s two totally different worlds, and actually, I had kind of an ‘aha’ moment this week when I was on a panel in Toronto. So in the United States, where it’s federally illegal, you have to always preface everything with that. It’s very different from Canada, which is not only federally legal for medicinal purposes but obviously headed towards full legalization for adults.

So in the United States, this really impacts companies in a lot of ways: the access to capital is not so great, and then there’s also some risk in these companies and there’s an inability to scale, because you can only operate within a certain state. These are some of the things. There’s some tax issues, as well.

So in the United States, the market of stocks tends to be more focused on ancillary plays, as opposed to companies that are actually growing, processing or selling cannabis. In Canada, it’s the flip side, and kind of this realization I hit, and one of the things I said on this panel I was attending at the Lift conference, is that the ancillary – you can’t really find that many ancillary investments in Canada. Because the LP situation is so easy to ascertain – everybody can look at the Health Canada site, see these companies are public, do their research, hopefully come to New Cannabis Ventures, learn about these names – so the focus in Canada tends to be on either the ones that are already licensed or may become licensed. And there aren’t that many ancillary plays.

So, those are the main differences, I’d say.

James West: Okay. What are some of your favourite marijuana companies presently, and do you have any conflict in talking about them?

Alan Brochstein: I do, I have two conflicts. Number one, so up until October 1st, we didn’t work with any public companies. There are a lot of reasons for this, but one of them was the conflict of interest with 420Investors. So if I sit here and hand out names that I like, they may be clients of mine, so I need to reference that. But I’m happy to do so; I just want to make sure people understand that.

At the same time, I have over 600 subscribers paying me for this information, so I want to be careful about that as well. In Canada, I don’t want to say it’s necessarily my favourite stock at the moment, but I know people care about Canopy Growth, and this is a company I’ve followed for a while; I just toured their factory again. And I don’t always like their stock. They are a client of ours. But that’s one that I think has really pulled back a lot, and people don’t seem to be appreciating a lot of the positives there. I think it’s been kind of a storm in general for Canopy Growth of late.

I think there’s concerns about the Mettrum integration in terms of customer loss following the myclobutanol issues there; I think that Cannabis Wheaton is an issue, the new MedRelief IPO may be weighing on it, there’s been some insider selling that maybe has gotten a little too much attention…the list goes on and on, but at the end of the day, they are the leader right now, and they have a lot less execution risk than others.

So that’s a big stock that I like, and if you want to ask me some more in Canada, I will. But I actually think that just thematically, James, we just went through a period where there were a bunch of new LPs, plus, another factor that impacted Canopy as well as just the overall market was this ETF that was created, HNMJ, which I’m sure you’re aware of.

So, a lot of different choices. There’s a situation right now where investors may – I focus on this full time, and I get a little confused, so I’m sure that people who don’t devote their entire lives to following this sector find it hard to differentiate between the different LPs. I think there are some really good bargains among the smaller names right now, and I’d rather not mention those by name.

In the United States, we work with only four clients, and one of them is relatively new. Three of them all have a high level of revenue. We actually have minimal requirements that you either have to have revenue or a high share price; we actually have published criteria of the companies who we’ll work with on New Cannabis Ventures. Out of the 400-plus names in the United States, less than eight would even qualify. So I’m going to mention two stocks that are my clients. Well, actually, I’m going to just mention one that I think is actually a good buy right now, and that is Grow Generation, but I just want to preface, this is a client of mine.

What I like about them: it’s a boring company. It’s a hydroponic store chain. So that’s not very interesting in and of itself, but they’ve raised capital, there’s a lot of potential for them to do acquisitions, but their organic growth is very high as well. And with all these states opening up and more and more of the production shifting from the black market to large-scale and medium-scale commercial producers, I think these guys are going to do very well.

I can’t identify names that have good valuations, typically, but these guys are on track to do $15 million in sales this year, and their market cap right now on a fully diluted basis is just a little bit over 40 million. I would challenge anybody to find a stock that looks better.

James West: Sure. And is their clientele 100 percent cannabis oriented?

Alan Brochstein: That’s hard to tell. It’s primarily cannabis-oriented, and they’re obviously – so they’re very big in Colorado, that was where they started. This is a company that, in and of itself, started just a few years ago, but their acquisition was of an older company and they’re in markets, they’re located close to growers, they’re expanding and re-doing some of their stores that they have in those markets. They also just opened in Nevada and two in heavy cannabis areas in California as well, and then Seattle.

So I think the answer is yes – they don’t – I have not been into their store to do surveys of each and every person coming in, but they’re definitely targeting the cannabis industry.

James West: Mm-hmm. Okay. So in your opinion, what is the likelihood that the marijuana industry will become legal on a federal basis in the United States?

Alan Brochstein: Ever?

James West: Yeah. That’s the question.

Alan Brochstein: I told you, I stumbled in the market in 2013, and my own assessment at that time was, if we were lucky, it would be by 2020. And obviously the way things are playing out, 2020 is too aggressive in my opinion.

We’re making a lot of progress in terms of getting the politicians, some of the politicians, on board, and there’s been a lot of legislation introduced, but it doesn’t ever go anywhere. Obviously right now we have a very unfriendly administration, or at least aspects of it, so we can rule out the next few years; we’ll just be lucky if they don’t really introduce some even more punitive types of measures.

Looking out further, a lot of people think that just because it’s legal in a majority of states in some form, that that’s going to be some sort of precedent for legalization. It just doesn’t work that way. I’m now saying 2024, just to pick a number, but in a lot of ways, and I don’t think people appreciate this – it’s actually kind of good for some companies to have this situation where it’s legal in certain states but illegal federally. Obviously it creates a lot of challenges, but that in and of itself can be a silver lining because it allows kind of smaller to medium sized companies build up their businesses without having to worry about competing with big companies. So, a silver lining there.

James West: All right, Alan. Let’s leave it there for this time. We’re definitely going to come back to you at some point in the future and continue this. Thank you so much for your time today.

Alan Brochstein: I really appreciate it, James. Thank you for giving me the opportunity.