It’s been a week since I’ve posted an MMJ update, largely because of the preparation time needed to prepare for and run my medical marijuana panel at this week’s Cambridge House Canadian Investor Conference
I've missed you all. But it doesn't appear that I missed much on the news front.
For those that have never attended a Cambridge House event, it’s traditionally the place to find grey-hairs perusing what’s being pushed to investors in the mining space. If you’re a happening rock-finder, it’s the place to be.
But hey, mining isn’t exactly what it used to be right now, so much so that I considered tossing a handful of singles to the floor and making bets on which resources CEO would kill the most of his compadres with a sharpened lanyard to get it.
Even the pension investors are beginning to realize sector diversity is a smart rule for your portfolio, so this week’s show gave over a hefty amount of floor space to the tech world, some more to a Deloittes-driven green energy section, a little Bitcoin
, some 3D printing, and four companies in the marijuana space.
Let’s talk about those.
First on the floor, both in your hearts and your scoresheets, was Naturally Splendid (TSX:V.NSP
, Stock Forum
). These guys,
who share top level management with Canada Carbon (TSX:V.CCB, Stock Forum) (who I’ll say nothing negative about because they have lawyers on around-the-clock shifts and paper the walls of the executive restroom with mea culpas of the fallen)
have a range of hemp-based health snacks, seed products and protein drinks.
(NOTE: Naturally Splendid shares office space with CCB, not management: My apologies for the error)
I’ve said it before; I like what the NatSplen folks are doing. Their packaging is superb, their product was in the hands of every second conference attendee, they’re doing what I’d consider to be a hard slog in pushing into the retail space, but if they can make that work (and thus far, they’re doing just fine), it’s a very real company with a product that will only show a better profit margin with scale. And that scale will most certainly come when they get the commercial supply side going and you find hemp seed in your Corn Flakes.
Also making waves, Verde Science (OTCQB:VRCI
, Stock Forum
), who sent out high profile consultant and potential one day California Governor Paul Pelosi.
Pelosi, son of 60th
Speaker of the US House of Representatives Nancy Pelosi, was doing the rounds talking about Verde’s plan to middleman between the growers and dispensaries
, a plan that shows promise the more you realize the cost of weed is likely to plummet in the years ahead, while dispensaries will be needing consistent, quality supply and marketing help to get them out of their current ‘crusty dude in a tie-dyed t-shirt telling you to chill while he counts change’ persona.
You may recall Verde as being Rango Energy until recently.
Said CEO Harp Sangha recently, “Our company was presented with a significant opportunity to participate by teaming up with top biopharmaceutical experts to help produce a meaningful supply of the highest quality product for the underserved markets; particularly Southern California and other jurisdictions as Marijuana is legalized for both medicinal and recreational use."
I haven’t been neck deep in the Verde story, but where they’re positioning themselves is exactly where I’d want to be, especially with the political pull of Senor Pelosi.
Side note: I got the distinct impression Pelosi doesn’t mind sampling the product. Either that or he’s one of the slowest, most considered, maybe even docile conversationalists I’ve met. Not that it seemed to hinder him – he was fine on camera and talked his company up like a trooper, he listened and conversed and held a crowd, but if you slipped a pillow under his head and stroked his ear a few times, I think he’d be happily napping inside ten seconds.
Also at the conference was Next Gen Metals (CSE:C.N
, Stock Forum
), which has put on the successful Greenrush medical marijuana investors conference and promises to establish quality control labs going forward. Side note: Come see me at the next Greenrush show in Toronto on June 26th
doing the most recent iteration of my “The Dot.Bong Bubble: Marijuana is great and all but how do we make money off this sh-t?” presentation.
And finally, rounding out the four, was Endexx (OTO:EDXC
, Stock Forum
), who I knew nothing about going into the conference, but which will supply growers and dispensaries with inventory tracking, quality control and compliance tracking software while also pushing the Autospense medical marijuana vending machine.
Okay, full disclosure: Endexx has announced a software partnership with CEN Biotech, a subsidiary of Creative Edge Nutrition (OTO:FITX
, Stock Forum
), and anyone who reads my columns knows that CEN CEO Bill Chabaan and myself are not BFFs
But I don’t mind the prospects of what Endexx is proposing on the inventory solutions side. If ever an industry is going to be prone to shrinkage, medical marijuana is it, and tracking the entire process from grow to sale is something that requires a robust software solution.
But, man alive, do I HAAAATE vending machine plays.
Those that are out there in the US already have seen their usefulness slashed by rulings that they can’t contain actual weed, and that the machines must be manned by an attendant so as to keep young and un-qualified hands out of the mix.
This, for mine, makes them a very expensive shelf.
Vending machines are at their most useful when they can be left alone to do business long after the retail outlet has closed for the night. In Tokyo, you can find vending machines for just about anything, from umbrellas to ‘gently used’ panties. Run out of toothpaste in the middle of a business trip? There’s a machine for that. Looking for a nice cold can of dragonfruit and peachfuzz Happy Monkey Time soda? You’ll find it within ten steps of any street corner, just waiting to be dispensed.
I love vending machines. They make me happy. But weed vending machines are just bad juju.
That said: After waiting for the crowd around the Endexx vender at Cambridge House to move along, I got a few minutes to talk to hard working CEO Todd Davis who pointed out the first positives I’ve heard for vending as an option.
First, he sees the potential for one store to bank up five or six machines in one retail space, which would allow one person to man the machines while also keeping stock secure. Thumbprint scanners and other security options exist to ensure customer tracking (certainly better than the notepad some dispensaries rely on), and Davis says his machine has been test run in several US locations under video surveillance, and they’ve seen several attempts to steal the machine foiled by its construction and weight.
In addition, he notes that some dispensaries in California are so overrun with clients that there’s a 20-25 minute wait to get your weed, which a vending machine bank may prevent.
Good points. But.
You also likely need a security guard in any vending establishment, to ensure users aren’t relieved of their medicine at the door. And that they don’t use the machine 18 times for all of their friends. And that they don’t drive a forklift through the door.
So now your costs are going up. You also need Health Canada to okay vending machines, which they haven’t and maybe won’t. In the US, you need regulators to settle on rules for them, something Davis is going to try to sort out by visiting Colorado and trying to work around that ‘no weed in the weed machine’ rule which, to be honest, is a play killer.
So the jury is out on Endexx, but I’ll get in touch with Davis in the weeks ahead to gauge his progress and dive deeper into the software side, which is where I think there’s real potential.
So what do all of these four companies have in common?
Next Gen is going to set up their lab and take a piece of sales in return for quality control. Verde is going to be the company that fixes the distribution problem of growers and the supply problem of dispensaries. Naturally Splendid is making hemp a retail superfood. Endexx wants to get paid to make all corners of the industry run smoother.
Ladies and gentlemen of the jury, if you’ve been sitting the weedspace out while it gets to grips with what it wants to be, these four companies are examples of what will be the long term growth path of the business.
They’re not ‘weed companies’, they’re tech companies, event companies, science companies, retail companies. They don’t live or die on the price of a gram – in fact, they’ll do better the lower the price of weed gets because they’ll help companies make margin. Low cost commodity in, high quality marketable value add out.
On my Cambridge House panel, which included Deloitte Tax Law’s Daniel Kiselbach, Cannabis Culture’s Jodie Emery (wife of soon-to-be-released Prince of Pot Marc), Verde’s Pelosi, and James West of Midas Letter, the overwhelming consensus was that there’s a crash coming for the MMJ sector, and that companies without a solid business model will eventually be dust.
When asked who The Prince of Pot would be alining with when he's released from a US prison for selling weed seeds, Emery said 'nobody,' adding that she and her husband have always given profits away, and that she believes the best investment advice in the space is to get behind companies that put the patient first and sell as inexpensively as possible.
I'm going to go ahead and suggest there might be better options. In fact, throw a rock at the sector and you'll hit one.
But not everything is as solid as the rising share prices may indicate.
For mine, what we're looking at is not a bubble per se, because everyone knows the reckoning is coming, it’s an educated bet on the ability of certain companies to keep turning over multiples in value before the guts drop out. It’s a daytrading play that relies on people to be able to make money on stupid plays by jumping in at the open and being out by noon.
That’s clearly unsustainable. West noted that the people behind the Supreme Pharmaceuticals push have made bank to this point, buying in at a micro level and running the rails to a nice mega-multiple profit today. Whether or not they ever get their license to grow a million square feet of weed is, right now, of little consequence. It’s going up, and if you’re not on it, you’re not where the cool kids are.
Kiselbach pointed to Tweed, a deal he helped put together, as being a crazy payday for the principals and early investors when they got in at the mid-$0.80’s point and the stock opened at the mid-$4 point. Whether Tweed can roll that into a big phat crop remains to be seen, but nobody at the company is crying poor.
But Naturally Splendid has not seen a massive share boost. Next Gen’s stock chart looks like an outline of the Disney castle logo. Endexx went up, then Endexx went down. Verde’s chart has only been kicking for a month, and despite a lot of volatility, it’s only $0.002 above where the stock debuted, at $0.088.
Verde’s earlier incarnation, Rango Energy, was at $0.40 in July of last year.
So why are these companies, with actual business plans and the ability to get to an investor conference and push their product decently, struggling to ride the same pop as companies that want to replicate a Hell’s Angels grow op, only with pharmaceutical grade conditions and costly government oversight?
Answer: Because investors in this space, right now, don’t care about your EBITDA.
Investors in this space are looking for pop. They want to know what company at $0.02 is switching to weed, and they’ll jump in for the day and jump out when it hits $0.06. Then they’ll jump back in when it hits $0.03, and get out four hours later when it’s at $0.05.
These are daytraders. Shorters. Basement suite zealots who live and die on half a cent of movement and have 195 buddies on Twitter who’ll follow them into a purchase and five accounts on the Stockhouse bullboards to say nice things, or crappy things, about whatever they want to raise or kill.
This is the medical marijuana market right now.
If you believe the sector has promise, as I do, but that such promise will come not tomorrow but in three months, or six months, or a year, and that an annual return of 30% is just fine for your money, then you must disassociate yourself with the day to day share price of what you own.
I believe the four companies at the Cambridge show will appreciate in value. But they’ll drop 85 times first, and for no apparent reason. If you’re in, you need to understand those red numbers are opportunities to add to your shareholding, not a reason to bail.
Keep your powder dry, friends. Buy quality. Ignore daily movements and look at the monthly swings. Investigate management. Think forward. Consider the likelihood that weed, which has never been cheaper on the street than it is right now, will get cheaper when a billion square feet of Canadian grow space is devoted to it and companies can’t find patients to take it at above-closet-grown prices.
Who will benefit from that likely to self-destruct commodity market?
Processors. Value-adders. Brand builders. Solution providers. Roll-ups. Vertical Integrators.
When you start to look at the sector with the long view in mind, you begin to see amazing value in what the daytraders are ignoring.
My top five right now, based on long range forecasts and the expectation of grower carnage:
Would love to hear your own top three, and why, in the comments.
Full disclosure: Next Gen Metals and Cannabis Technologies are Stockhouse Publishing marketing clients. I do not own any of the above mentioned stock, nor has any company paid for this coverage. If I trash your deal, it's because you need to do better, not because it'll send my kid to college.
Find more marijuana sector coverage at http://www.stockhouse.com/discovery/marijuana
Passenger pigeon: 49.287317 N, -123.125311 W
Desk: The one with the IPA bottles underneath.