Capitalizing On Cannabis: High Returns Yet Again
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Posted On: 03/02/2014 9:05:29 PM
Re: Westcoastbio #1116
Capitalizing On Cannabis: High Returns Yet Again
05:54 PM ET | by Alan Brochstein | Includes: CARA, EDXC, FITX, FULL, PHOT, SPLI
Editors' Note: This article covers stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Despite concerns of an overheated market after the 328% rise in the Marketfy 420 Investor Cannabis Stock Index in January, the index added another 18% in February, closing at 805.18, up 405% YTD.
(click to enlarge)
The index, which was rebalanced at year-end and has 20 equally-weighted members, was based on 8 companies in 2013 and is now up over 700% since the end of 2012.
Taking a look at not only the 20 components of the index but a broader universe paints a similar picture:
(click to enlarge)
I have seen lists that exceed 100 stocks, while my total tracked universe now has approximately 64 stocks. This list is a partial representation and contains the same names as last month less a few that are below $10mm in market cap.
Note that Puget Technologies (OTCQB
UGE), which was previously attempting to get into the cannabis market, has decided that 3-D printing is a more attractive industry. Excluding PUGE, all of the stocks are up YTD. In fact, the returns are higher than the index, as many small names excluded from the index have performed spectacularly. At year-end, the combined market cap (of 18 names then), which is now almost $12 billion (for 37 names), was about $2 billion. I include some other data to help investors parse the universe. The second-to-last column, the number of Seeking Alpha followers, has shown tremendous growth but highlights that several names are still not widely followed.
February Review
The average stock on the list rallied 58%, which exceeded the index. 11 of the 37 stocks posted declines. One challenge for reporting purposes is Medbox (OTCPK:MDBX), which paid a 100% dividend in restricted stock, effectively creating a 1.5 for 1 split. So, depending on how one values the restricted stock, the decline wasn't as steep potentially as it appears. With that said, restricted stock was sold throughout 2013 at a substantial discount. As of the end of February, three stocks have market caps in excess of $1 billion.
New Stocks
Two new issues of the dozens caught my attention: Vapor Group (OTCQB:SPLI) and Cara Therapeutics (CARA). SPLI, a recent reverse merger and is still known officially as AvWorks Aviation pending FINRA approval of a name change, is primarily an e-Cig company that is developing a vaporizer that works with dry herb. Vaporization's popularity is growing rapidly, and other companies, like mCig (OTCQB:MCIG) and Vape Holdings (OTCQB:VAPE) have commanded substantially higher market caps. SPLI currently has about 280mm shares, but will have a little over 1 billion shares (about a $70mm market cap), most of which is restricted stock that will be issued to the CEO, Dror Sorvai.
CARA, a recent IPO that is focused on pain therapeutics, has a patent and a pre-clinical cannabis compound, but it appears to have a second patent recently awarded that it hasn't yet disclosed to investors. Seeking Alpha contributor Super-Trades laid out a bullish case for the company, suggesting it offers more potential than GW Pharma (GWPH).
All Eyes On Canada
Colorado's legalization, which became effective 1/1, proved to be a substantial catalyst for the sector earlier this year as media interest drew in new investors. Investors should be aware of Canada's new medical marijuana program scheduled to begin on 4/1. Canada's new system will move from a state-run program with a sole supplier that also permitted home-grown to a system of multiple licensed providers serving the nation through mail-order while outlawing home-grown. There are many ways to invest in the theme, and, unlike U.S. stocks, there are options to invest directly in growers.
Colorado, which has about 5mm residents, moved to fully legal while maintaining its medical program (untaxed purchases by consumers), while Canada has about 35mm residents. What investors haven't yet realized is that the rules of the new program create de facto legalization. One offset, though, is that the Canadian program doesn't allow edibles or concentrates. Still, it is clear that the concerns of the Canadian government regarding supply not being able to meet demand are likely warranted.
One company betting big is Creative Edge Nutrition (OTCPK:FITX), which, through its CEN Biotech subsidiary, is aiming to grow up to 1.3mm lbs per year. It has partnered with Growlife (OTCQBHOT), which is taking a 25% stake in the project and helping equip the facility, and Endexx (OTCPK:EDXC), which will provide "seed-to-sale" tracking software mandated by the government. For less aggressive investors, there are several other options, including two companies in Canada that will begin trading soon, Tweed, Inc. and PharmaCan (which has stakes in two licensed growers).
Fill Up On FULL
Full Circle Capital (FULL) is a small Business Development Company ("BDC") that struck a really smart deal with Advanced Cannabis Solutions (OTCQB:CANN) in mid-January. While the stock has rallied a bit since then, the stock could be worth as much as $14 based on the current price for CANN. Before I explain the math, it's important to note that FULL acquired 1mm warrants in CANN at $5.50 per share for $0.50 and will be lending in the form of a convertible note $7.5mm at 12% with a conversion at $5 per share (1.5mm shares).
FULL reported an NAV of $7.09 as of 12/31 and issued shares in a public offering in mid-January and then another direct offering just last week to two institutional investors at $7.81. There are approximately 10.1mm shares at this point. There are many factors to incorporate that could reduce the value of the securities to some degree, and I realize that the accountants will most likely be conservative, but assuming $33 per share, the 2.5mm shares less the warrant or conversion price, works out to intrinsic value of $70mm or $7 per share. Adding this additional value to the $7 NAV for the rest of the portfolio yields $14 as an adjusted NAV. This suggests that $8.15 is a substantial discount to the underlying value of the stock. Even if one were to use just 50% of the intrinsic value of the warrants and the converts, the stock's adjusted NAV would be over $10 per share.
For anyone who wants some exposure to the cannabis market, FULL offers a relatively conservative entry. Not only does it allow investors to participate in the success of CANN (the relationship calls for up to $30mm in funding at 12%, but with only the first $7.5mm tied to very favorable terms for the convertible notes), but it generates a 10% dividend yield (with monthly income).
Outlook
Cannabis stocks are one of the biggest stories on Wall Street so far in 2014. The market has been dominated by retail investors chasing a relatively small universe of mainly low-quality companies, leaving stretched valuations. The fundamentals remain very strong, but the easy money has likely been made. Going forward, look for higher quality choices, a phenomenon that could lead to substantial losses among some of the lower quality names investors are buying today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have shared alerts initiating long postions that remain open in BRDT, EDXC, FITX, FULL, and PHOT at 420 Investor and in FULL at The Analytical Trader
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05:54 PM ET | by Alan Brochstein | Includes: CARA, EDXC, FITX, FULL, PHOT, SPLI
Editors' Note: This article covers stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Despite concerns of an overheated market after the 328% rise in the Marketfy 420 Investor Cannabis Stock Index in January, the index added another 18% in February, closing at 805.18, up 405% YTD.
(click to enlarge)
The index, which was rebalanced at year-end and has 20 equally-weighted members, was based on 8 companies in 2013 and is now up over 700% since the end of 2012.
Taking a look at not only the 20 components of the index but a broader universe paints a similar picture:
(click to enlarge)
I have seen lists that exceed 100 stocks, while my total tracked universe now has approximately 64 stocks. This list is a partial representation and contains the same names as last month less a few that are below $10mm in market cap.
Note that Puget Technologies (OTCQB
UGE), which was previously attempting to get into the cannabis market, has decided that 3-D printing is a more attractive industry. Excluding PUGE, all of the stocks are up YTD. In fact, the returns are higher than the index, as many small names excluded from the index have performed spectacularly. At year-end, the combined market cap (of 18 names then), which is now almost $12 billion (for 37 names), was about $2 billion. I include some other data to help investors parse the universe. The second-to-last column, the number of Seeking Alpha followers, has shown tremendous growth but highlights that several names are still not widely followed. February Review
The average stock on the list rallied 58%, which exceeded the index. 11 of the 37 stocks posted declines. One challenge for reporting purposes is Medbox (OTCPK:MDBX), which paid a 100% dividend in restricted stock, effectively creating a 1.5 for 1 split. So, depending on how one values the restricted stock, the decline wasn't as steep potentially as it appears. With that said, restricted stock was sold throughout 2013 at a substantial discount. As of the end of February, three stocks have market caps in excess of $1 billion.
New Stocks
Two new issues of the dozens caught my attention: Vapor Group (OTCQB:SPLI) and Cara Therapeutics (CARA). SPLI, a recent reverse merger and is still known officially as AvWorks Aviation pending FINRA approval of a name change, is primarily an e-Cig company that is developing a vaporizer that works with dry herb. Vaporization's popularity is growing rapidly, and other companies, like mCig (OTCQB:MCIG) and Vape Holdings (OTCQB:VAPE) have commanded substantially higher market caps. SPLI currently has about 280mm shares, but will have a little over 1 billion shares (about a $70mm market cap), most of which is restricted stock that will be issued to the CEO, Dror Sorvai.
CARA, a recent IPO that is focused on pain therapeutics, has a patent and a pre-clinical cannabis compound, but it appears to have a second patent recently awarded that it hasn't yet disclosed to investors. Seeking Alpha contributor Super-Trades laid out a bullish case for the company, suggesting it offers more potential than GW Pharma (GWPH).
All Eyes On Canada
Colorado's legalization, which became effective 1/1, proved to be a substantial catalyst for the sector earlier this year as media interest drew in new investors. Investors should be aware of Canada's new medical marijuana program scheduled to begin on 4/1. Canada's new system will move from a state-run program with a sole supplier that also permitted home-grown to a system of multiple licensed providers serving the nation through mail-order while outlawing home-grown. There are many ways to invest in the theme, and, unlike U.S. stocks, there are options to invest directly in growers.
Colorado, which has about 5mm residents, moved to fully legal while maintaining its medical program (untaxed purchases by consumers), while Canada has about 35mm residents. What investors haven't yet realized is that the rules of the new program create de facto legalization. One offset, though, is that the Canadian program doesn't allow edibles or concentrates. Still, it is clear that the concerns of the Canadian government regarding supply not being able to meet demand are likely warranted.
One company betting big is Creative Edge Nutrition (OTCPK:FITX), which, through its CEN Biotech subsidiary, is aiming to grow up to 1.3mm lbs per year. It has partnered with Growlife (OTCQB
HOT), which is taking a 25% stake in the project and helping equip the facility, and Endexx (OTCPK:EDXC), which will provide "seed-to-sale" tracking software mandated by the government. For less aggressive investors, there are several other options, including two companies in Canada that will begin trading soon, Tweed, Inc. and PharmaCan (which has stakes in two licensed growers). Fill Up On FULL
Full Circle Capital (FULL) is a small Business Development Company ("BDC") that struck a really smart deal with Advanced Cannabis Solutions (OTCQB:CANN) in mid-January. While the stock has rallied a bit since then, the stock could be worth as much as $14 based on the current price for CANN. Before I explain the math, it's important to note that FULL acquired 1mm warrants in CANN at $5.50 per share for $0.50 and will be lending in the form of a convertible note $7.5mm at 12% with a conversion at $5 per share (1.5mm shares).
FULL reported an NAV of $7.09 as of 12/31 and issued shares in a public offering in mid-January and then another direct offering just last week to two institutional investors at $7.81. There are approximately 10.1mm shares at this point. There are many factors to incorporate that could reduce the value of the securities to some degree, and I realize that the accountants will most likely be conservative, but assuming $33 per share, the 2.5mm shares less the warrant or conversion price, works out to intrinsic value of $70mm or $7 per share. Adding this additional value to the $7 NAV for the rest of the portfolio yields $14 as an adjusted NAV. This suggests that $8.15 is a substantial discount to the underlying value of the stock. Even if one were to use just 50% of the intrinsic value of the warrants and the converts, the stock's adjusted NAV would be over $10 per share.
For anyone who wants some exposure to the cannabis market, FULL offers a relatively conservative entry. Not only does it allow investors to participate in the success of CANN (the relationship calls for up to $30mm in funding at 12%, but with only the first $7.5mm tied to very favorable terms for the convertible notes), but it generates a 10% dividend yield (with monthly income).
Outlook
Cannabis stocks are one of the biggest stories on Wall Street so far in 2014. The market has been dominated by retail investors chasing a relatively small universe of mainly low-quality companies, leaving stretched valuations. The fundamentals remain very strong, but the easy money has likely been made. Going forward, look for higher quality choices, a phenomenon that could lead to substantial losses among some of the lower quality names investors are buying today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have shared alerts initiating long postions that remain open in BRDT, EDXC, FITX, FULL, and PHOT at 420 Investor and in FULL at The Analytical Trader
Add CARA to portfolio
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