We chatted with Alan about the Cannabis industry in 2021 and look ahead to 2022.
Alan is the founder of 420 Investor, an online community featuring ideas, research, and conversation about stocks in the cannabis industry, and NCV Media, the company behind New Cannabis Ventures, a publicly facing curated content aggregation site focusing on the most promising companies and investors in the space.
He focuses on the cannabis industry and helps investors find the most promising public and private companies in the space while assisting legitimate companies to boost their exposure with potential investors, strategic partners, B2B customers, and the media.
(edited for publication)
Good afternoon and welcome to another edition of the CannaList Conversations. We are here today with Alan Brochstein of New Cannabis Ventures. Alan, how are you?
I’m doing great. Thanks, Mike.
Give us a little bit of background about New Cannabis Ventures.
Sure, I guess I should start with the practice, not predecessor, but what preceded it, for 20 investors. And that’s kind of where I made a name for myself in the space. It was 2013 and early 2013. And I was an independent analyst working with a handful of small to medium size institutional investors and had a couple of other things going on as well. I stumbled into the two facts that I was unaware of number one, that Washington and Colorado had voted to legalize and November just before that, and number two, that there were publicly traded companies that were supposedly cannabis companies. And so, I was a prolific contributor at the time to Seeking Alpha. And I was I just stumbled across this article about this scammy company that piqued my interest. And there was no looking back after that.
I ended up spending several months doing due diligence on the handful of companies trading back in early 2013. And concluded only GW Pharma was a reliable company. But I also spent time learning about the promise of medicinal cannabis in learning about social injustices and things like that. So I ramped up and had a subscription service for people interested in publicly traded stocks. And some of those people and some of my readers at Seeking Alpha pushed me towards focusing on the cannabis space.
And in the summer of 2013, when Sanjay Gupta did his weed documentary, the light bulb kind of went off, that finally in mainstream person was embracing minimal accounts. And then the Cole Memo hit a month later. And that’s when I launched for 420 Investor, which continues to this day in that it’s all about helping individuals. I help some institutional investors better understand the publicly traded landscape by giving them ideas and news about what’s going on.
You asked about New Cannabis Ventures that followed two years later, and it kind of leveraged 420 Investor, which takes a lot of information and distills it in. But, you know, I think the cannabis industry suffers from too much information. And you have all these media out there, that every little thing that happens is some big news. And so if you’re trying to follow the space, it can be very challenging because you get bombarded by things that are not essential companies that aren’t real news about them, for example.
So my partner Joel and I decided in 2015 to launch New Cannabis Ventures, which is open to the public – no registration required, no fees. Public-facing, supported by ads. And that’s been our model. since then. Initially, only private companies could advertise, but we could work through that. And so beginning of 2016, a year later, we began working with public companies, some of which we continue to support today. So many have come and gone along the way. But the idea is really simple: to provide it’s to be like kind of The Wall Street Journal of the cannabis industry and to provide very deep coverage of the space, and that is what we do at New Cannabis Ventures.
It’s about 80% curated content. The curated content is as simple as rerunning press releases, but they’re enhanced – it’s not just cut and paste, and that’s it. They’re thoughtful titles, good imagery, tagging, and many things that really can help people understand the story over time. And those curated press releases revolve, typically around capital raises, financial reporting in M&A; those are the three main topics. And then the other 20% of what we do is proprietary. And that tends to be we do about two interviews a week. These interviews are with both public and private companies, sometimes investors, and the people tend to be North American, but many of them are Canadian. We have seven indices that we’re running in. Each month, we’ll write an update about the indexes.
A third area is that same monthly review process; we have the cannabis revenue and profit tracker. And there, we list over 50 companies sorted by revenue, both in Canadian dollars in US dollars. And we’ll write a review each month of that. And then another piece of proprietary content – there are several markets where I’m interpreting data as it comes out in those markets – Illinois and Michigan – both states issue monthly revenue data.
And the other one I do is Canada, which Statscan puts out Canadian data. And so that’s the type of content we run. And then there’s one other piece I guess I should mention on Sundays. So we have a policy of pretty much its noneditorial people who come to our site shouldn’t know if it’s a client or not that the news is about, and we don’t tell people to buy the stock or sell that stock. I do that for 20 industries, of course. But New Cannabis Ventures, the only real editorial thing we do is every Sunday; sometimes, it’s a struggle. Sometimes it’s really easy. We publish a weekly newsletter, and each newsletter has a piece of what I would call editorial content. It’s not so much editorial as it is, I would say, educational. But what we’re trying to do is inform our audience in a first-person voice and tell them, you know, what we think that lies ahead that might be important or things that people may be misinterpreting or misunderstanding. So each week, we’re writing about that, Mike.
And then, when you talk about the public companies, these are typically Canadian companies because we don’t have US public companies yet. We have companies trading.
Oh, yeah. Well, I mean, that’s been one of the great changes over the last year or so.
Without federal legalization, we don’t have they can’t trade.
They do trade. They just don’t trade on the NASDAQ or the New York Stock Exchange. Just so your audience understands the landscape in 2013. Most of these companies were masquerading as cannabis companies. GW Pharma was an exception, but it was listed on the NASDAQ in 2013. And that’s been the only plant-touching biotech to do that. There have been some synthetic cannabinoid companies that have made it to the higher exchange. But that was it for the next few years, the stocks traded on the OTC, and so real American cannabis companies didn’t trade. So your statement was accurate. The big change was up in Canada, we started to see the CSC, and then the TSX listed these Canadian LPs, and those companies in 2018 were able to begin to get NASDAQ and New York Stock Exchange listings. But a big change was so the CSC had started to list American companies. Still, it wasn’t really until 2018 that the really the largest US cannabis operators went public through the CSE for the most part. A couple of them through the SPAC process through the Neo, but they have traded since then on the OTC they’re unable to list on higher exchanges, which creates just a whole litany of issues. But even with that said, in the United States on the OTC, they trade millions of dollars today. And there’s also an ETF now that invests in swaps of these companies, which trades publicly and has over a billion in assets. And, you know, some of those position sizes are 100 $125 million of those companies. So it’s an indirect way for anybody that wants to participate.
Guess I was focused on NASDAQ and NYSE.
We have ancillary companies, so that’s become a big part of the market, and Scott’s Miracle-Gro has been in the space for quite some time and lists on the New York Stock Exchange. And we had IIPR go public as a REIT back at the end of 2016. And we had grown generation up list to the NASDAQ and urban grow up lists in the NASDAQ, and we’ve had new companies like Hydrofarm and some other REITs. So a good dozen ancillary companies are in the United States trading on these higher exchanges.
Yeah, because I know there are a couple of foreign companies trading on the NASDAQ, but because of their legal where they are correct, the Canadian LPs. And some Israeli companies, things like that. If you were in this space, you know, 2013 2015, then you experienced the green rush. Right? Right. And like you said, a lot of these companies weren’t truly cannabis companies; they were other things. What was that like?
So it was pretty bizarre. The best example I can give is how the BBC wanted to interview me in early January 2014, when Colorado legalized the BBC; interviewing me is insane. That so, you know, it was tough; I was in an awkward position of really supporting the industry and its mission and wanting to protect investors. And so when we came into the year, I was warning people, you know, these companies are bogus, but there was so much demand for the stock, it’s sent them up, like 10 to 20 times.
And, of course, things like that always end poorly. And so, my kind of mission was to keep my subscribers aware of how the future would change how we get legitimate companies trading publicly. And so, a lot of my focus was on Canada, once those companies began trading in 2014 2015. And, you know, once 2018 hit, things got a lot more exciting. I had been asked to speak at the CFA society in Houston several times. And I always said, You know what, it would be a waste of people’s time. And it’s just not time yet.
But in April 2017, I was able to accept the invitation. And I remember like it was yesterday, I said, you know, I’ve turned this invitation down for a few years now. But and I’m not telling you to buy cannabis stocks on April 17. But what I’m telling you is as an investor, they’re finally on the radar for something that can become investable in they have, and so is a CFA when I first showed up; being a CFA didn’t help to have a bullshit detector helped. And then, as the years progressed, still having a CFA didn’t help because it was still more venture capital and not so much. These were publicly traded companies that should have been private. But there was a land grab, and, you know, race for capital and being public health, don’t that.
But I have to say, in the last two years, 2020, 2021, you know, many analysts have come into the space covering the American companies; there are services out there that have all the consensus estimates and everything. Companies are reporting positive, adjusted EBIT, da some companies positive net income, we’re talking about both ancillary and American Direct cannabis companies. So it has become, to the point where having my CFA is helpful, you can be an analyst and start to look at earnings projections and talk about valuations in a significant way. So it has changed a lot.
So, where is the market now? I mean, we see a lot of M&A activity.
Yeah, this year has been the mirror of 2020. 2021 started great and is ending horribly when it comes to the stocks 2020 started horribly and ended great. Now, what happened in 2020? At the end of 2019, the vaping crisis was wreaking havoc, and I used the words capital crunch repeatedly. The reality was capital available to our industry dried up, and then the pandemic hit, and it looked like lights out for a lot of companies. And the pandemic turned out to be a blessing in disguise because essential services are what these companies were declared. And they were able to do things like curbside pickup and delivery. And all of a sudden, eCommerce started to be a factor, and then on top of that, you had more and more states and municipalities seeing that cannabis would help with jobs, for example, in tax revenue.
Hence, things lined up as 2020 played out that back half in stocks went up a lot after we followed through into 2021. But his usual things got ahead of themselves. And I was pretty good at calling that out pretty much at the top for my subscribers, but I wasn’t so good at was just predicting how long and how deep this correction from that action in 2020 would be. So, we find ourselves right now that a lot of these stocks have pulled back to where they were in the fourth quarter of last year.
So better than they were in the spring of 2020 By far, but still way down from these levels in February, so what’s going on is that a little bit of technology is fundamentals. And so one of the things in 2020, we saw very robust cannabis sales growth. And, you know, it’s hard to tell at the time how much of this was due to eCommerce. How much of that was due to things like, well, people had extra money, they, they couldn’t go anywhere. So they had extra time, money, and a lot of anxiety. So they were consuming a lot of cannabis. So there was a little bit of a shift out of the illicit market due to the eCommerce factor, and maybe some focus on safety. But at the same time, there were some one-time factors. And so, this year, we’ve seen some very tough comparisons over the last few months. There are glimmers of hope that that’s improving, but still, there have been some slowdowns. Also, I would say, you know, part of the excitement last year was that there’d be more state legalization in the fall elections in November; we saw the most critical state, New Jersey, of the five that voted.
But here we are at the end of 2021. And there’s still no date set yet. So many publicly traded companies are set to go in New Jersey. And this is very different from other states that have legalized it. Some states have had this where publicly traded companies are involved. But New Jersey, it’s almost 100% large, a publicly-traded cannabis company. They’re in their nascent medical market, with some of them holding inventory waiting to sell in. Then we saw New York legalized, but oh, by the way, not till 2023, Virginia legalized but not till 2024. So hopefully, that’ll be a little earlier. So it’s been a year of delays.
And then, of course, the California price implosion, most of the larger MSOs aren’t that involved in the state. Some were involved at all. So it hasn’t reached as much havoc necessarily on those companies. But, on the other hand, some companies are focused on California; they’ve seen their stocks come down 80% from the peaks earlier this year, as prices plunged there. So that’s been an issue. But it also seeds some uncertainty like, well, if it can happen in California, maybe I’ll happen somewhere else. So it does weigh on the sector soon.
The final point I would make, so one of the reasons people got so excited early in the year, was the hint that there could be federal legalization. I’ve been saying for a long time that federal legalization will take a long time. It’s complex, the issues around taxation, around interstate commerce around social equity. These are in regulation by the FDA; for example, these are complex issues if you already have all these states doing things differently at the adult-use level. And so to kind of rein all that in and have a unified state was going to take a while.
We saw in Canada, Justin Trudeau was elected on a platform of legalizing adult use. And yet it still took three years. They were already federally legal for medical, and it took another three years, so that first Graham was sold. So So what has happened? So many people showed up thinking we’re going to legalize tomorrow, which never was going to happen. But it’s been worse than that. Not only is it not happening, the Democrats kind of had this opportunity to do something. Instead, the Senate has done absolutely nothing concerning even talking about cannabis.
And finally, we had control of the Senate. Not really because not 60 votes, but Chuck Schumer in the others took an approach that I was critical of from day one: trying to go big and get everything done in one piece of legislation. And to do that, when you had only a nominally supportive president. He’s not for cannabis legalization. So they blew it; they had an opportunity to be incremental in intake the ball and moving it down the field. Instead, they threw a Hail Mary, and it didn’t work. And so that has left people worried about things that legislation had high taxes. It had an increased regulatory burden with FDA, which again gets people nervous because the US cannabis industry status quos are working well. There have been delays like in Illinois; there’s been some delays or dispensary license. So it’s the cannabis industry. It’s two steps forward, one step back all the time.
But when you start throwing out uncertainty about taxation and regulation, in addition to that the interstate commerce could alter the dynamics. That’s kind of scary now for those that are listening. I want to say there’s been a huge positive this year. I talked just a few moments ago about the capital crunch that arrived at the end of 2019 during the vaping crisis, and this year, we see well, first of all, these companies took advantage of the price rise in the first part of the year. Sold a lot of stock and improved their balance sheet, which turned out to be good, and I’m glad that happened in stocks went up after they sold that stock so people who bought it had a chance to exit profitably if they wanted it to.
But what’s happened it’s very different from history is that we’ve seen a tremendous proliferation of nonequity capital available we’ve seen several REITs go public, one mortgage, I’m sorry, one equity REIT and two mortgage REITs with another one behind it as Chicago Atlantic and AFC gamma. These companies take regular investor money and recycle it into the cannabis industry through either sale-leasebacks or mortgages or debt. And then, we’ve also seen a significant increase in the amount of debt capital available. Again, so many investors, but it’s a different group of investors.
A lot of investors won’t buy OTC stocks, or they won’t invest in CSE-listed companies. But they’ll do debt, and you know, debts more protected than equity. Right. So for whatever reason, you know, there’s a pool of institutional investors that are putting money into federally illegal cannabis companies through debt. And this week this past week, I don’t know when your ERA this but in mid-December Curaleaf, closed the largest debt raise ever 400,000,008%. And then they can expand it by 200 million. And I think people looking at the stock prices are missing the bigger picture that these things I mentioned earlier, New Jersey, New York, and Virginia, are all happening. And oh, by the way, Michigan is continuing to develop. I mentioned Illinois; new dispensaries there will help other states are expanding. Other states could go public that could go legal. So whether or not we make any progress on federal legalization or some of the things that could happen to fall short of federal legalization.
Still, there will be massive growth, but a reasonable investor would say Okay, but how will we fund it? Well, here’s the answer. They’ve taken on this debt capital and have access to sale-leaseback. There are a lot of companies out there that are trading with a billion-dollar market cap that have done no sale-leaseback, so that’s still available. So I’m very encouraged as I look out about the American Cannabis industry as bad as it feels right now. So long, that was a long answer. The short answer is, I said at the beginning, the complete mirror of 2020.
And just like things were crazy and early 2021, I was telling my subscribers that it’s not sustainable the valuations were the prices got to where I thought they should be ten months. Later in, you know, I’d say since then, the fundamentals didn’t change that much. We didn’t see the revenue estimates go down or anything like that. So, you know, maybe you could argue that I had the wrong idea about what the valuation should be; perhaps I don’t know. But as I look out now, honestly, I think these stocks could double or triple over the next year without federal legalization. And I mean, just to wrap it up on this point, it wasn’t that long ago that people that were going to invest in the space had to worry about potentially being arrested or having their money confiscated. That’s not what we’re talking about anymore. Now we’re talking about investing in companies that are cash flow positive, and where we have a situation where the federal government is trying to figure out how to legalize, not how to beat it back.
And do the debt vehicles allow for, you know, less scrutiny as far as the public companies are always focused on revenue and mean their numbers? Does the debt give them a little product? Give them a little more breathing room?
I don’t think so. I mean, they have covenants and things like that. So no, I mean, I think it’s the opposite. And it should be encouraging to equity investors, these people that are lending, okay, first of all, they are first in line, so let’s just be cognizant of that. But still, these tend to be more conservative investors. And I mean, right now, it’s a pretty good bet. Because, you know, they’re, they’re, let’s take purely they have a 6 billion market cap, the market cap thinks they’re worth 6 billion in the lenders or the first 400 million, and you look at the EBIT, da and things like that. So it’s certainly not onerous.
This is not like what we saw in Canada in the early days when the companies had limited revenue, massive losses, and yet they were borrowing hundreds of millions of dollars. They had convertible debt. And I remember I’m not going to name names, but I talked to the CEO of a major LP. I said, I don’t understand why you don’t just sell Stock, because why should we sell stock?
This debt will end up selling the stock at a higher price. It’s convertible at a premium. I’m like, but things change. And what happens if you don’t? He was dumbfounded. Well, it was a disaster. And I don’t have to name the company; it was a disaster for every one of those companies. And now we have a situation where I’m sure most of your listeners are familiar with Canopy Growth. And I’ve been watching that for unravel for a long time. And I’ve been very negative about it for quite some time. I think at this price, it’s harder to be harmful, and there’s no liquidation of it like maybe Hexo might be facing.
But wow, when constellation put all that money into it in late 2018, they had minimal debt. And they had like 4 billion, I don’t remember the exact numbers off the top of my head, but they had a lot of cash in minimal debt. And here we are three years later, and they just had to make a fire sale on one of their assets. And so I may be wrong about my prediction I’ve been making that I’ve publicly stated that at the end of this year 1231. So it’s not their year, but the year Canopy Growth debt will be bigger than their cash. That’s not going to be true because they just sold their European pharmaceutical operation. So I’m going to be a little wrong. I have a feeling, but that’s why they did it. They’re facing funding rounds; they have a lot of debt. They’ve never had to address their debt.
Tilray had to address their debt; Aurora had to address their debt, supreme had to address it. Organa Graham had a lot of debt; they made a strategic investment with British American Tobacco. Oxley has a lot of debt. They’ve done well on the derivative products, but they’re trying to deal with their debt. And I don’t think you’ve done it. We’ve seen a lot of companies stumble on their debt. So I’m very aware of this. And I think the US companies could get into a pinch, but it would require right regressive federal policy or something like that is the way things are right now.
It’s not a problem. Cannabis consumption is not going to drop. I mean, maybe people may be wrong about it going up, but more states are legalizing more municipalities are allowing us to. I don’t think that’s a problem. And I think equity investors should be happy. A because these conservative institutional investors, it’s the second set of eyes. In B, it’s reducing the need to sell equity. So
We saw Canada was hot for a while, then it sort of faltered. Then the US was hot. Are you seeing other areas that are looking to sort of emerging?
Yeah, it’s tough in I’ve been this is a question I’ve been thinking about for a long time. And I told my subscribers told the public I expected in 2021, the shift, not that people wouldn’t care about the United States, but they’d be more interested than they’ve been historical, in other geographies. And honestly, I’m not sure it’s; it’s played out. I’ll say, Yes, this is true, but not to the extent that I thought; I mean, a year ago, I thought Mexico and Israel would legalize this year in either of those played out, they still could, but just like all things, cannabis, things seem to take longer than we expect. But the Latin American companies that trade people publicly got excited about it, and then they lost this whole idea. Of reminds me of an old Seinfeld episode; everybody wants to export nobody. Import except for Poland. So. So I think, you know, we’ve seen some exciting things this year. First of all, back to cure leaf, they invested in Europe. And most of the time when I’ve asked for when at New Cannabis Ventures, we’ve asked in our interviews about you care about international, and I know the US where it’s at, it’s a huge market, blah, blah, blah. So California is not all we care about California. So people have been very focused, and it was interesting to see Curaleaf do this. And so, you know, in their timing to prove to be good, right? I mean, with Germany, you know, Germany, potentially legalizing, and they could be in a good position. So, I think, you know, people have been way ahead of their skis when it comes to international and, you know, I think the best example is Germany. And I told people, you know, the large LPS of Germany would do well would be the way to play it there. There. It’s an export; it’s an import market. And in that medical markets been very slow to develop been a huge disappointment. And so, you know, so far, being focused on international in not being more focused on just the US hasn’t been worthwhile, honestly. Still, that will change, and I think Israel is a pretty promising market, especially if it could go legal. A couple of names trade in the United States in or cure, which is cam doc in I am cannabis trade in the US. And I’ve noticed they’ve been doing well recently. And so a little bit of separation from the back there. And I think that made you reflect on some of the underlying fundamentals and the rapidly growing Israeli medical cannabis market and the prospects for potential legalization. Who knows?
Yeah, we’ve had a lot of dialogue around Germany in the last couple of weeks. And you know, the conclusion there is, things will happen. But not unlike you talked about in the States, it’ll take two or three years to kick in, even if they get forward, around, you know, so they do have medicinal, it’s slow, but it’s growing. There is the belief that they will have adult use, but nobody knows what that looks like. And no one understands, you know, how to do that. They don’t know-how, whether or not this is going to be a dispensary model, whether it goes through, you know, right now all the medicinal goes through the pharmacy, you know, and that’s the only available work. So nobody knows how any of that is going to roll out. So that’s two or three years away.
But it’s a big opportunity. Germany’s the largest market here in Europe for cannabis, and the other thing that I’ve talked about, and I’ve gotten sort of confirmation that folks agree, is, once Germany goes there, you’ll start to see the rest of Europe follow. But you know, start with Germany, and the dominoes will fall,
Right. I can’t say that about Malta or Luxembourg. But yes,
Well, Malta is moving to legalize adult use.
I mean, who cares? 1,000 people?
I think that’s maybe the challenge with Israel, like Israel, a big enough market?
It’s like 8 million, I think. Big enough more.
Yeah. But when we look at compared to Germany.
I agree. But I mean, like in the United States, that would be a decent-sized state. Actually. I care about it.
Israel is always big on technologies. So that and they’re forward-thinking on the research. So they’ve been doing a lot of research for 30 years. So when they do come to market, Phillip, there’ll be prepared. Yeah. So what do you what are you excited about in 2022? And what are you concerned about in 2022?
Yeah, you know, I’m always excited. And I’m always concerned. So that’s a good question.
So I think a couple of things excite me, but I’ll get to the concern first, and we’ll come back to the site to get in on the positive there. So I think you know where we are right now, with the cannabis stocks down a lot from their peak and even down year to date substantially. And many of them are in a bear market. I mean, Canopy Growth just took out its March 2020. Lows, for example. That’s a big stock. So I am concerned.
So why is this happening right now?
There are many fundamental reasons; we touched on some of those. But there’s a big technical right now. And that is, I call it three, three different things that impact people’s willingness to buy stocks right now. One would be tax law selling, and that you know that that goes away December 31. Another window dressing concept hurts ancillary companies in large K LPs because institutions own these. And you don’t look very bright right now, showing your investors that this is what you’re holding.
I think some of them they’ve been selling or certainly not adding to them; they don’t want to look stupid. So and then the third part is, you know, the hedge funds do tend to be active in the space, both from a long and short perspective, to be fair, but I think they take their risk levels down at the end of the year. Typically, you know, if they’ve had a good year, especially they don’t want to risk their pay performance payouts and things like that.
Nobody wants to make a huge bet in the middle of December, which is when we’re interviewing the so what I’m concerned, I think a lot of people, including myself, are excited about 2022. And we kind of expect that this technology will go away and things will change. And I guess what I’m concerned about is what happens if things don’t, and the good news is these companies, for the most part, don’t need to sell equity.
It’s not like this is a near-term problem. So that is a concern of mine for the people who follow me because, you know, many of them are investing right now, and I don’t like to see him lose money. And I think so my number one concern is that this market that we’re in just keeps going down, even though I don’t think it should.
What am I excited about? A couple of things. The first one is easier. And we’ve already talked about it. Sometimes people forget that every market in the United States is different. So, for instance, when Colorado legalized, it meant nothing to the publicly traded stocks, because remember, those were scams anyway, none of them were doing business in Colorado. So that didn’t even exist.
That’s easy to understand. Well, what about when Washington legalized it? No public companies were allowed? Actually, in Colorado, no public companies then were allowed. So all right. Well, what about California? And that was funny. You had Canadian LPS going up because California opened the doors on January 1 in 2018. Right before Jeff Sessions pulls the rug out. Wasn’t that long ago? Done my year, right? Yeah, I do on my year, right, January 1, 2018, four years ago. And so, but people don’t remember that there. There weren’t American cannabis companies in Canada; in California, they were waiting, they’re being patient. And then you get a state like Illinois, which has a lot of public participation now, but at the time, GTI and Cresco were the only ones.
What we’ve seen is, you know, these public MSOs s east of the Mississippi are very big. And so you get a state like New Jersey; it’s almost 100% public companies at this point. And so, I think the actual go-live date for adult use in New Jersey is going to be a big deal, not the type that brings in investors left and right. But something that gives conviction to those that follow the space. And I think it’s going to be important.
And I remember from a previous life; Whole Foods didn’t strike me as a particularly attractively valued stock. But it was a good company, many, many years ago. Now it’s owned by Amazon, of course, but I just wanted to reference a timeout a long time ago, and they opened their first store in New York City. And all of a sudden, it was a game-changer in I didn’t think about it in advance. But yet, all these New York analysts won’t be analysts. They’re right there. They walk into the store; they’re blown away, they raise their target price, and all that all of a sudden, it’s like, Aha. And so I think, you know, in New Jersey, when people see the lines, people driving across the bridge from New York, and what have you, in it’ll be in the news, I think, I think some new people will get attracted to the space again, and I think the existing investors will have some relief.
It’s not just New Jersey; next year, New Mexico will connect. I don’t think those areas are impactful, but I’m still excited to see this develop. Some other states could as well. And we continue to see some progress. I meanLookesota a small state; there’s public publicly traded there. But they’re going to add flour, they haven’t had, that they’re going to add edibles and had that just these incremental things. Get me excited because, from my perspective, the cannabis industry has never been better. But the mood is maybe never been worse, except for, you know, in that brief periodperiodlate September of 2019, into March of 2020. When things look really bad, it’s never felt worse than it feels now.
Now, here’s the bigger thing, and these are hard to handicap. But I think we’re looking at very depressed valuations right now for American cannabis companies. And there are companies out there that I would imagine would like to be in the cannabis industry. Now. They can’t let’ face it, they can’t But this year, we’ve seen a very unusual development, not n, not that it’s novel because it’s happened before. This unusual development started when Canopy Growth made an investment in acreage, not an investment; they paid the acreage shareholders for an option to buy the whole company – a stupid deal at the time. Not so stupid anymore necessarily, to be honest, really, but they paid too much by picking the wrong company and all sorts of things. So this year, Canopy put $400 million into an option to buy edibles brands Wana; this year, Khronos Group put 110 million into an option to buy like ten and ten half percent of a private MSO that’s supposed to go public – Pharmacann.
We’ve seen Scott’s Miracle Grow create this vehicle, and they’re doing some of this as well. So there’s defined interest in the past, but it’s accelerated right now. Layer on to that the valuations are really than they have ever been; you could argue they were better in March. But you would also, you; you know what the future would look like in March of 2020.
So we are confident that the future is looking brighter, and what you pay now to invest in the future. So it’s never been better. It’s never been less speculative; I guess a better way to say it has never been closer to an investment-grade rather than a speculative investment.
I look forward to a company like Anheuser Busch doing one of these deals. So far, these deals have gone through Canada; there, there’s a reason legally that has to happen. There’s no reason a Diageo or AmBev, or any number of consumer packaged goods companies couldn’t do this type of thing with another company. And that would be a super catalyst for the industry. BUD is the stock symbol for Anheuser Busch. Is it going to get into bud – likey, so, look, is this going to happen? It’s hard to say, but could it happen?
On top of it, I have a theory that has looked wrong so far. But I put it out in public and kind of fell on my face for now, but I still think I could be right in that. So Altria made invested in Kronos. And there’re are some interesting things about this. Number one, the stock is now changing very close to its cash value. Number two, the company doesn’t burn a lot of cash or anything like that. So it doesn’t look like a dumpster fire like Canopy Growth. They’re very focused on what they don’t do. They it’s an option for biosynthesis. And they’ve got got a project in Israel. And believe it or not, they’re doing better in Canada. They’re the sixth sixth-largest in adult use in Canada, and this probably eludes people because they’ve done nothing so far. But in the last few months, it’s ramping up. So you have a company with the exclusive right to do any kind of cannabis business that Altria wants to do has to go through them. And they’re tied to Gotham. Gotham’s got their hands on all these assets, iAnthus and others. And so the warrants are running out of time, and they’re way out in the money. So I’ve gone on the record, and that’s why I’m saying this – I think Altria will buy Khronos. Khronos Group has about a billion in cash right now.
Altria has access to low-cost debt capital; it is pretty much a dead company selling tobacco. It’s not a growth industry, and nobody gets excited about it – I think it trades at a nine PE and a very low enterprise value to EBITDA. So I don’t know that much about that company. But I can say that it would be very easy for them to buy Khronos. Khronos only has a billion in cash; you pay a little more than that. You get the cash. And I think that Altria is in a position to do what I was talking about. So we already saw Khronus put 100 million into Pharmacann, they could just buy all of pharmacann with another 900 million, but Khronos can’t do that much. It’s too big of a risk for Kronos because if you never federally legalized, then Kronos just is out the money in the form; again, people are like, Yay, we got all this money. So it may be there’s some other way to structure it, like an optional option or something like that. But point being, if Alt is committed to the cannabis industry, which it should be in which it sounds like it is, then this is something I look forward to them buying Khronos Group and putting not a billion but $5 billion into these types of deals that I’m talking about. And I think that would excite the investor base as well in cannabis stocks are attractively valued now that this is all lining up, in my view, Mike.
I think there’s a lot of industries that should they want to enter the cannabis space, you know, with this would be a great opportunity. Right? Yeah, we’ve heard Amazon sort of support cannabis and a lot of that. And we, you know, we never believe they do it out of the goodness of their heart. So
Right, Friend or foe, right.
So we assume that they’re making moves, right? Anybody in the liquor industry or the tobacco industry would be crazy to ignore any of that. So, yeah, we’re sure that we will see some of the other industry sectors enter the market by buying something.
Right. Well, we haven’t seen big ones do it. I’ve mentioned examples. There’s a company in Canada called humble+fume. They have a kind of attractive model where they are a big ancillary products distributor in both the United States in Canada. They represent LPS in stores in Canada, so they’re like a brand rep. They kind of broker cannabis product sales.
And they partnered; I’m not going to mention the company I never even heard of them before – but it’s a 70-year-old alcohol distributor – it’s called Johnson Brothers, I think. But it doesn’t matter. But a 70-year-old alcohol distributor kicked in, I think $8 million, with the ability to take it to 10 to get into California into direct cannabis distribution. So it’s this isn’t a very small scale. But, still, I think it supports this point of anybody that understands CPG if they’re in tobacco or alcohol, which is threatened to some extent by cannabis if even if they’re not threatened, there’s some overlap there. So it’s a way to diversify and to grow. And we’re going to see; I threw out InBev and Dr. Zhu, that wasn’t an accident. But there’s a lot of other types of companies that I think will kind of put two and two together that, that it’s more than two and two; it’s three and three or something like that.
So, first of all, I like Nancy Mace’s legislation, but it’s not going anywhere. But it may spark the conversation. And the first thing I want to see is a Senate version of it. But, unfortunately, it’s just in the house, which gets us nowhere. But her legislation was less heavy-handed on regulation from the FDA, and less taxation, two critical issues. And I thought it was very thoughtful; I believe that she is very smart, and many people wrote her off. But she’s a very thoughtful person; she has a very deep personal connection to both the use of cannabis, as well as the regulation and legalization in South Carolina, so she knows what she’s doing.
And so I think when, you know, when the CPG companies listen to people like me see people like curves, like wait a second, just a few years ago, we were worried about Jeff Sessions. Now we’re like seeing this competition between the Democrats and the Republicans. And sure, it’s going to take a while. But why not plant a flag. Now, we know that the downside isn’t there anymore. The downside of hey, I’m Mr. Big or Mrs. Big CPG company. And if I take my billion dollars and do this kind of weird transaction, I may never see my billion dollars. And so now, not only that, we could go to jail or something. So now it’s a different conversation. So you’ve got the federal backdrop is better, the valuations are low, the pipeline is very robust. So even if we don’t get that federal legalization, the state-by-state expansion pipeline is robust. So I think it’s it’s all there. Right?
I was just thinking of an event about a year ago, and we were talking with a startup company, and then we’re talking with a pharma. And when we’re talking with the startup company, they’re talking about months, like looking at being able to look ahead six months, maybe a year, and we were talking to the farmer, she was talking about a ten-year plan. Right? You know, so and I mean, I think that is a big difference. Because if their players want to come in, they have a ten-year focus, or they have a much longer focus, so they don’t need it to happen tomorrow.
Well, it’s so it wasn’t that long ago that the idea was if you want to be in cannabis, then what you need to do is buy a Canadian LP. So a couple of suckers fell for that constellation in, they didn’t buy it, but they, you know, move to control it that that was the way to do it federally legal, you don’t have to worry as long as they don’t violate any rules you You’re fine. And that was a good model at the time. That’s no longer a good model.
The companies in Canada have had plenty of time to prove if they’re good companies or not. And honestly, the largest companies haven’t it.
Right. That’s being nice, by the way.
I think small companies have proven it, but you’re not going to get a lot of bang for your buck there. But some big companies in the United States didn’t. They weren’t capital markets phenomenon. These companies were essentially bootstrapped. And, you know, raised and deployed minimal amounts of capital and got huge returns on their capital. They have proven themselves.
And, you know, as I said, we have this revenue tracker, and there are 11 companies right now that have, I believe, a billion-billion-dollar market cap, I think the right way to say it. Maybe it’s ten right now, things move around, but I do. It’s probably 10 or 11. But these companies, you know, I like some more than others. Some yet. They’re different. Some are the more retail focus; some are willing to take lower margins in places like California and Michigan, which are more wholesale focus than retail there. They’re all different. The leadership’s different. Some. I don’t know who they would like the most, but I can take a guess.
And, you know, I mean, I’ll throw one out – Planet 13 – a company I followed for a long time, and you’re what I think would appeal to a company and I, don’t even know if I should talk about some things, I don’t research them, but conceptually Hard Rock Cafe. Wow, I mean, they’re cool. They used to be, in a way, a cool company; I don’t know what their financial status is now. But that’s the kind of company I can imagine them buying. It has stores. Very tourist. So I wouldn’t predict that because I have no idea. But what I’m trying to say is, there are different types of companies that would chase below a billion, by the way, but they’re, they have substantial revenue. In some cases, in that case, profit or adjusted EBIT, da profit, it’s hard to have net income because of the owners.
But still, I think that this is the time that these companies are given; given all these factors I just mentioned, this would be the time for these types of strategic investors to go direct in the United States. And, you know, they have to be creative; they buy the companies because of federal legality. So at least for now, if we get fortunate, and the exchanges, change the rules, and allow these companies to list, even though they’re dealing with a federally illegal drug, then that would be a game-changer because then all of a sudden, if DOJ or whatever wanted to do it, I guess they could they might not because they might their internal risk control might be a little bit different. Their views on risk, like just because you can do something doesn’t mean you should.
But in any event, if that happens, I think we’re going to see just well that would be good. Forget the consolidation; it’s; it’s to be great if that were to happen. I didn’t mention that is something positive that could happen? Just because people don’t understand this? The exchanges are not prohibited from listing these companies. They choose not to do so. And I know these exchanges are cashflow machines; why would they want to do something that could kill the golden goose?
They have to get creative. They can, they; they these companies up in specific ways. I have an idea, which like taking any like Hershey’s they sue cannabis companies for knocking off their brands right or, or what have you. Well, they could make a deal with, you know, MSO A, I don’t want to name a name. And they can say, here’s the deal; we’re going to pay you through a convertible note because I can’t put the money directly, and apparently, in we’re going to pay you X, it’s a down payment. We’re going to structure a takeout price based on whatever, you know, it’s complex stuff. But oh, by the way, you’re going to manufacture Hershey’s cannabis edibles. And you can’t pay us a royalty, so you get to do a royalty-free to. So I’m just spitballing like how this could play out. And I think that’s what excites me about 2022. I don’t know how significant it’s going to be. It could be more like Johnson Brothers – a small and targeted market or something bigger and I, sure hope the latter.
Like a year ago, Wrigley’s was making rumblings, and I don’t know that you ever came up with that.
Oh, Wrigley’s was suing. So it’s kind of funny because Wrigley’s Bo Wrigley runs Parallel. Parallel in it was kind of interesting to see Wrigley’s. I always thought, okay, he’s just trying to corner the whole market himself. And he’s going to put everybody out of business with Wrigley’s doing that. So I don’t know if he has any control over Wrigley’s at all exerting influence. But yeah, there’s been litigation there as well. So anyway, there’s, you know, low valuations, strong growth ahead. Creative minds, these things can yield some positive things, Mike.
Alan, we very much appreciate your time today. If people want to learn more about what you’re doing, where can they find you?
I’m always at my desk, but I don’t think that’s what you’re asking. You can always find me all day at my desk, ask my wife – 420 investor.com will take you to a landing page where it talks about that product, and you can learn more about it, and if you join, then you can access the product. But if you want to learn more about me in a very easy way, New Cannabis Ventures. And what you can do there is we have an app, you can if you like news apps, you can download our app. And that’s for you, of course, and you’ll get all the news. And then, you can also sign up for that weekly newsletter, which comes by email. And you can always access the newsletter on the website as well. But that’s the best way to find me. And you’ll find my Twitter and LinkedIn and all that through those venues.
Yeah, now, and we appreciate your time. We enjoyed the conversation. We will check back with you in a year and see how those predictions worked out. And we look forward to more discussions.
All right. Great, Happy New Year to you, YouTube. Thank you very much.
