With the cannabis market growing and excitement over its potential legalization, cannabis stocks have been reaping the benefits lately.
As the market blooms, the Investing News Network (INN) recently caught up with cannabis stock analyst Alan Brochstein for his thoughts on the Bill Blair report to prime minister Justin Trudeau expected this month, sector catalysts and the recent stock rally in the US Marijuana stocks.
Alan Brochstein’s 420 Investor is the go-to community for investors to learn, explore, and profit from the marijuana companies. The main goal of 420 Investor is to provide real-time, objective information about the top marijuana companies in the market in order to help investors capitalize on cannabis.
In particular, highlights of the conversation included:
- The Bill Blair Task Force Report
- The US cannabis stocks rally
- Cannabis sector Catalysts, including Sanjay Gupta’s infamous reversal and the Coleman Memorandum in Oregon and Washington.
- Recent mergers and acquisitions in the cannabis sector
- How the marijuana sector is attracting technology entrepreneurs from Silicon Valley
Below is a transcript of our conversation. It has been edited for clarity and brevity. Read on to see what Brochstein had to say.
INN: For readers that might not be familiar with your work, can you give us some background on yourself and new cannabis ventures?
AB: I’ve been in the cannabis industry since 2013, fulltime since early 2014.
Right after college, I went to work on Wall Street in the bond market and later in my career moved into investment management and shifted into equities. At the end of 2006, I started my own firm as an independent equity analyst providing research and consulting services to money managers. I was also was a blogger on Seeking Alpha and ran a few model portfolio services. That put me in a position in early 2013 when I first realised I was one of the first people to research cannabis stocks from an analytical perspective.
INN: What prompted you to start covering the cannabis sector? Can you give us some insight into new cannabis ventures?
AB: In early 2013 right after the 2012 elections,(cannabis was) legalized in Colorado and Washington. All of a sudden there were about eight to ten cannabis stocks–or purported cannabis stocks–that doubled in value.
I was a writer on Seeking Alpha and somebody published an article about one of these companies.
This article really spoke to me because on one hand, it pointed to the promise of legalization, but highlighted that there were scam companies out there..
As that year progressed, Sanjay Gupta issued his famous reversal. He was the Chief Medical Officer for CNN. He had been a pretty adamant opponent to medical cannabis and said it was a fraud. He then released the documentary Weeds and issued a Mea Culpa. He said he was wrong and that was one of the things I was looking for in terms of a major media figure embracing cannabis legalization for medicinal purposes.
In August, the federal government allowed Colorado and Washington to move forward by issuing the Coleman Memorandum. This was huge because everybody wanted to move forward, so the government gave Colorado and Washington the green light.
INN: The cannabis sector’s heating up on both sides of the border with the US election arand the Bill Blair report to the Prime minister expected out this month. The report will follow the lead with states like Washington and Oregon which has successfully implemented recreational use of cannabis. Do you see something completely different in Canada?
AB: Yes. Canada’s a huge focus of mine. About a year ago in mid-October, right before the elections, I hosted a panel in Denver that had some of the leading CEOs from the sector there and it was like an empty room. . Part of Trudeau’s platform is to legalize cannabis. It’s been really interesting to see this play out.
I don’t think people widely appreciate that this Task Force Report will not be publically disseminated at first, so that’s the first thing. That’s something people should be aware of; there’s a timeline and the only things on it right now are the Task Force and introduction of the legislation which has been pinpointed to be in the spring of 2017. Then there’s a timeline beyond that what the legalization will look like.
I think what’s going to be complex about this is – and I don’t have any answers – is what’s the distribution going to look like? Right now every single gram of cannabis is sold legally in the ACMPR system, which is through mail order and. ‘Will it even be an option?’ is the question for legal. I think it will.
I think that what the ultimate legislation will show is that it’s not going to be a “one size fits all”approach. Each province will have control over the distribution, so it’s going to be different in the east and the west. ill we have dispensaries like in Colorado and Washington? Will it be only the producers that are allowed to have physical stores? Will it be the LCBOs type model? Will it be the drug store type model? I really don’t know how it’s going to play out.
INN: Can you give our readers some insight into the big rally of late in the US cannabis stocks? Do you see it’s sustainable?
AB: Yes. This has been amazing. Some would say there were rallies before but there just weren’t enough stocks. That first rally was in February of 2013 where the stocks basically doubled and then they lost two thirds of their value, until the summer of 2013. The second rally is what I’d like to call The Mother of all Rallies. In that rally, I have an index that bottomed out at 70 in the summer of 2013 and I think it was at about 150.
In the next two and a half months, that index went from about 150 to over 1000. The reason for that was people were waking up to what I had learned in early 2013 because it was on national media, international media.
In that rally there weren’t that many companies that people could buy and there were a lot of people that wanted to buy simple.. You had stocks go up way more than they should have and it was not fundamentally driven. The valuations were insane.
Now fast forward to this year. I’ve been telling my subscribers that we’re going to have a very big rally at the end of the year due to these elections. I published on August 31 a report not only saying what I expected to happen and when, but which stocks should be bought as well. I warned people that it’s not sustainable. It’s a trade.
On October 31st I called the end of the rally. To answer your question about sustainability, unfortunately it’s not sustainable. The valuations are too high.
INN: Canopy Growth (TSX:CGC) made headlines with the acquisition of Verdi Medical and Groupe Hemp. Can you give us some insights into this acquisition?
AB: Canopy Growth is the largest in terms of market cap and sales of a publically traded license producer in Canada. They have two brands that they operate under: Tweed which consumers will be familiar with and Bedrocan which uses the license to produce a medicinal minded product.Vert Medicalin Quebec is a really different animal from the rest of Canada.I think it was smart that they established a toe-hold there in Quebec. They bought what’s now Tweed Farms, a large greenhouse.. They were able to use their clout with Health Canada to get that license pushed through pretty quickly.
Mettrum Health (TSXV:MT) did the same thing with another pre-licensed LP. I think we should expect to see more consolidation. Canopy Growth is the biggest company will probably continue to be a consolidator.
INN: Do you think we’re going to see more mergers and acquisitions to cannabis sector?
AB: There actually are some decent companies listed on the OTC. I think one thing that you can do with your high valued stock is use it to make acquisitions. We’ve seen a couple examples of that and I do expect to see a little bit of that. It’d be really nice to see a real company, like one that shines in the private sector, merge with one of these publically traded companies. I don’t know if we’ll see that.
In Canada, I think it’s going to be really hard for a lot of these LPs,depending on how the rules play out if we move to a system where there are a lot of storefronts, it’s a little different. You don’t have to establish your own brand but then you have to grow at a very low cost. It’s going to be really tough for some of these pre-license companies that plan on having their own brands and all that, it’s going to be really tough. If they want to succeed. I think they’re going to have to be part of a larger company.
Right now, there is one more that about to go public, so there’ll be about 10 companies that are publically trading. There’s 36 licenses, but some of those are multiple licenses that are held by some public companies. There’s probably another 20 companies that I think don’t have good access to capital. The LPs definitely have good access to capital so that suggests consolidation as well.
INN: You recently published an article rg on how the sector’s attracting technology entrepreneurs from Silicon Valley. Is there anyone in particular you’re following or think investors should watch out for?
AB: Yes. The article you referenced, done by Melia Robinson on Business Insider picked out some great companies,
I would point to even among that list, there’s just some bigger themes. Everybody always likes to think about “Who are the big players in cannabis? They must be the people selling it or growing it.” That’s really not the case. There are some. It’s really hard to make money in that business because of punitive taxation, not only is there the state and local taxes that we’re all familiar with, but w something called 280E . It’s a more than 30-year-old rule for the Miami drug lords, the cocaine industry. They wanted to collect taxes on these people that were engaging in illegal activities.
They use this antiquated law today to push marginal tax rates 75 to 80 percent. I think where companies are able to attract more capital is where I would point people they need to be looking at.
Big picture I would suggest focusing on some of these ancillary companies that are outside the growing and selling part of the industry.
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Editorial Disclosure: Mettrum Health is a client of the Investing News Network. This article is not paid-for content.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.