Article

WORTHLESS CANNABIS INVESTMENTS

December 3, 2018

 

Before we apply our proprietary SP-Game Theory Model algorithm to determine WORTHLESS CANNABIS INVESTMENTS, an article published in the  The New York Times is required reading.

 

On November 30, 2018, The New York Times reported, “Trimmigrants Gather for the Harvest, Deep in Marijuana County,” page A10, courtesy of Dan Levin:

 

    “… The legalization of recreational marijuana in California and other states across America has help flood the market with ever cheaper supply, growers say. And as the legal risks of cultivating marijuana have declined, competition from both corporate and black-market farms has increased.  A decade ago, marijuana sold for around $2,000 pound, but growers said they are now lucky to get $500, and that   means there is less money to pay for the trimming.” emphases added.

 

The facts:

 

In the United States, medical marijuana is now legal in 29 states. Not only that, but the recreational use of marijuana is now legal in 10 states. You can walk into a licensed store in places like California, Oregon, and Colorado and purchase cannabis nearly as easily as buying beer. Similar dynamics are taking place in Canada. Medical marijuana consumption was first legalized in 2001, and in 2017 legislation paved the way for the legalization of recreational use throughout all of Canada -- a development that was implemented on October 17, 2018.

 

Today, cannabis is 30 percent less expensive in Canada than the United States. When you compare different cities, the price differential can be even more pronounced. Legal marijuana is 39% cheaper in Vancouver than San Francisco, for example. A case in point offers a resounding problem: Farmers growing marijuana are unable to earn a profit, and many are operating at a loss. The dilemma of expanding supplies and a highly taxed recreational market means lower prices for marijuana flowers.

Indeed, the trends  are not favoring the cultivator.  And the prognosis is much worse.  Our proprietary SP-Game Theory Model algorithm predicts that a pound of recreational marijuana, on average, will be $225 a pound by 2025.

 

Now, for reality: 

 

The management of the  ten-worst cannabis investments have calculated that the trend for recreational marijuana would increase in price to $3,500 a pound by 2025. Based the unrealistic assumption,  their collective business models are flawed. These ten public companies raised more than $50 billion on this hypothesis, and in the process are dinosaur growers with limited ability to recoup their investors capital.

 

The ratings of the biggest publicly traded cannabis stocks based on market capitalization and flawed business models.

 

1. Canopy Growth Corp: $4.36 billion  - DG 5 rating.

 Canopy Growth Corp. (NYSE: CGC). Canopy currently has seven grow facilities spread across 665,000 square feet, and it is in the process of developing greenhouses on 3.7 million square feet of land in British Columbia. Though tight-lipped about its annual production capacity, it could easily top 300,000 kilograms of dried cannabis.

 

2. Aurora Cannabis: $3.47 billion  - DG 5 rating.

Aurora Cannabis (NYSE: ACB)  - After acquiring CanniMed Therapeutics in the largest marijuana acquisition in history, the company is on track for 283,000 kilograms in fully-funded, fully ramped-up, annual production. The bulk of Aurora's annual yield comes from its organically built Aurora Sky project, which should yield over 100,000 kilograms annually, as well as its partnered Aurora Nordic project in Denmark, which is expected to produce at least 120,000 kilograms of cannabis a year. Aurora's state-of-the-art facilities should boast some of the lowest per-gram costs in the industry.

 

3. GW Pharmaceuticals: $3.13 billion - DG 3 rating.

Regarding cannabinoid-based drug developers, GW Pharmaceuticals (NASDAQ: GWPH) is a cannabinoid-based drug developer. Though it already has an approved drug throughout Europe known as Sativex, GW Pharmaceuticals' claim to fame looks to be experimental drug Epidiolex, a cannabidiol-based drug that's currently under review by the Food and Drug Administration (FDA) for use in the treatment of two rare forms of childhood-onset epilepsy. In two pivotal-stage trials each for the Dravet syndrome and Lennox-Gastaut syndrome -- neither of which have an FDA-approved treatment -- Epidiolex handily met the primary endpoint of a statistically significant reduction in seizure frequency from baseline. Though estimates vary, peak annual sales may top $500 million, if approved.

 

4. Aphria: $1.39 billion - DG 5 rating. 

Aphria (NASDAQOTH: APHQF) is yet another Canadian-based grower with a billion-dollar valuation. Following the acquisition of Nuuvera, the new Aphria is on track to produce approximately 230,000 kilograms of cannabis a year. This includes a four-phase expansion project that should yield 100,000 kilograms, along with a strategic partnership with Double Diamond Farms that'll produce 120,000 kilograms. The acquisition of Nuuvera didn't boost Aphria's annual production targets. However, it did push Aphria's access up to a dozen countries, including Canada. In other words, its Nuuvera buyout was a major step forward for the company's distribution channel. 

 

5. MedReleaf: $1.23 billion - DG 4 rating.

MedReleaf (NASDAQOTH: MEDFF), a grower that has historically placed a strong emphasis on cannabis oil and extract production. Even though MedReleaf is only forecast to produce 140,000 kilograms of fully-funded cannabis a year, it could produce beefier margins than its peers as a result of its strong focus on higher margin oils and extracts. MedReleaf's recent acquisition might be it's most impressive. In a cash-and-stock deal, MedReleaf acquired 164 acres of land, 69 of which already had a growing facility (the Exeter facility) that could be retrofitted to cannabis production. Doing so, rather than building a greenhouse from the ground up, is a time- and money-saving venture.

 

6. Cronos Group: $982.7 million - DG 4 rating.

 

Canadian investment firm Cronos Group (NASDAQ: CRON) made waves in late February when it became the first pot stock to up list from the over-the-counter (OTC) exchange to the Nasdaq. Doing so is expected to improve visibility and make its stock more attractive to institutional investors who would otherwise not purchase stocks listed on the OTC exchange. As for the underlying business, Cronos holds a 100% stake in cannabis growers Peace Naturals and Original BC and a 21.5% stake in Whistler Medical Marijuana. The company has smaller investments in other growers too. As is the case with practically every grower mentioned above, the expected legalization of recreational cannabis in Canada is what has pumped up Cronos' market cap.

 

7. Hydropothecary Corporation: $504.3 million - DG 3 rating.

When it comes to truly niche operators in the cannabis space, Hydropothecary Corp. is it. The Quebec-based company, which currently prides itself on medical cannabis production, has expansion plans in the works that'll result in 1.3 million square feet of land being used to grow 108,000 kilograms of cannabis per year. But it's the company's focus on non-traditional cannabis products that has intrigued investors. Hydropthecary has focused on expanding its extracts, oils, and powder line (known as Decarb, a ready to consume marijuana powder), as well as on premium medical marijuana strains that cost almost double the average per-gram selling rate for average-quality cannabis strains.

 

8. CannTrust Holdings: $473.2 million - DG 3 rating.

CannTrust Holdings is currently focusing its efforts on more than 40,000 actively registered medical patients. However, as every grower noted above, it's in the midst of a major expansion. CannTrust's 430,000 square foot Niagara Greenhouse remains on track and budget to eventually produce 40,000 kilograms per year. Beyond that, the company expects to add another 600,000 square feet of capacity using a portion of the 36-acre vacant lot next to the Niagara Greenhouse. CannTrust announced in its latest quarterly results that just over 64% of its sales were a result of extracts. Extracts are a significantly higher margin product relative to dried cannabis, leading to the belief that CannTrust could offer superior margins in the future.

 

9. Cannabis Wheaton Income Corp.: $442.2 million - DG 3 rating.

The ninth-biggest marijuana stock isn't a grower at all -- it's a royalty and streaming company known as Cannabis Wheaton Income. Since access to capital is a challenge for most pot stocks, Cannabis Wheaton steps in with the financing they need to expand capacity or their product lines. In return, Cannabis Wheaton receives a percentage of production at a below-market cost. It then turns around and sells what it receives from its licensed partners at the market rate and books the difference as a profit. Cannabis Wheaton offers immediate geographic and product-line diversity with its more than one dozen licensed partners, without the hassles of dealing with day-to-day cannabis growing expenditures. Of course, the downside is that streaming companies like Cannabis Wheaton have high initial costs, often resulting in shareholder dilution.

 

10. Emerald Health Therapeutics: $416.3 million - DG 5 rating.

Rounding out the top 10 largest marijuana stocks is Emerald Health Therapeutics (NASDAQOTH: EMHTF). Emerald Health has big ambitions of placing itself among Canada's top growers by annual production, and it is currently in the process of building out two major projects that should push its annual yield over 100,000 kilograms. The first involves a from-scratch build-out of 1 million square feet in British Columbia that'll house the company's headquarters. The second involves a strategic partnership with Village Farms International that'll see an existing 1.1 million square foot facility get retrofitted from tomato production to dried cannabis. This latter facility is expected to produce at least 75,000 kilograms annually when complete. D

 

Our Conclusion:

 

Basic economic principles of supply and demand drive the marijuana markets: lower supply drives up demand, which equals higher prices, and vice versa.  Marijuana is an agricultural commodity, like coffee beans or wine grapes -- a diverse market of buyers that demand uniqueness and quality. The price of cannabis, coffee and grapes are set by supply and demand, quality and genetics.  Grapes, coffee and cannabis, are monocropped, mass-produced and priced like a commodity. The current tout of financial experts to raise billions of dollars that marijuana not as a commodity but a unique product based on “genetic diversity.” The only truth to the argument is that the raw produce can be converted into oils, foods and other byproducts, but to claim that a large and thriving prize of the crop is its genetic diversity fails the smell test.  Genetic diversity was the same claims made about tobacco and coffee beans. And the results were the same – the crops eventually had to conform to the basic principles of supply and demand.

The ten companies expressed above will eventually understand the reality of economic principles that marijuana must trade like a commodity, and the trend suggests lower prices. To calculate a business model on continually higher prices because of the “genetic diversity factor” is a fool’s game. Beware of history, it will repeat – marijuana is a commodity and will trade as such. 

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Note: DG – Dinosaur Growers - rating systems are based on fundamental and technical analysis with the emphases on trends, taxation, business and social patterns,  and probabilities made by our SP-Game Theory Model algorithm. As noted, not one company reached a DG1 or DG2 rating because the criteria were too high to meet the minimum standard.  Additionally, all ratings from DG 3 to DG  5, are likely to file for bankruptcy or be consolidated within five years.

 

 

DG 3. The company is likely to be profitable by 2022

DG 4. The company is likely to be profitable by 2023

DG 5. The company is likely to never be profitable.

 

 

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