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The McDonald’s of Pot & The Amazon of Weed

Part Two of our look at Casey's Crisis Investing Marijuana Stocks

By Travis Johnson, Stock Gumshoe, October 31, 2017

Many Gumshoe readers wanted me to follow up on yesterday’s marijuana article right away, identifying the other two stocks hinted at in the ads for Nick Giambruno’s Crisis Investing… and we aim to please, so let’s jump right into it.

If you missed part one, you can check that out here — the overriding argument in the ad is that Canadian legalization of recreational marijuana will happen any minute now, and that will drive these stocks all much higher (and higher than past US pot stock booms, since this is the whole country). I’ll remind you that Canadian legalization has been the assumption, promised by the government, for more than six months, and is widely expected to go “live” next Summer… so this is not at all a “contrarian” bet, this is a bet that the crazy bubble in pot stocks that we’ve seen inflate a few times over the past several years will be reinvigorated by whatever political progress is made in Ottowa, and will soon be surging higher again. I don’t know whether that will really happen or not, and for many specific companies I’m sure the details of the actual regulations and prices, none of which are certain yet, will be critical to their success… but we can at least name these top secret “pot stocks” for you.

Yesterday it was the “Mother of all penny pot stocks” we de-teased… today it’s the “Amazon of Weed” and the “McDonald’s of Pot” we’ll be searching for.

Clues, please!

“Marijuana ‘Boom’ Stock #2: The ‘Amazon’ of Weed”

This pitch focuses mostly on the huge demand increase from recreational marijuana…

“… while there will be lots of regional growers supplying the market, their output won’t be enough.

“But there’s one company that is already a national powerhouse.

“It builds and operates the largest sites in Canada and holds almost 10% of all marijuana growing licenses in Canada.

“And nearly half of all Canadian medical marijuana patients are its customers.

“With 500,000 square feet of growing space (that’s the size of nine football fields), it’s in position to dominate the recreational pot market.”

OK, so this is one of the big boys. What else?

“It’s building an additional 160,000 square foot facility in Alberta.

“It’s also one of Canada’s most diversified cannabis companies, producing over 45 strains of medical and recreational cannabis.

“And no other company in the history of marijuana has been as innovative or been first to market with as many breakthroughs.”

OK, I’m pretty sure many of you can already name this one now… but we do get a couple other clues for the Thinkolator…

“It’s already exporting medical marijuana to Germany and Brazil. And recently it was granted a license to grow marijuana in Australia.

“And it also acquired a German-based cannabis distributor that gives it even more access to the growing German market and the rest of Europe.”

And, of course, the “Amazon” connection…

“Earlier this year, it started working on its ‘Amazon of Recreational Weed’ e-commerce site.

“It’s estimated that the majority of recreational sales will come through mail order for the first two years after recreational marijuana is approved….

“After Canada legalizes recreational pot, the market will grow from $400 million to $8 billion. And this company will capture an even bigger slice of the pie.

“In our opinion, this company is the safest bet in marijuana.”

So… hoodat? This is, no surprise, the largest marijuana company in the world, Canopy Growth (WEED.TO, TWMJF), which is the biggest player in the current medical marijuana business, exports medical marijuana to other countries (notably Germany, where their business is small but they see a lot of promise — the German market is potentially 10X larger than the Canadian market).

And yes, Canopy did take a short-term earnings hit by revamping their ecommerce operations last quarter as they prepare for what they think will likely be a big ecommerce opportunity, as provinces and municipalities debate the right way to “do” retail marijuana.

And, as we noted yesterday, it’s a pretty big deal that mega-alcohol company Constellation Brands has bought into Canopy Growth with a 10% stake — if only because it solidifies their leadership status and brings them a huge partner when it comes to branding and marketing, which could be key advantages for early recreational cannabis companies.

That doesn’t mean there’s no risk, of course — the company is insanely valued based on its current operations, with a C$3 billion market cap despite having revenues of less than C$50 million… which is crazy-high even if revenue is growing at more than 100% a year. And it’s certainly possible that regulations could squash their “brand” advantage — which is the fear you can see between the lines of their response to the Ontario government’s proposed recreational marijuana retail framework.

And, well, the stock just jumped 30% in two days because of the Constellation Brands news, and they report earnings in two weeks… to say nothing of the uncertain specifics of the cannabis retail environment next year… so to some degree the stock is walking a bit of a tightrope right now. I’d agree, given my fairly limited research, that it’s probably the best and most comforting cannabis company to invest in, and it’s the only one that I’ve seriously considered as a “grown up” pot company that has somewhat trustworthy financials and an established brand… but it’s also priced like it’s the best so there isn’t much margin for error. There are a couple analysts following the stock now, and they do forecast profits by 2020 for WEED.TO… so if they’re right (and it’s almost impossible that they could be, given the vast uncertainties on everything from regulation to pricing), the shares are trading at 30X forecasted 2020 earnings.

So if you’re looking for something to cling to that makes a pot stock look like a real company you can invest in without first spending 20 minutes in the closet with a full bong, well, maybe Canopy’s your best bet. It would be my first stop in building a marijuana portfolio, but I’ve never owned it (or any other pot stocks), so I clearly have not embraced the “wild west” part of the pot business.

And what’s pot stock number three?

“The McDonald’s of Pot

“Growing marijuana in the United States can be a horror show.

“American growers can only sell marijuana in the state it’s grown in.

“That’s a huge roadblock to growth….

“And because of the legal risk, most landlords won’t rent to growers.

“And it’s illegal for banks to loan money to pot growers.

“So even when property becomes available, funds are tight….

“But one company has come up with a solution.

“A solution that may catapult it to becoming the most profitable and richest marijuana company in America.

“… the first publicly traded real estate investment trust (REIT) for cannabis.”

Huh. I was hoping for some cannabis french fries, but apparently the McDonald’s connection is something else entirely… from the ad:

“What most people don’t know about McDonald’s is that it makes its money from real estate.

“As its former CFO, Harry J. Sonneborn, put it:

‘We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.’

“And this company will capitalize off the greatest producer of revenue for warehouses, which is now pot.”

So what’s the business? Sounds like it’s a pretty standard sale/leaseback REIT…

“Simply put, it buys warehouses from large growers and then leases it back to them.

“The marijuana companies get the funds they need to expand operations, become more efficient, and lobby states for better regulations.

“Without the headache of owning the property, it frees up cash that growers can put into operations and yield higher returns.

“This company is quickly becoming the largest owner of marijuana grow facilities in the nation.”

Any other clues?

“… this company just went public in December. And it’s already paying out dividends on profits.

“I expect the dividend payments to go up dramatically as it buys up more properties.

“If you get in at current prices, you could easily see double-digit dividend yields on your initial investment.”

OK, so that perks up the interest — dividend growth REITs that raise rents faster than expenses can be fantastic investments, as we’ve seen from so many sectors in recent years (data centers, self storage, cell phone towers, etc.)

The ad notes that they have other advantages — like the ability to own facilities in different states, which they couldn’t do if they were an actual grower… though it’s also important to note that advantages that are created by regulation can also be removed by regulation.

And we’re told that the founder is an old hand in REIT land — he founded two other REITs, including one that he sold to Blackstone last year for $8 billion. So what’s the stock?

This is, sez the Thinkolator, Innovative Industrial Properties (IIPR), which is a small REIT that went public just under a year ago with the intention of buying up marijuana grow facilities and leasing them back to operators — thereby providing some financial flexibility to companies that can’t access the credit or debt markets very effectively.

And yes, its founder has “done it before” — Alan Gold grew BioMed Realty into a large owner of biotech lab and research facilities, and also was an executive at Alexandria Real Estate Equities, and he did sell BioMed Realty to Blackstone for $8 billion.

IIPR is quite small at the moment — they raised about $60 million last December, and they just raised another $15 million or so with a preferred share offering that yields 9%… so there’s clearly some risk if they have to pay that much for capital.

And the potential returns on their facilities are quite high, with what look like an effective cap rate of about 15% on their most recent transaction. They own two facilities at this point, a PharmaCann facility in New York and the Alaking Property in Capitol Heights, Maryland, both medical cannabis cultivation facilities. Once the Alaking property starts paying rent, it appears that their cash flow should be pretty close to break-even — rent would be about $6.8 million a year, and their operating expenses annualize out to about $7 million a year.

So they’re in decent shape if they can make some other cash-flowing acquisitions, and on a Funds From Operations basis they’re not too far from being able to cover their 60 cent dividend payment (15 cents/quarter), so that’s a pretty good place to start for a company that has roughly $50 million in cash on the books to use in making more acquisitions.

I’m sure there’s plenty of risk, since they own facilities that produce what the Federal Government still considers one of the most dangerous drugs in America… though perhaps that risk is mitigated somewhat by the fact that their tenants, at least so far, are on the more regulated “medical marijuana” side of the business. You don’t get 15% cap rates for industrial properties without doing something special, and presumably what this REIT is doing that’s special is dealing with companies that other financiers are nervous about dealing with. The financials of their deals look appealing to me, and I can see that if they sign a few more such deals and put their capital to work, this will be unusually cheap for REIT and they can probably increase the dividend pretty dramatically… but that presumes that you can live with the political or regulatory risk, the marijuana business remains strong enough for their tenants to pay their rent, and that the company can find other good facilities to buy on attractive terms.

Sounds kind of interesting to me, I do like a good growth REIT… but I’m not ready to jump in just yet. I think I’ll probably put this one on the watchlist.

But it’s not my portfolio that matters here, it’s yours — so what do you think? Ready to leap into a marijuana REIT? Think owning the “blue chip” of the business is a better idea? Have other favorites (or warnings) to share? Let us know with a comment below.

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5 years ago

Way over bought in my opinion. But that does’nt mean it won’t keep running.
I find APHQF, CNNRF & EMHTF to be more fair value & relatively solid co’s.
This sector came out of it’s slump a few months ago and continues it’s forward momentum. Market cap is rising fast for all co’s mentioned & will probably top out in 6 to 12 months.

👍 83
5 years ago

Travis, could this be related? Could you thinkolater this?

Kerrisdale Capital Investing Notes….Upcoming Report on Pharma Stock Worth More than 4x Current Trading Price.

Tomorrow we will issue a new report explaining our long position in a pharmaceutical company with a product that has the potential to deeply penetrate a multi-billion dollar market.

We will hold a conference call tomorrow at 10:30am ET to discuss our views. To participate in the conference call, dial 888-567-1602 (US and Canada) or 404-267-0373 (international) and reference the Kerrisdale Capital call.

Add a Topic
5 years ago

Big alcohol will buy out canopy eventually. And the shareholders will walk away with a lot of cash.

Add a Topic
5 years ago

Bought a few shares of twmjf @ 6.45 so am surprised, pleased, and hope it continues for a bit.

5 years ago