This article was originally published on March 26, the ad in question continues to circulate unchanged but we have lightly updated our coverage below to reflect some changes in the company… including the 40% drop in the share price since the ad started running.
Matthew Carr at the Oxford Club is pitching a new marijuana stock in ads for his Strategic Trends Investor ($79/yr), and a new pot stock idea pretty much always drives Gumshoe readers into paroxysms of money lust and FOMO lamentations… after all, we’ve all heard of someone who made 500% or 10,000% on some crazy little pot stock, or who bought in to giants like Canopy Growth early and rode the wild ups and downs to big profits, and we want ours… right?
Well, these surges of fantastical gains often end badly, particularly when it’s somewhere between difficult and impossible to guess at the eventual market size and profit margins that we’ll see in the legal marijuana space (let alone the shifting sands of law and regulation in the US), but, still, curiosity demands that we sniff around each idea that comes through the gate.
So what is this? Well, here’s a little taste of the ad:
“‘I Helped People Make a Fortune on Canada’s #1 Pot Stock… and Now I’ve Identified America’s #1 Pot Stock’….
“Pot stocks are exploding across America….
“Every single election brings more states into the fold…
“Adding millions of new buyers and creating electric jolts of profits for marijuana investors….
“Yet the marijuana industry in America still has its biggest moment out in front of it….
“I’ve identified the No. 1 Pot Stock in America.
“And it’s not even close.
“This company offers BY FAR the most upside potential you can find in a pot stock that still trades for just $3.”
So what else do we learn about this “no. 1 in America” pot stock? Here are our clues…
“It now has 19 locations in five states with 1,100 employees in total… and flagship stores in Beverly Hills, the Las Vegas Strip and Fifth Avenue in New York City….
“… this pot company… is banking $6,541 per square foot in its stores…. revenue multiplied 1,094% in the first fiscal quarter of 2019 over the previous year.”
OK, that narrows it down a bit. What else do we learn? It’s expanding quickly:
“In Arizona – one of the largest marijuana markets, with more than 172,000 buyers – it’s now licensed to operate a 20,000-square-foot cultivation facility, which will distribute to more than 60 stores.
“In Florida – which is expected to be a $1 billion annual market – it’s acquired an enormous 217,800-square-foot cultivation facility and the right to operate 25 stores.
“And it’s in the midst of a merger that would help it develop another 32 stores and multiple grow operations in states like Illinois… Maryland… Massachusetts… Michigan… and Ohio.”
And we’re told that the “customer base” has grown to 339,000 people, whatever that means, with Carr certain they’ll be over a million by the end of 2019.
“… the company CEO says, it’s on the path to becoming “the largest U.S. cannabis company in the world’s largest cannabis market.”
“And as one prominent media outlet put it, it will soon be ‘the Starbucks of weed.’
“In short, if you were to pick one pot stock to invest in… or any stock, for that matter… this is without a doubt the very best.”
We like to keep an eye on the forecasts these teaser pitchmen make, too, if only so we have something to come back and check against reality in a few years… this is what Carr says:
“I believe my No. 1 Pot Stock in America has SO MUCH MORE upside than even Canopy that it could be the best-performing stock I ever recommend.
“Based on what we saw with Canopy, my new No. 1 U.S. pot stock could go from $3 all the way to $128.
“It’s a chance to earn 42 times your money….
“Everything is in place for this stock to become – at minimum – twice as valuable as Canopy.
“Which is why my price forecast of $128 is 100% achievable.”
So that’s a little odd — I guess we should be used to misleading comparisons, but he’s pitching this as if the price per share of Canopy has any connection to the price per share of this secret company, and implying that if the company is twice as valuable as Canopy, it will reach double Canopy’s stock price of $64 (it was recently at C$64, though the all-time high in US trading was about $59).
That would only be the case if the two had the same number of shares outstanding, of course, if you want to compare two companies you need to look at their total valuation (market cap, or even enterprise value) not just the price per share. Amazon is not 10X more successful or valuable than Apple just because the price per share is roughly 10X higher, the two companies are almost exactly equal in current value (both have market capitalizations of within a percent or two of each other $875 billion and $890 billion, respectively)… they just have a different number of shares outstanding.
If you think this secret stock is going to be worth roughly twice what Canopy is worth today at some point, that would mean you’re looking for roughly a $30 billion valuation (Canopy has a market cap right now of about US$15 billion)… whatever the price per share of that should be depends on how many shares are outstanding right now and, if you want to get a little more complicated, how many shares they’re going to have to sell, if any, to raise money to grow to that size.
And it’s a little bit ‘secret’ or ‘complicated’ — which always makes people feel a little better about buying a newsletter, they hate to buy a newsletter and find that the “secret” stock is something ordinary that anyone can buy, we all want to feel a little bit special. More from teh ad:
“Right now, the company doesn’t trade on the NYSE, Nasdaq, AMEX or any of the regular American exchanges.
“Instead, there’s a special way to get in on this $3 stock, which I’d like to show you today.”
Ahh, it feels so good to be SPECIAL! Wait ’til I tell the guys down at the driving range. Woohoo!
Sorry, just got caught up in the excitement. So what’s the stock? I’ve got an answer for you, but want to make sure we get to some more of the clues first. Here’s some of the rest of the story from the ad:
“Their goal was to become the world’s most professional marijuana company.
“‘We do not run pot shops. We manage class-leading retail stores that happen to sell marijuana and marijuana products,’ the company says….
“In order to ensure the highest-quality product, it decided to create a fully integrated business model.
“It does everything from start to finish…
“Growing the cannabis, extracting it, distributing it to stores and then selling it.”
So that also gives some room for them to find efficiencies and improve operating margins, though I doubt they’re really being valued based on that yet — pot companies are not being traded based on their current or near-term earnings or even revenue potential, they’re being traded, for the most part, based on guesses about future market dominance and what kind of profitability that might bring.
Any other details?
“In December 2015, the company opened its first store in California….
“As legalization started coming to states like Nevada, New York, Colorado and Washington…
“The company decided it was time to expand beyond its first store.
“So it opened five more stores in the Los Angeles area… including in Beverly Hills, Venice, West LA, Santa Ana and downtown.
“It expanded into San Diego…
“And then into Nevada, where it opened a store on the Las Vegas Strip.
“And it also made the jump to the East Coast… opening three stores in New York, including one on Fifth Avenue….
“States are going to turn to our No. 1 pot stock because it’s quite simply the most professional marijuana company in the world.
“And as it expands nationwide, it has the chance to go from fewer than two dozen stores… to hundreds of stores in virtually every state.”
It apparently has been opening growing facilities, too, with a 45,000 square foot operation outside of Reno and new ones going up in Desert Hot Springs, CA and Utica, NY. He thinks that those three facilities will grow enough weed to create $192 million in sales at their retail stores, and that is fueling their push to open more stores… including a big new acquisition:
“In its biggest move, the company recently made a massive push into multiple markets all at once.
“It’s in the midst of an acquisition that would give it the rights to add another 32 retail stores. And it would also increase its total production facility permits to 16 in 12 states.
“This include several of the most prized markets, including Illinois… Maryland… Massachusetts… Michigan… and Ohio.”
OK, fine, so we’re getting into an embarrassment of riches on the clue front here… I’ll take you out of your misery, Thinkolator sez this is: MedMen (MMEN on the CSE in Canada, MMNFF OTC in the US).
And interestingly enough, when this ad started in March MedMen was trading at almost exactly the same price as it was in its IPO on the Canadian Stock Exchange (that’s where many US pot stocks went public, since they don’t have the listing rules of the Toronto or NY exchanges… they don’t require that your business be legal in the country where it operates, which is key since marijuana is still technically illegal under US federal law, and, frankly, my impression is that they don’t seem place much in the way of restrictions on their listed companies at all). That was C$4.40 or so, which means it was trading at about $3.33 when this article first published.
Now we’re down close to 40% in price for MedMen, with the stock at C$2.78 (US$2.07), so it still technically fits the “below $3” price but it hasn’t been a great speculation thus far. So what’s going on?
The big acquisition MedMen has made was of the medical marijuana company PharmaCann, though that planned deal hasn’t closed yet, and they are indeed aggressively expanding their operating base — particularly focused on building out the stores they already have licensed, including 30 locations in Florida, and on building up their branded marijuana products. PharmaCann is a private company, though the acquisition valued the deal at $682 million at the time it was announced and would lead to PharmaCann shareholders owning 25% of the combined company.
Which is where figuring out the value for MedMen gets a little hinky, because MedMen itself boasts of having completed $975 million in M&A transactions (before PharmaCann, I assume) but appears, on the surface, to have a market cap of only C$436 million. That’s because there are huge tranches of unlisted and other-class shares or “to be issued” shares, to say nothing of warrants, that should also be accounted for.
The CSE listing notes that the real number to consider should be 475,817,041 shares as of January 31, which presumably doesn’t include the shares that will be issued for the PharmaCann acquisition, so that would mean the market cap is somewhere in the $1 billion neighborhood, presumably soon to go to ~$1.5 billion with PharmaCann.
They are also getting some additional funding through both asset sale/leaseback deals and convertible notes, which aren’t in those numbers. The biggest lately is their deal announced recently for up to $250 million in funding from Gotham Green Partners — that funding seems to be on fairly decent terms for a pot stock, so I guess that’s an endorsement of their brand value and strategy, though it will be substantially dilutive eventually (part of it can convert into equity at almost any price, the balance once it gets above $7-8 a share, and they’re paying LIBOR plus 6%).
And silly financial talk has definitely made it into the world of pot financing, CEO Adam Bierman of MedMen said that “The growth capital will be used to operationalize the balance of our footprint.”
Which I guess means “open more stores.”
The asset sales are with their semi-captive REIT Treehouse, which did a sale/leaseback with them for a couple buildings just recently and will probably do more, though they do also have, through PharmaCann once that deal closes, a relationship with the only listed marijuana REIT (that’s IIPR, which I own, PharmaCann is their largest tenant).
So we’ll think of this as a company that’s valued at somewhere between $1-1.5 billion, including debt and lease obligations (that’s down sharply since March, but a billion dollars is still a lot of money). Is that fair?
Well, to answer that you have to figure out what their growing footprint is worth… and whether their brand is going to become nationally important, which might make marketing more effective and, combined with other possible economies of scale, allow for good profit margins. So far, they do have some phenomenal stores… they really do have massive sales per square foot at their best stores in California, and they believe that California buildout (leaking into Nevada) has built the leading US cannabis brand. If that’s true, then there’s some hope that the really successful launch they’ve had in California (they say their CA stores have 7X the revenue of competitors) could give them a great foundation as they build out in other huge states (primarily Florida and New York, though NY laws are apparently more restrictive).
But at this point, no, of course it’s not worth $1.5 billion, not for 35 stores and some growing facilities to support them.
It might be, if they reach the goals they talk about in their presentation. We’re talking about 35 stores and almost no revenue yet, though if we credit them for their forecast of $20 million in revenue per store for recreational markets that would be $700 million in potential revenue for their existing footprint and $960 million for the stores they hope to have operational by the end of 2019 (though some of those are medicinal-only which means revenues will be substantially lower). If they’re right about being able to earn a 30% EBITDA margin, that’s $288 million in EBITDA possible next year. So that might be an EV/EBITDA ratio of 10 or even a little lower if all works out well.
That’s a lot of “If” though — and those numbers don’t seem to work any more, so assuming $20 million per store in revenue could well be wildly optimistic. They claim only $226 million in “pro-forma run-rate revenue”, including stores where their acquisition is still pending, and that’s less than a third of the “potential revenue” that their other numbers would lead you to expect. Whenever the pie-in-the-sky forecasts for a company conflict, use the lower one. $226 million in pro forma revenue at a 30% EBITDA margin would give you $68 million in EBITDA. Even if revenue keeps growing at 20%+ rates, a valuation of 15X EBITDA is still a lot to take for a retail company.
And, not to throw too much of a spanner in the works, they’re not anywhere near making that 30% EBITDA margin — though they are closing in on $200+ million in annual revenue, even without PharmaCann. They are showing some mild evidence of possible improving margins — late last year they were spending $3 to bring in 45 cents of gross profit, and this past quarter it’s only $1.85 to bring in 54 cents of gross profit. So things are moving in the right direction — as you would expect for a company that is growing larger and can therefore, one hopes, spread out those huge general and administrative expenses (now 167% of revenues, was 300%+) out over a larger base.
Really, this is a California company with a pretty good base in that state, aggressively expanding into Florida and other states… but it’s awfully early, their high touch and expensive-looking stores are, in fact, expensive to open and operate, and they’ve been chewing up wheelbarrows full of cash as they build the company.
The risks run all the way through those investor presentation projections… they might not succeed in going from 5% own-branded products in the stores to 50% to drive their EBITDA margin up to 30% (they say their last quarter had a 17% retail EBITDA margin). Their costs could be much higher than are implied in the presentation. They might have trouble rolling out their new store footprint or distribution in Florida. Other states might end up with stores that pale in comparison with California, especially once the first frenzy of customers washes through. Competitors might succeed in establishing competing brands that take away some of their shine. Etcetera, etcetera, this is obviously an early state rollout story and either the strategy or execution might fail, though they are, at least, not without ambition.
So I see some reason to think positively about MedMen — I agree that a strong retail focus and branding is likely to be what eventually determines the market leaders in marijuana, there’s not likely to be any great profit in providing an agricultural product unless you own the brand and can charge more for your processed version of that same commodity (we all know Marlboro and Corona, but don’t know who grows the barley or tobacco for them), and I also think the US market has, of course, much more potential than Canada once legalization runs its course here.
But I don’t know the market well enough to place a bet on whether MedMen’s brand will be profitable enough to justify the money they’re spending or the valuation the stock carries. I guess I need to hang out more with the pot smokers, or wander down to my own dispensary and check it out, since evaluating branding and product position is, in the end, a very personal judgement in these early days (I didn’t see any appeal in Monster’s energy drink early on, either, which didn’t stop that stock from going up 10,000%). And, of course, there’s still the lingering risk that they could be shut down or hampered in their operations by federal law enforcement or regulatory changes, though I think that’s a relatively low-probability risk.
Which means that although the valuation is getting a little more interesting for MedMen, perhaps partly because investors are having a little trouble trusting the management team after accusations of self-dealing and other shenanigans and alleged bad behavior, I’m still mostly the boring guy on the sidelines when it comes to marijuana investing or speculation, though I am still holding my Innovative Industrial Properties (IIPR) shares. If you’re extra-convinced about the awesomeness of MedMen there are also some publicly traded warrants on the Canadian Securities Exchange — about 8 million warrants outstanding, with a September 27, 2021 expiration and a $6.87 strike price.
When it comes to speculative cannabis plays, as always, I’d urge caution and skepticism in this space, and remind you of the fuddy-duddy wisdom of keeping speculative positions small, but you shouldn’t just listen to me — I’m sure those of you who dabble in a lot of pot stocks know MedMen and their promotional nature and brand focus well, is it strong enough to get past the challenging valuation? Worth the risk to get in early on a possible future brand leader, or is it too early to chase a story like this in a world where national brands might take a long time to emerge? Think that other brands in the space are as powerful or more so? Let us know with a comment below… thanks for reading!
P.S. We’ve kept the older comments from our original March 26 article attached as well, so you can see what our readers were saying about this one a few months ago.
Disclosure: Among the stocks mentioned above I own shares in Amazon, Apple, Starbucks and Innovative Industrial Properties. I will not trade in any covered stocks for at least three days, per Stock Gumshoe’s trading rules.