Cannex Capital Holdings Inc, (CNSX:CNNX) who has already become the most dominant player across the cannabis stratosphere in Washington State, is now making concrete moves to repeat its successful recipe in California.
There are numerous reasons to be thinking about U.S. cannabis producers generally now, and California cannabis producers in particular.
Watch: Cannex CEO Anthony Dutton on Midas Letter LIVE!
US Glide-path Toward Federal Legalization
Despite the apparent dissonance between President Trump’s indifference to cannabis versus Attorney General Jeff Sessions’ seething hatred of the stuff, it now appears that the United States is moving closer to a federal marijuana regulation.
Senate Minority Leader Chuck Schumer announced plans to introduce a bill to decriminalize cannabis federally a month ago, saying “The legislation is long overdue based on, you know, a bunch of different facts. I’ve seen too many people’s lives ruined because they had small amounts of marijuana and served time in jail much too long.”
And just last week, the U.S. House Appropriations Committee passed the very significant Joyce Amendment, prohibiting the Department of Justice from prosecuting participants who comply with state laws permitting medical marijuana programs.
While Senate Majority Leader Mitch McConnell still opposes the legalization of cannabis at the federal level, the anti-legalization advocates on both sides are dwindling, and full federal legalization is only a change of government away. Considering the ongoing disarray of President Trump’s government, that is not a long shot by any stretch.
Positioning one’s self in cannabis companies in the United States now then might actually turn out to be the smart move, for risk-tolerant portfolios.
Cannex, who has demonstrated the ability to operate and dominate in an extremely price-competitive environment like Washington State, might make sense then for cannabis investors looking for exposure to high impact potential and a multi-state strategy.
Cannex Makes a California Play
On April 9th this year, Cannex announced its acquisition of Ametrine Wellness Inc., which owns the popular California-based extract product company Jetty Extracts, whose full range of cannabis extracts and concentrates is sold through over 600 locations throughout California.
The company will pay a total of US$22.5 million to Jetty’s existing shareholders in a milestone-based series of payments. Cannex will issue US$20 million of the purchase price in shares.
The transaction is subject to a mutual due diligence period.
According to CEO Anthony Dutton, “The Jetty acquisition is an excellent first step for Cannex as we implement our multi-state strategy. We looked at a wide range of acquisition targets in California but Jetty stood head and shoulders above the rest with its strong operational track record, its core focus on brands and product development, as well as its strong market position in both northern and southern California. We were especially impressed with the Jetty team,” continued Dutton, “and their long term vision and look forward to working closely with them to position the Cannex platform as a leading competitor in the US and California market.”
Echelon Wealth Note Supports a Price Target of $1.75
An analyst report by Echelon Wealth cannabis analyst Russel Stanley published on May 14th puts a target of $1.75 on the shares of Cannex. According to the report, “With a population of 40 million, California’s legal cannabis sales are expected to reach $5.0B this year. Management expects to execute a definitive agreement and close on the acquisition of Jetty by July 2018. While we currently exclude its potential contribution from our forecast/valuation, we believe it offers significant strategic value by making CNNX a multi-state story, and expanding its reach into the country’s largest cannabis market.”
The research suggests 2019 predicted earnings of $0.01 per share, but as stated above, does not include the potentially accretive revenue from the Ametrine acquisition, assuming it closes successfully.
Overall, Cannex presents great exposure to the U.S. market, and with Jetty Extracts, should prove to deliver a positive experience for investors who buy shares at current levels.
As the Echelon report concludes, “Cannabis processing, extraction, and branded product development are the Company’s core strengths. We expect Cannex to pursue acquisition opportunities in other Western US states that build on these strengths, with cultivation activity limited to a small-batch, premium quality focus. Management focuses on acquisition targets and structures that keep the vendors on board and engaged (i.e., an emphasis on milestone payments), with CNNX providing much needed capital support in a market that is still short of financing alternatives. Following the planned Californian acquisition, we expect CNNX to enter at least one more state by year end.”
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