VIDEO: Founder of 420 Investor Alan Brochstein on Tough Times for LPs

Alan Brochstein is the founder of the largest publicly-traded cannabis stocks due diligence platform, 420Investor, and the founder of the cannabis-centric marketing and communications company, New Cannabis Ventures. He joins Midas Letter to present his opinions on a variety of cannabis-related talking points trending in todays investment environment. Recent major deals in the cannabis industry including Canopy Growth Corp (NYSE:CGC) (TSE:WEED) (FRA:11L1) and Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E) are discussed. Alan also provides his opinion on what a possible U.S. Federal de-prohibition and recent Trump comments could mean for the global cannabis investment climate.


James West:    Alan Brochstein is the founder of 420 Investor and part of the team that brought us, or brings us, The New Cannabis Investor, and he’s been at this for over five years now. So he’s got a cannabis newsletter and a cannabis publication. Alan, thanks for joining us today!

Alan Brochstein:    Hey, how’s it going?

James West:    Good. This is kind of interesting, isn’t it?

Alan Brochstein:    Yeah, definitely. I really enjoy your show, and I’m happy to be on it, James.

James West:    Yeah. It’s great to have you here. So Alan, we were just talking about the, you know, first of all we’ve got Canopy has just announced this $500 million debenture with a 4.25 percent coupon and a convert that basically values it at $48 a share. Highly sort of representative of a maturation or a new phase of the cannabis market. And we’re trying to juxtapose that to another broad consensus: if you were to look at all the short positions being built up in all of these larger companies suggests that there’s a lot of fear and trepidation out there as to how far this market has run.

So, from where you sit as one of the longest-running chartered financial analysts in the space, how do you feel about that generally?

Alan Brochstein:    Yeah, I think it’s a tough time right now, James. I think everybody knows the valuations are high, but we’re in kind of new territory here. So I’m the type of person, I thought Amazon was expensive, Google was expensive, and I try to learn from that. Valuations are a pretty tough thing at this stage. That Canopy deal was interesting to me. They’ve been very adamant about doing equity-only deals; they’ve been, along with Aphria, extremely conservative, while you’ve seen some others be a little bit more aggressive on that capital raising. With the Aphria deal or with this large convertible note, which I think that was probably about a $14 option – there’s actually some options that trade out there – I think it tells you that some of these guys are hedging their bets.

It’s a land grab, they want to have money available. This has been one of the most surprising things. I was just checking my notes: 2.2 billion raised so far just this year, I don’t know, 5 billion or so just among the LPs over the last few years, and I think it’s going to take a lot of money to build these global brands and global cultivation facilities, everything these guys are doing. I can see why there’s a little bit of a war, here.

James West:    Yeah, but so, what’s your personal opinion?

Alan Brochstein:    My personal opinion, well: I have been favouring the large LPs, I have a model portfolio, a 420 Investor, for just the LPs, and I have some other model portfolios, and I’ve been a little bit underweight LPs in those. But in my LP-only model portfolio, I’ve sensed that it’s going to be pretty tough for a lot of public LPs – and there’s more coming, as you know – to stand out in the crowd and to really participate. When I look at the space right now, there’s a shortage. And I know you’re talking about a potential delay, and you’re not the only one; we’re all waiting to see what happens with C45. Canopy Growth looks to me to be the only organization that’s ready for Day One, Labour Day, let’s call it. So a delay would be good for everybody, probably, but Canopy, and it would probably be good for – I know this is going to sound terrible to people, but it would probably be good for Canada, to just delay a little bit. Let some people build inventories. You have supply agreements out there that I don’t see how they’re going to be met.

There’s no inventory, there’s no proof that they can scale up this fast…you’re talking about, you know, Canopy has been at this really for four years, and you look at their level of sales right now, and you’re talking about all these supply agreements that are bigger than what Canopy is doing right now. So my own view is, if you’re going to be in the space, at least my view has been, as of the end of May when I last updated my monthly model, is to be overweight the large LPs for now. But I’m finding some interesting stories, you know, down in the less mature companies as well, James.

James West:    Yeah, interesting! So I’m curious, Alan: you’re a US citizen, but you’ve obviously been playing a lot of the Canadian LPs because, in many respects, they’ve been the only real game in town.

Alan Brochstein:    We say a prayer every night: Thank God for Canada.

James West:    [laughter] We could go off on a tangent there, but let’s not go there. Do you think that the advent of the US Federal de-prohibition is going to constitute a shift in all of the investment interest globally that is currently focused on Canada, will it then sort of start to abandon Canada and shift to the US?

Alan Brochstein:    Well, I think Canada is well established like the mining industry right now is the clear global frontrunner when it comes to capitalizing the global cannabis industry, and I don’t see that changing. I don’t see legalization in the near-term in the United States; what I see is a relaxation of the regulatory environment. When I came onto the scene about five years ago, we didn’t have a Cole Memo, and it was very unclear what was going to happen when Colorado and Washington legalized. It’s been, I don’t know, 20 steps forward, 40 steps backward, it feels like, all the time. Things move very fast and they’re all over the place. We really hit a low point in January, when Jeff Sessions finally did something and said something, and it really impacted the way the real industry in the United States and the investors think.

Look, let’s face it: if you’re an entrepreneur, you don’t want to go to jail. And if you’re an investor, you don’t want your money taken from you, confiscated, so this has been the concern that’s really slowed down the United States. I don’t think everybody agrees with me, but I think that the Gardner/Trump agreement that was signalled in mid-April was a huge turning point, and whether it turns out to be or not, it’s having a massive impact on the way people think about things. What I tell my subscribers at 420 Investor is, the US cannabis industry, dollar for dollar, based on revenue, or operating losses, which is what it is, for the most part, is way undervalued compared to Canada. That’s easy to establish.

The hard part is to figure out how much should it be undervalued? It’s Federally legal in Canada; Canada has all these opportunities to exploit this with the globalization, whereas United States companies are not allowed to go into countries like Germany. There’s a 280E tax, and it is Federally illegal, let’s face it. So all these things suggest it should be cheaper in the United States; but it’s way cheaper, in my opinion, than it should be.

This week, GTI went public, and this is a midwestern based company – I know you feel strongly about MedMen, we don’t have to denigrate them, necessarily, James – but this is a very different company, and I bet most of your listeners don’t even know this, but the numbers are out there for March for both MedMen and GTI, and GTI had over $10 million USD in sales where MedMen was about 7 and change. And you can find that at; we track all the cannabis companies producing revenue in excess of $10 million USD per year.

And so the point being, this GTI came out, I don’t think that many people had ever heard of it, quite frankly, and I will say, they are not the only company like this. There are several very large companies, some of which are public, like MPX, which you just had, I believe – I think I was listening to that live, Scott – but there’s a lot of private companies as well, and they’re planning to come to the market in the near future. And I think what’s going to happen is, you’ll see some capital recycled from Canada into these companies. Most of them are going to go public through Canada because of what I said: the cannabis industry for Canada is like the mining industry, and that’s where the deals get done, James.

James West:    Yeah, you bet. The number of companies in the US that are private – like, there’s a couple of big ones that are still private, but you look at them and you just know that they’re putting themselves together for a go-public transaction some way, shape or form, whether it’s by a acquisition from a Canadian-listed company, or whether they’re going to list themselves in Canada, that seems to be coming down the pipe for them.

Alan Brochstein:    Indeed.

James West:    Do you see a shift in the attitudes of US investors gradually as Trump sort of moves, or at least expresses the idea, that he’s going to let states do what they own. It kind of conveys the sense that the Federal Prohibition is kind of superficial in many aspects. It’s obvious that the Attorney-General is not going to be able to act against investors or participants in the marketplace at the Federal level if the President is supporting the right of states to make that decision on their own. So I’m wondering, are you seeing more US investors get more comfortable with the idea of investing in cannabis, even though it’s Federally illegal?

Alan Brochstein:    Oh yeah, for sure. And I think it’s important to understand that it’s all real clear now what’s going on in Canada, but three years ago, nobody had a clue. Justin Trudeau wasn’t expected to win, and the minute he won, there was a reaction to the market. I think the way to define the Canadian market is, it’s been three uptrades, a staircase where you’ve consolidated; we’re in the third consolidation now since Trudeau won. And while I don’t think the United States is the exact analogy for Canada, it’s going to be similar. We don’t have to head to full legalization, but we’re going to get to a period where there’s what I would call ‘regulatory rationale’, where people don’t have to worry about going to jail and having their money confiscated, either of those things.

And I think that’s where we’re headed. Definitely seeing interest in the United States from investors right now, both into the private companies as well as in the public space. This underperformance of US – and there aren’t that many of them – but the underperformance of US stocks since, you know, it’s been going on for years, relative to the Canadian LPs, has reversed. You can look at companies like iAnthus, and I want to mention that one because it’s a great example of what you’re talking about – since April, when this Trump-Gardner deal was announced – they were able to receive a $50 million investment from Gotham Green. Gotham Green is a New York organization, hedge fund, behind Kronos Group, in fact: Jason Adler. Jason Adler owns, like 10 percent of Kronos Group, it’s amazing. And they went into Kronos Group right at the bottom; now, they’re going into not only iAnthus, and I mentioned that one because it’s a cannabis company, but they’re also investing in other US companies as well.

And so we’re definitely seeing deals. Kush Bottles announced exactly a week ago a registered direct offering; they raised 36 million gross, largest OTC deal I’ve ever seen for a cannabis company. So the answer is definitively yes.

James West:    Steve brought up an interesting point about the requirement to have a US brokerage account. Steve, what was the gist of that?

Steve Misener: Oh, it was more if you’re following US investors playing Canadian cannabis stocks and maybe US-based operating stocks that are listed in Canada, just a general question: US investors, are they, do they need to open a Canadian dollar account in their US brokerage firm to buy these Canadian stocks, and how do you see the evolution going to beyond the OTC to the NASDAQ, for instance, for cannabis stocks, either Canadian cannabis stocks or US state-based stocks? Do you see that as a trend in the future?

Alan Brochstein:    Well first of all, it’s nice to meet you and to see a fellow CFA interested in the sector.

Steve Misener: Absolutely.

Alan Brochstein:    So I tell people it’s possible to open a Canadian account; that’s where the better liquidity is. It’s not essential, and there’s some weird things about, when you’re in Canada, for your TFSA, you need to have CSE-listed stocks. I know there’s a lot of things going on – the liquidity is going to be better if you have a Canadian account, but it can be done on the OTC. And you know, I track them – they move in line, I just think it’s preferable, but not a huge deal, to do that with a Canadian account if you can.

As far as your other question, I think it’s going to be slow to get better listings than the OTC. What I’m hopeful – I hate the OTC, and they get so mad at me when I say that, but it’s true, I can’t stand it. So I’ve been relegated – I didn’t even know what the OTC was a few years ago. Some might ask me a question like ‘I don’t know what a penny stock is’, and so unfortunately, I’ve had to learn a lot. I’ve gone into the sausage factory a little bit; I can’t stand it. So I’m hopeful that things change, but unfortunately, this is what it is, and I would tell all investors, just because it trades on the OTC does not make it bad.

With that said, assume it might be bad, for sure. And we are going to see more NASDAQ listings, I would say, of US-type companies, but not direct cannabis companies. There was a blank-cheque company, MTech Acquisition, I think their units trade with the symbol MTECU; they haven’t announced their transaction yet, but they raised, I don’t remember what it was, 50 million or something like that? A big number, in an IPO, a real IPO on the NASDAQ, and they’re going to buy a cannabis-related firm, an ancillary firm. So we’re going to see more, and clearly some companies that don’t actually touch the plant directly do have a shot of getting onto the NASDAQ or the New York Stock Exchange. For your viewers, may not be familiar, IIPR is the symbol – New York Stock Exchange-listed REIT that went public around Thanksgiving of 2016, struggled the first year, it’s up 75 percent or so from its IPO price now; that is on the New York Stock Exchange. It’s a REIT, they lend to some of these companies that we were just talking about. The similars, the very large US private operators: Pharmacan, Vereo, a few others as well. So that’s proof, you can get to the New York Stock Exchange and take money from companies that touch cannabis, which is, to me pretty wild.

And you know, I would say, if your listeners are looking for what’s going to be the next one that we know of, that’s trading now, I should say, that could go public on the NASDAQ, I would speculate on Kush Bottles. Kush Bottles is moving towards it. They changed their auditor – this is all public, they talk about it all the time. They’ve never given a date, but there’s a company, they’re on track, according to Vivian Azer of Cowen, to do about 83 million in revenue in the year ending August 31st, 2019. And that company is going to qualify for the NASDAQ. They will be on the NASDAQ, I would say by the end of this year, early next year at the latest, after all these audits are completed and the paperwork filled out. And there’s more.

James West:    Kush Bottles, that’s a US-based firm then?

Alan Brochstein:    Oh, yeah. They’re based in California, they have a little bit of operations globally, but it’s mainly in the West. They have three big focus areas: Washington, Colorado, and California, actually, they just opened, or are in the process of opening, a bigger facility in Nevada, as well. And then they have a new East Coast facility as well. They’ve raised institutional capital…I mean, this is a layup, James.

James West:    Interesting.

Alan Brochstein:    Not saying the stock price…

James West:    A US company listing on NASDAQ, that’s really kind of a first. It almost makes like the federal prohibition completely irrelevant from the standpoint of an investor.

Alan Brochstein:    Yeah, we haven’t seen any sort of promise from investors so far. Even with the OTC or what have you, there’s been no lawsuits against investors. We’ve seen some pretty nasty lawsuits out there; they use what’s called RICO, and I remember, I love Summit County, Colorado; I try to get out there in the summers to Frisco, and there was a dispensary there, and they were charged with racketeering, and they lost. And this has been applied to a lot of companies. It’s the same group of people; it’s tied in, I believe, to that group SAM, and they try to use these weird laws, and they bring in all these investors, lawyers, service providers, everybody, and they try to sue them. And usually what happens is, they pick on a small guy and he just folds.

But anyway, we’re getting off topic there. There’s been no problem for investors, it’s just unfortunate, because I know that – and it makes sense – that most investors would prefer to buy NASDAQ and New York Stock Exchange names, and I think it’s going to get better, I think – I hope two years from now, I won’t even have to be looking at the OTC much anymore. Maybe just for those direct cannabis companies.

Steve Misener: I had another question: if one was looking at the US space and the checkerboard of different states as they begin to ease their licensing jurisdiction or legislation, would you see the future value for investors who were going in at this point to look at a company that might go to a state, let’s assume the state was generic of size and demand and things, but a state where the licensing to engage in the cannabis space was hard to get the license, and therefore restrictive and not many? Or a state where there’s a plethora of licenses because you’re going to get it and the market will grow more quickly? I mean, I know that’s a pretty vague question.

Alan Brochstein:    It’s not vague, it’s a good question, but it’s one I’m not going to be able to answer. I’ll answer around it, because I think there is no answer. I think you want to find good operators, and to get to your first point, these hard-to-get-into states, for the most part, produce good operators. And that’s what I’ve seen. The East Coast model, it’s called, and that’s basically east of the Mississippi. You’re talking about the Midwest and the East, where these licenses are limited and the companies have to try real hard to succeed, before more often than not, it’s a very high regulatory burden as well as limited patient access, the qualifying conditions. New York is a great example.

So I think that that’s kind of proof: if you can make it in New York, you can make it anywhere, I think they say. Or is that Chicago? But, same thing. Both those states. If you can make it in Illinois or New York, for example, that’s a really good sign.

At the same time, let’s not forget: as much as we fawn over the opportunity in Canada, California is bigger than Canada, and California has been very difficult for real investors to go into because it’s been a Wild West, the rules weren’t known until recently, and this transition is very nasty. So the people I talk to are finally comfortable looking at California – the operators, I should say – are finally comfortable looking at California, and I think California is a massive opportunity now that it’s in this regulated point.

So look, I know again, James, you don’t like MedMen, but look at what they’ve done! They’re in California, and by the way, I think the stock is overvalued; I’ll go on the record and say that. But they’re in California, they’re getting into Florida, they’re getting in – they’re actually in New York, I’m sorry, they’re not getting into it, they have a Fifth Avenue showcase. And they’re in Nevada, too. So you have a lot of opportunity. So I don’t think you can say ‘this is the best place to be’. I think there are a lot of good places to be, and I draw from, you know, I’m just watching the revenue grow, I’m watching these guys raise capital, I’m watching the interest, and I’ve been saying for a long time US is undervalued, but I couldn’t say it very loudly. Now I say it loudly and proudly, because I think people can make money. I’m not saying to sell Canada and buy the US, although some people may arrive at that conclusion; I just think this is a good time where new investors can come into the market and take advantage of what, to me, looks like a better opportunity in the United States.

James West:    I want to clarify, Alan, it’s not that I dislike MedMen. I’ve certainly had some guests who have opined clearly that they, you know, revile them for various reasons. The thing that I don’t like about MedMen, and it’s not to say that they can’t overcome this and deliver a successful experience for all of their investors; but what I don’t like to see in the evolving landscape of cannabis companies are these structures where the entire destiny of the company is controlled by a minute slice of founders’ supervoting shares, while all of the equity guys are forced into a ride that they might not like the direction of, further down the road. I equate it to agreeing to a third class ticket on the Titanic for first-class pricing, and agreeing to being locked below decks. If the captain decides to drive into an iceberg, you’re going to be first to drown.

So that’s the only thing I don’t like about these, and I’ve been around the market long enough to know that even the most egregious share structures that appear to target and victimize the retail shareholder have turned around and delivered, against all odds and probability, a profitable experience for them. So you know, I don’t like to see that, because I don’t like the idea of somebody asking for my money and saying, you know, ‘you gotta trust us’, and your only vote at that point is to sell the share if you don’t trust them. I look at MedMen and the sort of the slick polish they brought to the retail experience of their stores – you know, everybody equates them to Apple Stores, and fair enough. I really appreciate that; I think that’s what the entire industry needs.

So I wouldn’t say that I dislike MedMen – I haven’t even got to know them that well, to be honest. I’ve only talked to Vahan Ajamian, who’s their head of investor relationships. I can’t wait to go to a store, I’m going to go to a store, so you know, at this point I reserve judgment on, you know the potential for it. But certainly a lot of my guests are lined up against them.

Alan Brochstein:    Yeah, and that’s a fair point. I apologize for saying you don’t like them; you don’t like that aspect, and who does, right? I too have been around for a while and I’m not going to defend it, but like you said, you can vote, you can sell the stock. And sometimes, these work out. But I think there’s a lot of other things, maybe for another conversation, that might be problematic with the story. I wish for their success, I will say.

James West:    Yeah. Okay, well, Alan, that’s been…it’s been great talking to you. This is the first time we’ve done this via video, Skype – it’s working out well. Where are you physically, right now?

Alan Brochstein:    I’m in Houston, Texas, and heading to New York City this weekend. I don’t get out much, but I’m hoping to see you in August in Toronto too, James.

James West:    Definitely, definitely. We’ll make sure that happens. Thanks for joining us, Alan.

Steve Misener: Pleasure.

Alan Brochstein:    All right, take care. Nice to meet you.

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