VIDEO: Founder of 420 Investor Alan Brochstein on Future of Cannabis Markets

Midas Letter
Midas Letter
VIDEO: Founder of 420 Investor Alan Brochstein on Future of Cannabis Markets

The founder of Alan Brochstein is back on Midas Letter LIVE to provide his commentary on the future direction of North American cannabis companies. He discusses the most visible U.S. cannabis companies such as Medmen Enterprises Inc (CNSX:MMEN) (OTCMKTS:MMNFF) and Tilray Inc (NASDAQ:TLRY) and whether there is an indication that investors would prefer to invest in U.S. operations over Canadian alternatives. He describes the current weakness in the cannabis market place but the underlying strength of top companies Aurora Cannabis Inc (TSE:ACB) (OTCMKTS:ACBFF) (FRA:21P) and Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1).


James West:    Hey, Alan, how’s it going?

Alan Brochstein:    There I am.

James West:    Let’s start with –

Ed Milewski:   How does – I was just going to throw out a question here, sorry to interrupt, but how does it look to you? Does it look like money’s exiting? It looks – look, it’s rolling over a bit, doesn’t it? Or are you looking at it from a fundamental?

Alan Brochstein:    Okay, so first of all, I’m glad you didn’t ask me what my head set. I need to invest in some sort of audio equipment. But no, I’m not a video game player. Yeah, the market, to me, in Canada, looks a little toppy; I’ve been saying that for a while. I think at the same time, you know, the United States is just starting to see a lot of interest out of Canada. So much money has been made over the last few years in Canada, and I don’t think that people are necessarily going to sell their Canadian holdings to buy US, but at the margin, I think there’s a lot of interest.

And I saw the day GMP Richardson put out a report talking about the opportunity in the United States looking at lot better than Canada; this is something that I’ve been hearing a lot. And probably more importantly than just that whole dynamic, I think if you just step back and look what’s going on in the United States, things really changed back in April when there was just a whiff of optimism after a lot of pessimism, and that was with the Trump-Gardner kind of agreement. And we don’t even know if it’s going to play out, but there’s optimism over that, and so we’re seeing all these deals get funded out of Canada in the United States now.

So it’s clearly – I think that’s an important dynamic for people in Canada to understand that the interest may be shifting south of the border.

Ed Milewski:   What’s the market cap of those US-listed companies? It’s got to be a lot less than the Canadian side, right? Like…

Alan Brochstein:    Yeah. So apples for apples – and it’s never exactly the same, so MacIntosh apples for Gala or something – it’s a lot cheaper in the United States, and it should be, because in the United States it’s federally illegal still; that’s one thing. Number two, we have this thing called 280E; and number three, you can’t do interstate commerce. And I guess in Canada you can’t really either, apparently, but that’s another story.

So it should be cheaper in the United States, and I’ve been saying for a while, it’s just way too much cheaper. So to answer your question, I think this is the way to look at it: there are a lot of mom and pop operators out there, and we’re just now starting to see the emergence of companies like Acreage Holdings, which I think was on the show in the last couple of days. You know, the ones that have been around for a year have really proven themselves and have made a lot of progress; we’re talking about, like, MPX Bioceuticals and iAnthus, Liberty, CannaRoyalty – by the way, some of these are my clients; I’m not trying to show favouritism. And a bunch of other ones that are starting to prove themselves.

But now we’re seeing new names. We saw GTI do just exceptionally well. I know MedMen probably wasn’t perceived as being a good IPO; it wasn’t a true IPO in any event, but the market cap is phenomenal there. And so clearly, people are interested. And I think what’s interesting to me, somebody who’s been watching the market for over five years now, if you go back to 2014, there was this huge stigma, and it wasn’t about cannabis or marijuana; it was about the OTC. And so I think what happened was, the market crashed in 2014 in the United States, and nobody cared about Canada then, either. It really wasn’t till Justin Trudeau got elected in 2015. And the US market has really been shunned, the OTC market, for the most part.

What we’ve seen happen the last few years has been confidence in the US companies that are listing in Canada. They’ve proven themselves. Again, we’re talking about, like, CannaRoyalty, iAnthus, MPX – and people have made money, they’ve seen that these companies can raise capital much better than they can on the OTC, and they get research coverage and better liquidity, all these things, and so here we are in 2018: Cory Gardner, Senator who cut the steel with Donald Trump, told everybody it’s safe to come swimming, and the pool is very warm and sunny, and we’re seeing a lot of deals get done now. It’s just unbelievable to me. I’m so excited, actually.

James West:    Hey, Alan, did you watch the Tilray IPO at all?

Alan Brochstein:    What? What’s Tilray?

James West:    Tilray. Ha ha!

Alan Brochstein:    I’m just joking. Of course. So look, that’s another sign, obviously, and it’s not really supportive of what I was just talking about; it’s the exact opposite, and it actually was very interesting, because that’s the first time a Canadian company has basically given the middle finger to the Canadian exchanges and gone to the United States. Obviously that’s a one of a kind thing. You’re not going to see that happen again, because Tilray is one of the big producers in Canada; there aren’t any others that aren’t public, so you’re not going to see that. What you’ll see is Aurora and Aphria move, not move, I’m sorry, get an additional listing in the United States; they’re not going to say goodbye to Canada.

So that was rather interesting, and I think even though it’s the exact opposite of what we were just talking about – the US companies going to Canada to get money, which is what’s going on – that tells you the same thing: that the investment appetite in the United States is picking up. You know, and it’s obvious, because that deal, it was upside, so we don’t know on that last 1.35 million shares how many of those ended up in the hands of Canadians. But we know about 25 percent of the original deal only, which means 75 percent of the Tilray deal was bought on the NASDAQ. It could have been Canadians, but it was bought on the NASDAQ, not through the Canadian brokers, so I assume that was US demand. And so I think it’s pretty awesome. I think it’s pretty crazy where that stock is trading right this minute. Not as crazy as yesterday, but still pretty crazy.

James West:    Right. Do you think that some of these US valuations, like if you look at MedMen’s come to market with a $2.2 billion valuation, and Tilray comes to market with a $3.3 billion valuation, and, you know, Kush Bottles and all these guys have these big, beefy valuations; do you think that’s an indication that US investors would prefer to invest in US operations over Canadian ones?

Alan Brochstein:    I don’t know. There’s a home court advantage, clearly, and it took a long time for US investors to warm up to investing in Canadian LPs in general. I watched this for years, you know, I have a lot of subscribers, and they were very reluctant to buy even the OTC tickers. This is just the way it works all the time, almost: people prefer to invest in their own country. So I think these large market caps are great. It’s not necessarily great for the people who buy them at the top, but it’s great because it shows you that there’s a shortage of good companies in the United States. I guess you could say the same thing about Canada: the market caps are high, it just shows there’s a lot of optimism, and I think that gives a chance for other companies to go public. I mean, in Canada we’ve seen, I don’t know, nine in the last six or seven weeks, go public? LPs, we’re talking about. So I think, you know, Canada is pretty much done in terms of how many big stocks there will be in the future. Most of them are probably already public. They might not be big right now, but they’re already public. It’s going to get harder and harder; people don’t have the attention span to look at public company #42 through 50.

But in the United States – and I think this is kind of the point that GMP Richardson was making – there aren’t that many public companies yet, when you consider that the United States is like, nine times, ten times bigger than Canada and the industry, you know, it’s a lot bigger, there just aren’t that many public companies. And you know, the number of companies in Canada with a market cap in excess of $1 billion USD is probably like five or something like that, six? And in the United States I think there’s just two. So, you know, we’ll see what happens, but I think we’ll see a lot more of these companies going public.

Jim, didn’t you have Acreage on yesterday or recently?

James West:    We did have – yeah, we had Acreage on, what was that, was it about a week or so, I guess?

Alan Brochstein:    Friday.

James West:    And yeah, yeah. He was on, and he’s – well, they’re not gone public yet, but they’re going to soon, I guess.

Alan Brochstein:    Well, they said they are in the fall. They gave a date yesterday; not a date, but an estimate of the fall, which tells us something – this year. And you know, things always get pushed a little bit, but what was interesting, they had a press conference yesterday, and I’m not sure how many people were on it, but I was glad I got a chance to participate, and they talked about their acquisition strategy and the needs for capital. So Acreage is one of several companies; some of them, I bet nobody listening right now has even heard of these companies. They’re kind of quiet, operating, just operating quietly.

And so the people who have invested in them know, but the general public doesn’t know about some of these companies, or not that much. They’re not really, you know, in the limelight at all; they’re going public, they can’t say no. the valuations they see are very high when they look at GTI, and these companies are all in a land grab right now. They want to be able to go into the new states and, you know, when people sell, they want to sell into something that’s really big.

And the reason I brought Acreage up, because they had an issue, I believe, early on, that they were just buying pieces of companies and not control. And I think iAnthus had this to a lesser degree, and one of the things iAnthus did was, they went to 100 percent ownership of everything, even in Massachusetts, and I think investors really liked that. So I asked Acreage, just, they don’t have any documents out there in the public, and they said that the only one that they don’t control is Florida. I think they’re in a dozen states with two more on the way.

So one of the things they said was that they’re going to the people that invested in a certain state’s operations where maybe they had the majority, but they’re trying to get 100 percent, and they’re basically the story is, take our stock, we’re going public, and, you know, you’ll be more diversified. It’s a pretty simple story, and these platforms that are emerging, there’s already several that are publicly trading; we’ve talked about MedMen, we’ve talked about GTI recently, and some others – I think this is a great time to start studying these companies. It’s like Canada all over again, you know, going back really to 2014 or ’15.

James West:    What – I mean, there’s a whole bunch of people on our Facebook and YouTube pages right now, and the questions that, you know, we see most frequently, especially in the current environment where there’s all this blood in the streets, so to speak, is where is all this weakness coming from? What does it mean?

Alan Brochstein:    The weakness in Canada, or what are we talking about?

James West:    The weakness generally in all cannabis stocks in the sector generally.

Alan Brochstein:    Ah. Yeah, I think it’s been more pronounced in Canada, and I think, you know, one of the things that happened there was the delay. And it wasn’t that big of a delay, but it was a delay on top of another delay, so basically, yeah, if you go back, people were thinking it would be legal in April, if you go back to last year. And it got delayed, and then it was supposed to be, you know, August or September; now it’s October. I think, you know, there are a lot of traders in the space, and time is money. So it’s like take the summer off, come back after Labour Day, whereas before, you know, if it was going to go live on Labour Day that was a shorter time. So I think that’s a small thing.

I think I mentioned earlier that we’ve seen, I think, nine new public companies, and that’s a little bit, you know, dilution in terms of the number of companies out there. You know, if somebody wants to buy a new company they may have to sell one of their existing holdings.

Then we’ve seen, you know, the big IPO, Tilray, that money came from somewhere. But I think there’s another point. I mean, I saw some – the tea leaves I was reading were basically that the LPs thought their stocks were expensive. I mean, Canopy did that huge convertible note, $48 conversion price; if they were that bullish, they wouldn’t have done that.

But a bigger one was Aphria. Like, the eve of the Senate, in what was maybe the most historic moment ever for the cannabis industry, I love those guys at Aphria – I know Vic’s on your show all the time – but what a terrible signal to have the largest equity offering ever on that day! I think there’s just been a lot of signs that the market needs to cool off a little bit.

Ed Milewski:   Do –

Alan Brochstein:    Oh, I have one more thing to say, sorry. Just to add, I think there’s something actually even more important. I think people have come to the realization that legalization in Canada kind of sucks, quite frankly. And I’m not criticizing, but it really does. I mean, I’m going to be in Canada; I could be arrested, this is in August, so it’s not going to be legal yet. But what sucks about it is, most people like vape pens, and you can’t use vape pens for at least a year. A lot of people like edibles; you can’t do that. Ontario, a huge province, 25 stores at first for the whole province? It’s just, it’s sad. But it’s probably smart to start slow, start low and go slow, whatever they say for edibles. So I’m not trying to be super-critical, but I think the issue is, I think people are starting to understand that it’s not so great to have the government being the sole buyer like it is in Ontario, and hopefully that’ll change. It’s just not as good as it sounded, I would say. But it’s going to be good, it’s just not so good from Day One.

Ed Milewski:   Interesting.

James West:    Certainly I can speak for almost all Ontarians and, I think, almost all Canadians when I say nobody here is happy about the government being our dealer.

Alan Brochstein:    Yeah, exactly.

James West:    And when you compare the, you know, the range of products and the way in which you can access the products in, for example, I just came back from a week in California; I went to multiple dispensaries, we tried marijuana delivered to our hotel, we went and visited extracts labs, we tried – I mean, I didn’t try, but we were offered to try –

Ed Milewski:   Sure. To observe.

James West:    Shatter, yeah. But they’ve got, you know, every single product imaginable is fair game in California, and you can get it almost anywhere. It’s like, it’s so different from where Canada is today. And you know, if you look at the way liquor is sold in Canada and beer is sold in Canada, if you want beer in Canada, or in Ontario anyways, you’ve got to go to a beer store.

Ed Milewski:   Or a grocery store, now.

James West:    What, we’ve got beer in grocery stores?

Ed Milewski:   Yes.

James West:    This is news to me.

Ed Milewski:   Well, you don’t drink beer.

James West:    I sure do.

Ed Milewski:   Well, grocery stores carry beer.

James West:    I had no idea!

Ed Milewski:   You’ve got to be kidding.

James West:    I’m not kidding.

Ed Milewski:   You’ve got to get out of the meat section.

James West:    Apparently no, I’ve got to get out of the beer store! That’s what I’ve got to do. Anyways, that’s interesting.

Alan Brochstein:    It’ll get better, James.

Ed Milewski:   Beer and wine.

James West:    Yeah, you get my point, though: we’re so used to the government being the sellers of our stuff, and our rules have always been way more uptight than those of the US. It was only recently that beer gardens actually allowed beer to be sold on an unrestricted basis.

Ed Milewski:   Right.

James West:         But it’s always been a feature of Canadian sort of, you know, let’s call it recreational substance use, that the government is, you know, is like the daddy standing there saying what you can and can’t do.

Alan Brochstein:    Right. I think people are just starting to realize that there’s going to be glitches between maybe not enough supply – I didn’t mention that, but that’s something I’ve been talking about for a while, that – I mean, the delay is good for that, being more supply, but it’s still very under-supplied most likely at first.

You know, if you look at how much money is being lost by these operators, it’s clear nobody’s hit scale yet. Nobody’s making any money in cannabis except by selling shares so far, and you know, if you look at the inventories, they’re just not that great. So I guess the good news is, there aren’t that many stores anyway. So it’s just going to be a slow ramp at first, and you know, that’s the way the medical was. It was very slow to start, and then the doctors started to catch on and the medical program took off. And it’ll be the same way; it’s going to be great. So I’m not trying to be negative forever on it, but I don’t think people understood this point, that Day One is not as exciting as some might anticipate.

Ed Milewski:   So question, and I don’t know the answer to this, that’s why I’m asking the question: what percentage of the Canadian marijuana companies are owned by US investors? Is there a number out there? For instance, if you’re American and you sort of think well, I can go into Canada through my broker and buy some shares, so is it, would you say it’s 20 percent, or is it? There’s got to be some US money involved in this.

Alan Brochstein:    There is. I have not ever seen the data, so this is pure speculation; it’s, I don’t know, 20 to 40 percent US investors, which, you know, here’s a lot more US investors, but not that many of them involved. That’s just an estimate. It’s a great question; I’ve never seen that one studied by anybody.

Ed Milewski:   They sell their Canadian holdings to buy more of the US product, like US issuers that are – because I think that they probably want to get around buying, converting money, etcetera, right?

Alan Brochstein:    Yeah, I don’t know. I think, when I think about it, it’s really more that there’s a huge audience of investors in the United States that have never invested. So a lot of them didn’t understand the Canadian thing, didn’t know how to buy into it, maybe, and they missed out, so now they maybe have a second chance. So that’s kind of what I think could fuel the interest in some of these US names. I think what you’re saying makes sense; there could be some of that, too, where people have made a lot of money in Canada, you know, US investors or Canadian investors that say, ah: US looks like it’s bottomed out, and this is the place to be, maybe. I don’t know. I don’t think it has to be that way, but there’s probably some of that.

Ed Milewski:   Like, I don’t know about how many, but the two that I know, the GTI and the Tilray, they were spectacular. I mean, if you could buy them, you could have still made a lot of money in the first and second days, because they really, they both doubled, right?

James West:    Right.

Alan Brochstein:    And we know the way things work, people are going to look at those and they’re going to want in on the next one. So it’s going to be a self-fulfilling prophecy, probably.

James West:    So Alan, you touched on this briefly a short bit ago, and you said, you know, you asked the question, will US investors sell their Canadian stocks to buy US ones as America comes on strong? And I just want to flesh out that discussion a little bit more, because, you know, if you look at the valuations of Canada’s unicorn cannabis stocks, of which there are now about six, by any measure you would have to say that they’re, if not fully valued, they are definitely highly valued. And so one would immediately sort of lean towards the conclusion that there is more upside in stocks that have not been trading that long. And so especially in a market that is just sort of emerging from Federal prohibition, you know, or at least that’s the sense we’re getting is that it’s moving that way and therefore the market is opening up more, and so I’m thinking, as that happens, might that be more the catalyst that drives more money out of the Canadian market and into the US one is when you can safely invest in the US without risk of a Federal prohibition somehow interfering with your investment experience?

Alan Brochstein:    Yeah. So like I said, I gave some reasons earlier why there should be a disparity. Traders don’t necessarily take the time to fully understand all the risks, and I remind everybody, the United States: much riskier. I think traders will look at the charts, you know, let’s just pick on Aphria a little bit: their stock is way down from the highs and it’s pretty close to the recent lows; that’s not the kind of thing that attracts traders. The kind of things that attracts traders, I think, is like, GTI went up a lot; it’s down a little bit on this capital raise but it’ll probably recover. You start to see that – that’s just trader stock, and you can see some of that, just pure technicals that you can make some money in the US buying these names and Canada looks like it’s rolled over.

If you want to talk about the valuation, though, I’d remind everybody that Canada is Federally legal. This means a lot. It means that you can do these clinical trials and go after the pharmaceutical market, which is huge. If you listen to Bruce Linton talk, and I know you do, James, he’s been on your show, he’s been on with Kramer; the medical, the pharmaceutical opportunity for displacement, is just huge. US companies don’t really have that, and Canadians do. And then there’s also just in general the whole international market. US companies are precluded, precluded from participating in most international markets. The only thing they can do is license their brands. They can’t actually benefit in the building of businesses. Like, in Germany, they were cut out. If you had anything to do with a US illegal company, you can’t do that.

So Canada does have these international opportunities. I would argue at a second level that it’s expensive to pursue these international opportunities. It’s not like it’s free money; you have to, you know, invest in building cultivation in Denmark or what have you. So it’s not risk-less, and it’s not free.

I can understand why people are going to do this. I’m not saying it’s right or wrong. Some people will say hey, I made all this money in Canada, Canada looks pretty tired here, I’m going to move in the United States which has a lot of interest right now, and I’ll come back to Canada right before legalization. I mean, I can see people coming up with that. But I think the bigger issue is for the United States companies to get US investors that have never bought a cannabis stock, excited. You know, people like to invest in companies that they know or trust, and you know, there are a lot of companies like MedMen, I think that’s one of the reasons they’ve done well: they’ve built a big brand. When I say they’ve done well, their market cap is so high because people associate. They see their MedMen store, they can go touch it and feel it, buy it, whatever they want to do. And I think there’s going to be a lot more of this in the United States, where we get cannabis investment-naïve people who now get it.

It’s okay to invest in a Canadian company, you just have to learn how to do it. And it’s okay, you can go look at these charts. A year ago, these stocks were – like, iAnthus was at $1.70, and it’s at $7.50 Canadian. So that’s what people like; they like to buy when things are going up.

James West:    Alan, let’s talk a bit about – I mean, we talk about Canopy always as sort of the bellwether in the Canadian market, as the largest, the first, etcetera. But tomorrow we’re expecting Aurora to announce the conclusion of the takeover of MedReleaf, which will make Aurora the largest company by market cap in the world in the cannabis space.

Alan Brochstein:    And sales.

James West:    So I’m curious as to, yet their stock is selling off dramatically today, and I’m wondering, do you think that’s because people are taking this last opportunity to sell MedReleaf at the premium that it’s at before they’re actually having to take the conversion on the Aurora shares? And secondly – this is a long-winded question, I apologize.

Alan Brochstein:    I’ll remember that first one.

James West:    And secondly, do you think that Aurora’s new status as the largest company by market cap in the world will represent an inherent advantage to it in terms of attracting new investors that has formerly been occupied by Canopy as the largest company in the world?

Alan Brochstein:    Yeah, so first of all, I think for MedReleaf this is a very valid concern. We saw this with CanniMed: Aurora stock did very poorly in the back half of March after CanniMed, and this is not my area of expertise, but I mean, I can look back and see what happened there. You have a lot of people that will be able to sell stock that haven’t been able to sell, because they won’t be restricted like they were before. Their positions won’t be so large relative to the float; it’s a more liquid security.

So we saw that after CanniMed – the people that forced the deal, they weren’t locked up, I don’t think, and the stock went down a lot. So there is some of that, and I think the weakness today, it’s not just that. It’s not like just Aurora is going down; the whole market seems to be going down, and this has been going on for a few weeks. We had a nice little bounce, I guess, yesterday, and maybe Friday as well, but generally right now, I’m pretty cautious on Canada. Not for any reason except the charts don’t look that great.

To your second question, I don’t know why people have to do this either/or, like Aurora is the best, or Canopy is the best, or I hate both of them. I don’t get that. So your question really is, do people have an alternative now that Aurora and MedReleaf and CanniMed combined is now bigger than Canopy? I don’t think that even matters. I mean, both those stocks have been highly liquid; both those companies have raised capital immensely and at progressive levels. Both those companies check every single box that anybody could want from a company. It doesn’t mean their valuation is right, but they’re multiple platforms, they’re global, they have the extracts – they got it all. Doesn’t mean they’re the best investments, by the way, but…

So I don’t really see this as being negative for Canopy, if that’s where you were going with it.

James West:    Okay. Great, all right. Well, Alan, that’s been fantastically taking 30 minutes of your time, more or less. We don’t want to wear out our welcome with you, and as usual, I really appreciate your participation, as does our audience. And we hope to come back to you often.

Alan Brochstein:    Great, sounds good. Thank you, and it was nice to meet you.

James West:    Thank you.

Ed Milewski:   Thanks, Alan, nice meeting you.

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