Alan Brochstein on Tilray Inc (NASDAQ:TLRY) Free Trading Stock and Market Optimism
420Investor and New Cannabis Ventures founder Alan Brochstein addresses Tilray Inc’s (NASDAQ:TLRY) (FRA:2HQ) free trading stock and the likelihood of increased consolidation in the cannabis space in 2019. Brochstein cautions viewers that the free trading stock that will be available this month is not a significant amount when compared with Tilray’s total number of shares; however, it has been acting as a drag on the company’s share price. Brochstein believes Tilray’s stock should never have reached the heights it did but indicates the company can still grow into its current valuation. Brochstein sees potential for mid-tier LPs to merge into US companies as the valuation gap between the American and Canadian cannabis companies shrinks. He also believes American MSOs will see a lot of organic, state-by-state growth in 2019 and this will also spur M&A activity.
James West: Hey Alan, how are you today?
Alan Brochstein: Hey, it’s great to be back again.
James West: You bet. Alan, let’s start with an overview, I mean, the market’s looking pretty good in cannabis going into Q1, 2019. All of the stocks that are trading in Canada that are US operators in particular seem to be very positive today. Do you have any insight as to why that might be?
Alan Brochstein: Well, I mean, I think people liked that GTI acquisition today, getting into Connecticut, and for the overall market, I think it’s a reminder that there’s a lot of growth ahead, and I’d add to that as well, Origin House, which used to be CannaRoyalty, talking about receiving takeover bids, and I heard some of that, by the way. So I think those of things kind of, you know, set the tone for optimism here in the United States.
And remember, the end of the year was just horrible for some of these companies. Like, a lot of them came public – like, look at Acreage. I know people very excited about Acreage, it comes out at $25, that’s $25 USD, and then it drops 50 percent and it now it’s back. And so we’re seeing a lot of that, and people are getting a little bit more comfortable with the calendar flip, that some of the selling at the end of the year should be over. I think that’s what’s going on.
James West: Mm-hmm. So do you think it’s potentially likely that a lot of these Q4 IPOs that came out and promptly underperformed are likely to deliver some good performance in Q1, 20189?
Alan Brochstein: I think so, and I think what’s going to make this year work or not work for them is just to show being growth. We already know there’s going to be big growth among some of the leading Canadian LPs, but just because of legalization and what that means for their revenue ramp. And we have some pretty sexy revenue stories herein the United States, and I think your audience needs to understand things are different. In Canada, there’s really three markets: there’s the medical market there, which, you know, is getting pretty mature; there’s the new, adult use market, which is just taking off but nobody has supply, and then of course, there’s the global market, meaning Germany but other places as well.
But here in the United States, it’s multiple markets. We’re coming off of a really rough year in California, so things are probably going to pick up there now that these regulatory issues have been addressed for the most part or understood better; but we also have a bunch of states ramping up, and you know, I mentioned GTI earlier, you know, and Harvest is another one I would mention – these companies are just snagging new licenses in Pennsylvania, for instance. In other states, as well. So there’s going to get a lot of state-by-state growth.
And so we have that, just that kind of organic growth where they win licenses, and there’s also the M&A aspect; we’re seeing a lot of M&A. The MPX/iAnthus deal should close I think later this month, and then there’s also up in Canada, a couple of SPACs that were done – they trade on the NEO, of all places, which has not been a very great place to trade, but there’s two SPACs: one of them is buying Colombia Care, and one of them is buying five different companies, and these companies have big revenue positive, EBITDA…so I think it’s going to be a great year for people focused on both sides of the border.
James West: Mm-hmm, sure. Do you think that the US is going to be a little bit more, let’s just call it, a little bit more effusive in terms of share price appreciation relative to the likelihood of that happening to the Canadian LPs whoa re obviously dealing with a much more mature environment and a more competitive sort of backdrop?
Alan Brochstein: You know, I think Canada is going to do all right, but if I had to pick one over the other, I mean, I’ve been saying for a while, so nothing new there, I mean, the big difference has become the ability to raise capital that just hasn’t been there before. And so better liquidity, we’re seeing – so used to be, nobody would want to play with an OTC ticker. When I say nobody, it was just for retail investors and not really for family offices or anything like that.
And now we’re seeing huge volume in some of these CSE-listed, MSOs, multi-state-operators who are seeing the volumes sometimes bigger on the OTC as well.
So we have capital raising and better liquidity and I think the valuations are a lot better. And just as a reminder, as I always say, in Canada, you can sleep well at night. You don’t have to worry about the Attorney General knocking on your door like we do here potentially. I don’t think there’s going to be any issues, but you know, you should always be aware of that risk, and because of that, there’s going to be a valuation gap, but I’ve been saying for a while that this valuation gap is way too big. Way too big on the gap.
James West: You mean the discount of the US-operating Canadian-listed companies relative to Canadian operators?
Alan Brochstein: Yeah.
James West: Okay. I mean it seems to me if you looked at the OTC volumes increasing, the increasing availability of cash and private placements going into cash and US MSOs, it would seem to me that the issue with the Attorney General knocking on your door at night is becoming more and more a thing of the past. And, I mean, obviously the largest, oldest capital pools are still very much on the sidelines, but it seems that sort of the mid-market is coming further down into the cannabis space to the point where, is it just a matter of time till Canada loses its sort of monopoly on financing these companies?
Alan Brochstein: Well, when you say on ‘financing’ them, there’s not a lot of US financing going on; it’s all going though Canada, if that’s what you mean. We’re not seeing the investment banks here raise money.
James West: Well, except for a couple in the case of, for example, Cowan and Company.
Alan Brochstein: Not the US companies. There’s no investment banking unfortunately.
James West: Really?
Alan Brochstein: Cowan is working with Tilray and Canopy and, you know, those are Canadian companies. Cowan is not touching the US, really.
James West: Okay. Um, okay, interesting. So then, in terms of the –
Alan Brochstein: The Bay Street boys are fine.
James West: [laughter] Well, they’ll be happy to har that. So then you think the investment banking side is going to remain very much a Canadian opportunity and a Canadian game at this point going into 2019?
Alan Brochstein: Oh yeah. It don’t think that’s going to change until we get some sort of legislative change that makes these concerned institutions in the United States really crystal clear that they can do this, and right now, that’s not the case. And so there was actually a US investment bank that was building a research team, and they just ditched it. I know Cowan, they’re here, and they’re doing a great job, but they’re not doing the banking for US companies.
James West: Mm-hmm. In terms of private family offices, they seem to be wading more into the fray in the US side, like the Shot & Steam Family, we saw, is in there. Is that something that we can read into something into the future going forward that the lack o a Federal framework does not necessarily preclude the participation of larger capital interests in the United States at this point?
Alan Brochstein: That’s a good point – think that’s definitely going on. I think one of the interesting things about cannabis is, unlike bitcoin or something like that, people can relate to it, whether they don’t use consumer themselves, not as likely, but everybody probably knows somebody that’s really benefitted from medical cannabis, and you know, unfortunately it’s still murky with the new ‘hemp is legal, but what the heck is CBD’? it’s to be determined. I think this has been a very frustrating improvement for everybody that there’s no improvement yet, but to the extent that we see more proliferation of CBD, and we’re going to see that through GW Pharma and Epidiolex as one example, but this is a very fast-growing area. So it’s getting harder and harder for people not to be aware, not to be touched in their lives by at least a few examples of people who have really benefitted from medical cannabis.
I hear from people all the time – I guess everybody knows what I do, and so that’s what they talk about, and I’m always hearing these anecdotal stories, and I think that helps. There’s a lot of mission-driven investing going on among some of these larger family office types; we’ve seen, you know, there’s a wonman in Philadelphia, Lindy Snyder, and her father owned, I think, the Philadelphia Flyers, if I’m not mistaken – the Snyder family from, I think Comcast, I might be wrong about that part. But the point is, that was a little bit mission driven, and we see that sometime in CEOs, like Jeanette VanderMarel, co-CEO of 48North now, and we see it in the investors too, James, where people can really relate, they have a personal story, or they know of somebody that has a very personal story where they’ve benefitted from medical cannabis.
James West: Right. Well, I’ve got to say that that’s become almost background noise in my universe every day; every day, somebody’s telling me a story about somebody: aunts, uncles, cousins, nephews, returning vets, etcetera.
Changing gears a bit here, now, let’s talk a bit about Tilray. Tilray’s got some new stock coming free trading in the near future here, and we can kind of see that it’s struggling in the $70 a share range. Is that because there’s this perceived overhang in Tilray shares coming to the market?
Alan Brochstein: Yeah, I think so. I think, you know, when that stock came out, I liked the company; I still like the company, and I thought it was, you know, maybe a little expensive, but I said at the time, this company checks every box. And since then, they’ve checked more boxes or gone a little bit deeper. Obviously they have a partnership with Anheuser-Busch’s parent company, InBev. So there’s been, you know, positive developments, I’d say, for the most part, and they’re one of the larger revenue generators.
But the stock should never have been at 300, it should never have been at 300, and it probably never should have been at 100, so I think it needs to find its equilibrium. And you know, there’s a real disadvantage to having your stock be too expensive, because you won’t be able to do deals. You won’t be able to get people to take your stock, and I think Tilray may be encumbered a little bit by that.
But just so everybody understands, this is not a ton of stock. That company trades a couple million shares a day on average; sometimes as little as 1 million a day, sometimes as much as 3 million, and the unlock is, I believe, 7.2 million shares or something like that? Plus, that’s from a $7 and change financing round from a little bit less than a year ago. But plus, there are other shares that will be coming unlocked.
Privateer holdings I don’t think will be selling any stock, but there may be some distributions, and those people could sell, we’ll see. But these types of events, people pocked up on it, they usually sell the stock in advance, so usually the best time to buy an unlock is like the day before. It’s really weird; I don’t know if you watch that, but everybody’s always afraid of these unlocks and the stocks will sell off in a day and then they seem to find their, you know, equilibrium.
James West: Right. So in your estimation, is Tilray at roughly call it $70 a share fairly valued, or is that still a bit expensive in your estimation?
Alan Brochstein: I don’t think so.
James West: No? Okay.
Alan Brochstein: Well, look: I want to be really humble about this, because you know, I think it’s hard to value these companies. You can look at things like forward revenue projections by analysts, and if you do that, then you’re going to say it’s really expensive and you would turn to some of the other peers, right? For market cap, it’s way higher than the projected revenue compared to its other peers. For example, there’s a lot of things that we don’t know. For example, if you were trying to do the analysis of, is Canopy Growth expensive a year ago, you would have said well, you know, they have this little investment by Constellation, and you could say that might, you know, materialize into something else. Well, low and behold, Constellation puts a ton of money into the company, takes control of it, so things change.
And just like Tilray, like I thought Tilray was okay at $20, and then it should have gone up after August 14th when the market started to take off. And they have a partnership, but they didn’t get any equity investment, or anything like that, so I think the number is lower, but I don’t know if and when it gets there. And I will say this: that I’m pretty confident that that company can grow into this valuation over time, I just don’t think it should be here today.
James West: Right. Okay, great. Do you see any other companies out there that you could refer to, Alan, as being a bit of a discount for investors that they might be able to take advantage of?
Alan Brochstein: Yeah, there’s a bunch of them. I think, so I came into the year kind of with the thesis that kind of in the middle, some of these stocks were beaten up is kind of the baby in the bathwater syndrome, and some of the smaller ones, too. I think it’s going to be hard for investors to wade through, if you take out the top three or four of the 46 LPs that trade publicly, so you’re left with 42 companies trying to get a really good handle on all of them, that’s my job and I have a hard time with it. So I think makes sense that there’s going to be some oversights by investors, and without naming names, that’s where I’m kind of focused in my model portfolios, in some of those medium companies. And I think I said last week, I see the potential for maybe some of them to merge into US companies through consolidation. CannaFarms was acquired by VIVO, that used to be ABcann; we’ve seen, so a year ago, Aphria brought Broken Coast, so we’ve seen some M&A. More recently, Emblem announced it was going to merge with Aleafia – I don’t know if that deal with go through.
So we could start to see some consolidation. I think the problem is, many of these companies, nobody wants them. I’m not going to tell you which ones, but we could see some of these companies stay cheap for a while.
But I’d like to see, to me it’s disappointing; a lot of these companies have been around since 2014 with their licenses; I mean, I’ll pick on one: Emerald. And their revenue is just like nothing. Like, what have they been doing the last four years, it’s almost five years. I don’t ant to pick on just them, there’s a bunch of companies just like this, and I think that some of these companies are really facing existential crisis.
So Emerald, they’ve already hitched themselves to Village Farms, so they’re not in that existential crisis, but some of these other guys that have been around for a while, maybe they need to give up on Canada and just focus on Germany. I don’t know. There’s definitely an existential crisis.
James West: Interesting. Well, that makes 2019 a great year, I mean, in terms of excitement. And also, I guess this is the year the Canadian companies are really going to start to be valued on their balance sheets, isn’t it?
Alan Brochstein: Yeah, well it think this is going to be the year where we see positive cash flow. That’s been another frustrating thing for a lot of investors, not so much for me, but the extent of the cash firms have been problematic. I don’t mind seeing young companies be aggressive in their spending, you know, in front of growth prospects, but this is the year – and we need to see, this week, Aphria report. I would say we need to see some good cash flow generation there. If they’re telling – well, it’s not them, but if people are going to say, well, Aphria – and I always say this too, if Aphria can stand on just Canada, well then they better start getting some better financial performance out of Canada.
I think they will, but this is going to be a year where a lot of these companies, they need to start showing smaller cash runs or move into cash flow generation, or they’re going to lose their institutional investors.
James West: Well, Aphria is projecting roughly $40 million in top line revenue this quarter?
Alan Brochstein: Well, the analysts are.
James West: Yeah. Do you think?
Alan Brochstein: Nobody every used to hit their numbers, but if they had the inventory, and it looked like they did, it seems like they will, because there’s such a shortage right now.
James West: Sure. All right, Alan, let’s leave it there for now. We’ll come back to you soon. Thanks very much for joining me today.
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