James E Wagner Cultivation Among Top ML Junior Cannabis Picks In 2019

Benjamin A. Smith
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Although most cannabis stocks trailed-off badly in 2018, it was especially brutal for Canadian juniors throughout. Receiving the lion’s share of investment outflows once “funded capacity” ceased becoming a thing, the merciless pummeling only ever temporarily abated. The licensed producer squeeze predicted by Aphria CEO Vic Neufeld has indeed transpired. But has it gone too far? Perhaps, and if my thesis is correct, select Canadian junior LPs could be among the sector’s biggest gainers this year.

That’s not to say that all juniors will outperform in unitary fashion—far from it. Many will likely continue falling in lieu of sufficient funding or market differentiator separating their flower or product from the pack. I certainly don’t believe a country of 36 million people requires 140 licensed producers to service them. Invariably, many will meet an unfortunate demise.

But that also doesn’t mean every junior LP will get strangled-out by Big Cannabis either. Given the legal market’s erratic roll-out, widespread reports of substandard product, high-profile crop failures/recalls, and lack of dominant brands, select juniors still have a fighting chance of tapping into a wider audience. Stringent Cannabis Act marketing rules—among the strictest in North America regarding marketing, sponsorship and endorsement—act as a material equalizer in this race.

With that reasoning in mind, I profile one particular company I really like to beat the odds and thrive in 2019. In my estimation, this company combines an attractive valuation relative to the sum of its parts, which are swiftly moving in the right direction. If I’m right in this assessment, it could be among the best-returning Canadian LPs in 2019, as investors start comprehending that not every junior is destined to suffocate.

James E Wagner Cultivation Corp.

From my perspective, James E Wagner maintains several defining characteristics of a long term out-performer in the space.

Nathan Woodworth, President and CEO of James E. Wagner Cultivation, discusses how developing a series of unique technological solutions along with utilizing their brand new proprietary aeroponic production platform

This starts from a branding perspective, where the company’s farming roots go back at least three generations in Canada. The company is named after James (Jim) Ellis Wagner, a now-deceased tobacco farmer born 90 years ago in Port Colborne, Ontario. Unlike other LP’s inbred and marketed through a corporate lens, JWC’s markets itself as a humble family-run business founded on communal values. While it’s uncertain whether such optics will resonate among consumers, few companies offer a contrasting distinction, making JWC unique among the competition. In the marketing world, unique is good, and only JWC can leverage this type of family-oriented branding which remains unaffected from marketing restrictions inherent to the Cannabis Act.

More importantly, James E Wagner is growing a really good product. How do I know without testing the product myself? The science has long since established its growing methodology.

As an aeroponics cannabis grower, it doesn’t use soil or aggregates in the growing process. This medium eliminates rooting variables from the growing equation, yielding robust crops which are consistent and deliver maximum terpene and cannabanoid profiles. This provides JWC with a potential competitive advantage, as discerning consumers seek the greatest “entourage effect” flower on the market. James E Wagner’s growing methods are very efficient, producing 5.2-6.4 crops per year—significantly above the industry average.

Evidence suggests that others are buying into the concept as well. Five weeks ago, JWC announced it had entered into a non-binding letter of intent to licence its GrowthSTORM system & SOP’s to Wellness Farms Inc. for use at its proposed cannabis cultivation premises. Details on the royalty agreement remain scant, but the company expects more licencing arrangements in the new year. Buoyed by the technological advances of its GrowthSTORM Dual Droplet System, JWC is about to conduct a large study to prove it has the most advanced aeroponics platform in the world. Results are expected to be published in 1H 2019, and should work towards validating the licensing side of their technology.

Shifting gears to the company’s income statement, JWC is also well-positioned in that regard. While the company lost $2,305,02 from operations last quarter, this will narrow as 24 flowering rooms come online in Q2 2019. These rooms will give JWC the ability to produce hundreds of kilos every month, exceeding the point where non-scaling operating costs prevent them from being revenue positive. In other words, JWC’s active cash flow by spring 2019 will drive completion of the expansion facility (JWC 2) from production within the space. Even if the company’s current cash and cash equivalents totaling $8.5 million fall short, JWC has an existing drawdown equity arrangement giving them the ability to access $2M funding tranches on short notice. James E Wagner is not in a situation where it will dilute itself to smithereens—or at all necessarily.

Additional catalysts in 2019 include likely recreational product introduction at the Ontario Cannabis Store, once JWC 2 is built and licensed. Investors can look forward to related extract products in 2019, and a wider array of products as edibles regulations come into effect. Organic certification is also on the radar, although exact timelines are dicey.

All the while, JWC  benefits from advisory support from core partner Canopy Rivers Inc.—an underestimated advantage working in its favor.

Final Thoughts

Originally, this article was intended to be a piece highlighting three top stock selections. But this must come another day, as I’ve had too much to say regarding one company already. Quite simply, JWC’s value proposition seems tantalizing at these levels, if one if willing to wait through the build-out. That’s scheduled to finalize in about 12-months—within the 6-12 month discount window the market generally starts pricing-in such events.

Ultimately, James E Wagner’s story belies its modest aggregate production capacity (around 32,000kg/annualized once JWC2 is complete in 12 months). It’s about a potentially differentiating brand, proprietary cannabis growing technology, yield efficiency and quality that will likely outpace its competition. It’s about product so clean that irradiation is often not necessary. Although ascribing peer comp valuations is beyond the article’s purview, I believe fully-diluted valuation in 18-24 months will probably be closer to $200-300 million than the $75.50 million afforded today. There are no funding issues clouding its path to prosperity.

Investors should keep in mind that with all the positives working in JWC’s favor, the cannabis market remains ensconced in a searing bear market. The company is subject to exchange, liquidity, and market risks like all others. There’s also broad market/recessionary risks the sector must navigate; speculative junior stocks generally do poorly in these periods. Please conduct your own due diligence before acting on any information gleaned from this page. JWCA has appreciated 32.07% over the last two session, casting doubt whether better accumulation points can be achieved.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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