February 27, 2019

420Investor Alan Brochstein on Strong Medical Cannabis Performer CannTrust Holdings Inc (TSE:TRST)

Midas Letter
Midas Letter
420Investor Alan Brochstein on Strong Medical Cannabis Performer CannTrust Holdings Inc (TSE:TRST)

420Investor and New Cannabis Ventures Founder Alan Brochstein dissects the latest financial reports in the cannabis sector. He highlights that Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) and Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) together secured 50 percent of recreational sales in Canada. Brochstein believes the era of hockey stick growth has begun and notes more growth can be expected. He’s surprised Canopy Growth’s medical side has slipped for the second straight quarter and questions the company’s recreational focus. Brochstein is impressed with NYSE-bound CannTrust Holdings Inc’s (TSE:TRST) (NYSE:CTST) performance in the medical space. Brochstein is enthusiastic about the crucial role biosynthetics will play in the extraction and derivative space but worries this will create stranded assets for cultivators.


James West:   I’m joined now by Alan Brochstein, uber-analyst of cannabis from America, and he’s in Houston, Texas today joining us via Skype. Alan, how are you today?

Alan Brochstein:   I’m going great. Good to see you, James.

James West:   It’s always great to see you too. Alan, I understand, let’s start it off with a little promo here: you mentioned that you’re going to be here in Canada in April for an event.

Alan Brochstein:   I am. It’s my 29th anniversary, and I’m going to be there with my wife, but I don’t think that’s what everybody cares about. Benzinga was such a great conference last time even though you weren’t able to make it, and they’ve decided to come back April 17th and 18th, after a very successful Miami event. And I think they’re going to have another one in October in the United States, as well. So yeah, put it on your calendar.

James West:   Sounds like fun, I will definitely be there! Alan, let’s cut straight to the chase here: Aurora and Canopy both put out financials. Collectively, they sold, the two companies were 50 percent of all cannabis sold in Canada. Aurora had 55 million-ish in top line revenue; Canopy, 87, was it? They both had still substantial losses, but what’s your take on sort of reading the tea leaves between these two behemoths of cannabis globally and their progress towards ever-greater amounts of revenue?

Alan Brochstein:   Yeah, it’s pretty exciting. We’ve been waiting for this for a long time, to see this big hockey stick in revenue, and I think the good news is that there’s more to come. I think investors this year are going to be very focused on more than just revenue. And fortunately for both of these, as you said, behemoths, there’s a lot of different buckets of revenue, and I found one of the more interesting things to see who focused on what, because the three big buckets are the consumer market in Canada, the medical market in Canada, and then the global market. And you know, both Canopy and Aurora are tops, if not at the top, for the international, and that’s still small and growing.

I was kind of surprised to see, and I still have not figured it out, honestly, why Canopy Growth’s medical business in Canada fell for the second straight quarter. So there’s a difference, and I don’t think there’s a right or a wrong, but investors can probably spend a little bit of time trying to figure out which is the smarter move: to devote more resources to the consumer market today, which Canopy has done, or to be like Aurora and really put the pedal to the metal on the medical side. And I’ll throw in a little plug for CannTrust, which is uplisting to the New York Stock Exchange; nice to see that. Not a client of New Cannabis Ventures, so I’m happy to plug them just because they deserve it.

They apparently, I just watched an interview, it was probably with you – actually it wasn’t, but it should have been – their medical business appears to be growing, James. So this should be interesting as well, because they’re on a different calendar. You know, their year-end is December 31st, and they’ll be reporting in March, presumably, and we’ll learn, I believe that they picked up some share in Canada. And I think this is fascinating to think about, you know, the longer-term implications of who’s going to focus on what; and I’ll leave it at that, for now.

James West:   Right, okay. So do you think that the fact that the medical market is sort of growing and now we’ve had the first full quarter of the recreational market reported in the financials of these two companies – do you get the sense that the Canadian market is going to be all right, or do you get the sense more towards the idea that it’s overvalued and investors need to be careful?

Alan Brochstein:   You know, you read the cover of Barrons, and I think they were picking on US companies this weekend, and it was, you know, a long weekend for both Canada and the United States. Certainly some déjà vu to a year ago, when Bill Alpert talked about how overvalued all the Canadian LPs are. And even with the scandal at Aphria and what have you, you know, Canopy and Cronos have lifted that boat a lot.

So I think investors are always wise to understand valuation, and not wise to obsess over it. I think this year in Canada things, as I’ve been saying, things can only get better. It is so messed up, it’s sad. I don’t know if I could have designed a worse rollout than Canada has done. I give them credit for the absolute stupidity that’s been engaged in the way they’ve gone about it, especially in Ontario, as we all know.

So I think investors are going to be very pleased that it can only go in one direction, and I remind everybody that, you know, for many companies, Canada is it, and even maybe just the medical market is it. It’s going to be very fierce competition in the adult consumer side, but the distribution… you know, I listened to, I think it was Matt Bottomley yesterday, and, you know, he pointed out, you know, that distribution is just horrible. I’m here in Texas, I don’t get to walk around Vancouver or Alberta, but even in the more progressive provinces that have seemingly doing it right, but were limited by these supply constraints, even there, there’s really no reason for people to be using these stores yet. They’re just not there.

But if you look out, it’s going to be pretty awesome over time. You will have, you know, more cannabis dispensaries in Canada than you have Starbucks, probably. So I think this year’s going to be a lot better. Many of these companies will see some progress on the global landscape. And, you know, a year ago we wouldn’t have been talking about this, but now we can talk about either these front door or back door US plays, and everybody knows that’s where the big dollars are – or some of the big dollars, Big Pharma might be another one.

So, James, I’m pretty optimistic, actually.

James West:   Sure. And what’s your take on the proliferation of the biosynthetic business company developers?

Alan Brochstein:   Yeah, that’s a good topic. I’ve been writing about that for actually a couple of years now, and I think there’s a couple things to keep in mind. First of all, if this is successful, and it’s not proven yet that these alternative forms using things like e.coli or yeast to generate cannabinoids rather than cannabis – if it works, this is really a good thing. I mean, unlike synthetics, I know a lot of people don’t like the sound of this, but these are natural cannabinoids. And there should be no difference between the cannabinoids produced by cannabis and them.

And they can be reconstituted with terpenes, and so you can basically look at probably half the industry moving in that direction, and that’s probably going to be a better thing. And then for the pharmaceutical industry as well, it’s probably going to be a better thing. And the implications are mixed for companies. If you’re out there telling investors ‘we’re just going to be weed growers’ you’re screwed. That’s not going to work. I mean, there will always be a place for flower, and you can’t create flower through this biosynthesis, but, for half the market that will be extracts and edibles, and for the pharmaceutical market, this is a great thing.

So as an investor, you need to be aware of, you know, is your company going to have stranded assets? Are you going to have these cultivation facilities that are, you know, you’re competing for a much smaller market than you thought, and you’re not taking your feedstock and feeding it into the extraction companies.

So I think it’s an interesting topic; there’s a lot of capital now being poured into it. Nobody is at scale, to the best of my knowledge, and I continue to think it’s something we need to monitor, but it’s a longer-term concern, not a short term one.

James West:   You bet, Alan. Okay, those are great insights as usual, Alan. We’re going to leave it there for now; I’ll come back to you in due course. Thank you for so much for joining me today again!

Alan Brochstein:   All right. Stay warm.


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