March 29, 2019

420Investor Alan Brochstein on Ontario Retail Opportunities and Alcanna Inc (TSE:CLIQ)

Midas Letter
Midas Letter
420Investor Alan Brochstein on Ontario Retail Opportunities and Alcanna Inc (TSE:CLIQ)

420Investor and New Cannabis Ventures Founder Alan Brochstein discusses investment opportunities ahead of the bricks and mortar retail cannabis launch in Ontario. Brochstein emphasizes that retailers may be able to command more value in Canada as the illicit market in the country is displaced. Brochstein believes Alcanna Inc (TSE:CLIQ) (OTCMKTS:LQSIF) has been overlooked by retail investors. While the company’s stock price plummeted in December, the alcohol retailer’s market cap is $180 million and does not take into account its burgeoning cannabis retail operations, according to Brochstein. Alcanna already sells cannabis in Alberta and has partnered with a retail lottery winner in Ontario. He also shares his thoughts on Gotham Green’s investment of $250 million dollars in MedMen Enterprises Inc (CNSX:MMEN) (OTCMKTS:MMNFF) (FRA:0JS). Brochstein highlights that the investment signals a note of confidence in the company from one of the industry’s preeminent investors.


James West:   Alan Brochstein joins me now, CEO and publisher at 420 Investor at Alan, welcome back.

Alan Brochstein:   Hey, thanks. Good to see you, James.

James West:   How are you?

Alan Brochstein:   I’m doing great.

James West:   Awesome. So Alan, give me an overview: what are you seeing in the market? I mean, obviously we could talk about the end of – I saw your comment on Twitter that cannabis investors should be glad that it’s over, which is, you know, fair enough. How has the end of the Mueller investigation overall affected the cannabis stock complex?

Alan Brochstein:   Yeah, I don’t think it’s a big issue, but I think it’s important to remember: a lot of people have strong political views about our President, and I won’t go into my own – it’s not important. But I think one of the big challenges for our industry is, if he were to be removed from office or anything like that, it would leave a President Pence. And I can assure you it’s hard to figure out where Donald Trump comes down on certain issues in terms of legality, and even for medical he seems to be staying out of the way, and it’s not an issue at this point. And he could embrace it, for all we know.

But I can assure you, a President Pence would not be good for our industry.

James West:   Right.

Alan Brochstein:   So I was glad to see that yesterday.

James West:   Okay, great. So with that, then, in the rearview mirror, what else are you seeing this week in the cannabis space that is exciting you, worrying you, etcetera?

Alan Brochstein:   Sure. So one of the topics that I started to approach back in September was the retailers in Canada. And at the time, obviously, that was ahead of legalization. Most of these companies weren’t well-known; a few of them were public. Now we have more public companies, and one of the ones that I picked up on early that was just a total disaster was Alcanna. This used to be National Liquor Stores North America or something like that; they changed their name last year.

And just to show you how bad it is, I think Aurora invested in them at like 14 or something like that, and it trades at 5 now, and that’s over the course of the last, maybe, 13 or 14 months. And so you know, I usually don’t go out publicly with ideas, I usually share my ideas at 420 Investor. But one that I think is, I don’t think I’m going to move the price by talking about it, is this Alcanna. I talked about it in my newsletter yesterday, New Cannabis Ventures.

Without getting too much into the detail, but I can share some more detail with you because, James, I’m sure you’ve been there before. You get involved in a theme, in a stock, and it’s not working out, and you have to figure out, well, did I make a mistake? Or is this just a better deal? I’ll say I made a mistake, because I felt that the retailers were going to gain some attention, and I was early. And the reason for that was obviously what happened in Ontario and then in Alberta, with delays on licensing – kind of messed it up, and then the supply shortages and all that.

But I would suggest, whether it’s Alcanna or any of these retailers, that people who are following the Canadian LP space open their mind to the possibility that these retailers may be able to command more of the value in that market. They obviously don’t have the plays on, in some cases, in the United States or globally that some of the LPs have; but the retailers are interesting, because the dynamics in Canada, as you know, are just horrible. The websites for each of the provinces does no justice to the product. And so any sort of new entrant to cannabis, or somebody that hasn’t used cannabis in years, who wants to, is going to have a hard time navigating those websites, at least initially until they get up to speed.

And so because of that, these retailers, I think, are going to really play an important role in helping educate new entrants to the market. And I think also, you know, we know there’s a very large gray market and illicit market in Canada, and for that to be displaced, you know, the prices have to be right – including the taxes – and it has to be convenient. And I think some of these stores will be able to pull that off.

So long story short, I think that the sector in general is definitely worth following. A few stocks are really doing well and seem expensive; Alcanna, just to summarize the story, this is a turnaround in its core business of alcohol sales, primarily in Alberta. They posted 7 percent plus same-store sales growth last quarter; this was just revealed last week, actually, or maybe it was the week before. This is like the best performance they’ve had a in long time, and when I look at the valuation of this company, it seems like you’re getting the cannabis part for free. The market cap is about 180 million CDN, I think, and you can look at their tangible book value and all that, and you come up with – it’s a very defensible valuation that doesn’t even take into account their cannabis business.

You can look at other cannabis retailers, and their market caps are even higher than Alcanna with that big liquor business that’s now growing again. So I think that’s an interesting play with an interesting sector, James.

James West:   Yeah, actually, funny you should mention Alcanna. I’ve had James Burns on here in the past, he’s the CEO, and in fact, I’ve been following the story closely. There was concern among shareholders about their ability to service some of the credit facilities that they had, because of the share price deteriorating so badly, and that is actually, I think, the primary cause of the price deterioration. You know, they have this mutually sort of confirming effect, and just after that company announced its annual results, they announced a whole bunch of reorganizations of these contracts. So that risk has, for now, been eliminated.

And so when you look at the improving numbers from cannabis sales, which at this point liquor sales in 2018 were 182 million; cannabis sales were only, where did it go – I had it in front of me, here – cannabis sales were –

Alan Brochstein:   It was just a few months.

James West:   Just a fraction…cannabis sales were, yeah, 7.8, call it 8 million, and –

Alan Brochstein:   8 million.

James West:   Yeah. So I mean, as a percentage of sales, it’s still, like, 5 percent or less. So exactly: the cannabis side of the business is free, and I don’t know how many liquor stores they have in total, I haven’t had a chance to go over the whole thing, but I think you’re absolutely right and I’m so pleasantly surprised that you actually talked about it in your newsletter, because I think anybody, you know, that dives in at this point is probably going to be quite happy. Full disclosure, I’m not a shareholder, they’re not a client; we don’t have any sort of financial interest in the company whatsoever, so I can say in all honesty that –

Alan Brochstein:   Neither do I.

James West:   It’s just looking good!

Alan Brochstein:   Yeah, and I would tell your viewers as well, part of why it got crushed was, they cut their dividend, and I don’t know why they did it at the time they did it. It wasn’t a surprise that they did it, but you know, the markets were melting down in December, whether we’re talking about cannabis or the broader markets, and they got rid of their dividend. And a lot of people owned the stock for the dividend, and they weren’t prepared for it, unfortunately, and so the stock ended up going way down. It’s crazy.

And so it’s started to rebound, but I mean, I’ll just make it really simple: I think you can look at the company, forget they’re a cannabis company, come up with a valuation that I think is where it is now, and then you go and you look at some of the other cannabis retailers – and I’m not saying they’re the best, but I think they have the chops to pull it off, and they’re already up and running in Alberta with five stores. They’re one of the retailers that was able to get one of these lottery Ontario stores as well, and you know, for the future for the cannabis, we have to get the licensing to open again in Alberta and to really open up in Ontario.

But the company seems to have access to capital. You mentioned that point they talked about on their call, and I had a concern about the Aurora ownership that, you know, maybe Aurora would be a forced seller; I’ve confirmed that’s not the case. So this is right up my alley. It’s growth at a reasonable price, now.

James West:   Right, okay. Well, we’ll keep that one on the ticker. It’s actually, it’s been on the ticker that streams across our show every day for probably the last year, just because since we interviewed James Burns, I was super bullish on the idea, and then, of course, the market did what the market does.

Alan Brochstein:   It didn’t work.

James West:   Right. It hasn’t worked yet.

Alan Brochstein:   Right. Well, let me say another thing: so we know that the cannabis space, there’s some institutional investing. Certainly a name like Alcanna, trading on the TSX, can get some institutional sponsorship; but the reality is, our sector is driven by retail traders, and I know that when you take something like this, that’s not a pure play, it makes it really challenging for a lot of people, and they’d rather just buy the pure play. And I appreciate that sentiment, but if you can get this other thing for free and they’re paying up for the pure play that maybe isn’t any better, it seems like a layup to me, James.

James West:   Yeah, you bet. And in the spirit of retail storefront, you know, we saw MedMen got a $250 million cash injection last week, and we did discuss that a little bit, but do you think that, you know, the investor in MedMen was a well-respected and seasoned, as far as that’s possible, cannabis institutional investor. Do you see that that has improved the outlook for MedMen going forward, and made it a better investment proposition?

Alan Brochstein:   So a resounding yes, to be real clear. I think it was two weeks ago, I kind of defended MedMen. And I have no reason to defend them or not defend them, but people were writing them off as dead, and saying they wouldn’t be able to raise money. And so this puts the kibosh on that talk. I think everybody can appreciate some of the challenges that MedMen is facing right now, but at the same time to appreciate the huge opportunity that they have, as well as to put in perspective that their valuation is way below peers. And, you know, there’s been a lot of excitement in the space, in the MSO or multi-state operator space recently; we’ve seen a lot of these new issues that struggled with that fourth quarter deluge of reverse takeovers, not only get back to their deal price, but explode.

We’re talking about Cresco, Harvest, Curaleaf: those three have totally rallied back through those overhanging prices, and so at the same time, MedMen is just bouncing along the bottom. So if your viewers aren’t familiar with Jason Adler and his team at Gotham Green, I consider them one of the preeminent investors in the space. Jason is a humble guy; he would say he doesn’t deserve it. Whatever. He happens to be that, and if you want to look at their success, all you have to do is look at Cronos. They were the people who came in and took over Cronos Group when it was PharmaCann and failing. They recapitalized it at $0.20; it’s been a 100-plus bagger. So they know what they’re doing.

I know, you know, I’m close with them; I was concerned that Cronos – I’m sorry, not Cronos, it’s the Gotham, maybe would be turned off by some of the drama that we’ve been seeing, but I think this is…you can look at this $250 million financing as having two key things. One, it takes off the table the idea that MedMen is not a going concern, at least for now. And two, it tells you that a very serious investor thinks that all this drama is just that: it’s drama, and not going to be consequential to the company.

So I think MedMen’s made a lot of mistakes, and I’m glad that I don’t have to defend them or attack them but just observe that it’s been a rough go since they went public. I think they’re learning, I think that this is a real validation about the future of MedMen, and I kind of like the stock down here.

James West:   Yeah. That’s true, you know, the – I think from where I sit, the great sort of, the biggest flaw in the whole MedMen value proposition from the outset has been the dual ownership structure, the super-voting structure. Now that I’ve kind of gone, well, going to like it or lump it, it’s not going to change, I kind of now look at MedMen in that sort of regard, and it doesn’t bother me so much that it’s, you know, it’s not like there’s any serious risk that the guy’s going to go out and start raising, you know, trying to cross cannabis with soybeans or something loony tunes like that. They’ve got a business plan they’re focused on, they’re executing; obviously a quarter of a billion dollars is going to help them get there, and I’ve been to the MedMen stores and I always have a pleasant experience.

So there’s no reason to assume that their sales aren’t going to grow as they grow, so I’m with you there. They were sort of the favourite whipping boy of the market for a while.

Alan Brochstein:   For sure.

James West:   Great, Alan, well then, so you know, here’s a question for you: if we were to look at the market in segments – so we’ve got primary production, you know, cultivation of cannabis. You’ve got extraction. You’ve got consumer packaged goods, and you’ve got pharmaceutical products, technology, etcetera. Of those four sort of sub-sectors, which of those four excites you the most, or do they all sort of have their own individual value propositions?

Alan Brochstein:   Yeah, I would say the latter, and I would say you really ought to include a fifth bucket, which is kind of the ancillary space. And one of the things that happened last week that I found interesting, that you may not have heard because it’s here in the United States, is Green Lane is going public. And so they filed an S1 – this is going to be a NASDAQ IPO. I haven’t weighed in at all, but I just wanted to bring everybody’s attention. If they make it to the NASDAQ, there’s another vehicle in – so one of the things I’ve seen is, the trading volumes in the United States for cannabis are really picking up, and while they’re healthy in Canada, we’re seeing names like Aurora, Cronos, Canopy Growth, even names like Curaleaf or Charlotte’s Web, we’re starting to see an increasing proportion of the trading in the United States.

Some of those names I just mentioned aren’t even on the NASDAQ or the New York Stock Exchange, like Curaleaf and Charlotte’s Web. In this case, get an ancillary name with a lot of revenue – they reported about 180 million pro forma, 178 million actually, in revenue in 2018 – that might have been, yeah, 2018, and I think this is going to open up people’s eyes to other ways to invest in the space.

And I’ve mentioned to you before, they’re a client, and I have a big position in KushCo Holdings, used to be Kush Bottles. There’s another company, GrowGen. MJ Freeway is going public through a NASDAQ vehicle, hopefully that can close. But the point I’m trying to make is, the NASDAQ is opening up. I think a lot of investors would feel more comfortable not trying to make that decision that you just asked me to make, like, do I want to be on cultivation, do I want to be on processing, retail, what have you. And so these ancillary companies, if they have good liquidity, trade on major exchanges and have gazillions of revenue, I think that’s going to be an interesting dynamic for the whole market, James.

James West:   Yeah, wow. Okay, that’s great, Alan. I think that’s good enough for this week, and we’ll come back to you again soon. I really appreciate your input, thank you so much.


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