TSI Cannabis Investing Bulletins August 29, 2018

Bulletin 3, Volume 1

TSI Cannabis Investing Bulletins has reports and recommendations on two featured stocks: one a medical grower that has just completed an IPO on a major U.S. exchange, the other a Canadian software specialist entering the e-commerce side of the marijuana business. You also get further insights on the investment outlook for the cannabis industry; five of the most timely news stories on cannabis; plus, our exclusive Cannabis Quality Ratings System for marijuana stocks, and more.

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Table of content


Marijuana Producer

U.S. IPO will help medical producer expand into recreational cannabis

Established as a medical marijuana producer in 2013, this Canadian company recently completed an initial public offering on Nasdaq—only the second cannabis company to list there.

The proceeds will help it expand its facilities and move into the production of recreational cannabis ahead of legalization in October. The stock has more than tripled since the IPO, but like other big producers, the company will need steady revenue growth to justify its current high market cap.


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TILRAY INC., $62.13, symbol TLRY on Nasdaq (Shares outstanding: 76.5 million; Market cap: $5.9 billion; TSI Cannabis Quality Rating (CQR):  www.tilray.com) is a Canadian medical marijuana producer, which began operating in 2013. It also sells related accessories. The company’s grow facilities are in Ontario, B.C. and Portugal.

On July 19, 2018, Tilray completed an initial public offering of 10.35 million common shares at $17.00 a share (all amounts in U.S. dollars).

Seattle-based investment firm Privateer Holdings now controls about 82% of the shares (and 93% of the voting power).

The company will apply the gross proceeds from the IPO of $175.95 million to its $37.0 million loan from Privateer. It will also earmark $52.9 million to expand its facilities, including building a plant in London, Ontario. That will help Tilray expand into recreational marijuana. Canada legalizes recreational use in October 2018; it’s likely more countries will follow in the next few years.

Using pro-forma information provided by Tilray, its revenue rose 62.4%, from $12.6 million in 2016 to $20.5 million in 2017. That’s due to expanding cannabis production and a 20.5% jump in the average selling price per gram.

The higher revenue help Tilray cut its net losses, from $0.10 a share (or a total of $7.88 million) in 2016 to $0.09 a share (or $7.81 million) in 2017.

In the quarter ended June 30, 2018, the company’s revenue jumped 95.2%, to $9.74 million from $4.99 million a year earlier. That sharp rise was mainly due to increased demand for medical cannabis in Canada and other countries. Tilray sold 1,514 kilograms in the quarter, up 96.9% from 769 kilograms a year ago. As well, the average price per gram rose 2.9%.

Despite the higher revenue, Tilray’s losses ballooned to $12.8 million, or $0.17 a share, from $2.4 million, or $0.01. That partly reflects $5.6 million in non-cash stock options granted to employees as the company went public. As well, Tilray continues to invest in new production facilities.

The company ended the quarter with cash of $25.3 million. It has minimal debt.

The stock has more than tripled since the IPO. That’s partly because the Ontario Cannabis Store (OCS) has signed new supply deals with 26 cannabis producers, including Tilray. OCS is the government-owned corporation that plans to sell recreational cannabis online.

The Ontario government also recently announced that it has canceled plans to open its own cannabis stores. Instead, OCS will supply private stores, starting in 2019. That should expand the availability of cannabis products, and boost demand for suppliers like Tilray.

The company has also lined up deals to supply cannabis to other provinces and territories, including Manitoba, B.C., Nova Scotia, Quebec and Yukon.

In addition, Tilray has deals to supply medical cannabis products to Canadian drug store chains Shoppers Drug Mart and Pharmasave if the federal government grants them the authority to sell.

This week the stock received an added boost on speculation it may be in talks with alcoholic beverages giant Diageo plc. That global firm is looking to follow competitors Constellation Brands and Molson Coors, which have partnered with Canadian marijuana producers to develop a non-alcoholic beverage infused with cannabis.

Tilray’s broadening variety of high-quality customers and well-established international operations give it a big advantage over smaller producers. However, its needs huge revenue growth to justify its current market cap. If its revenue growth stalls, Tilray could drop sharply as momentum traders unload the stock.

Tilray has a 3-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.

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Investment Outlook

‘Up-and-coming’ pot stocks could soon be ‘down-and-out’

New cannabis penny stocks are sprouting continually. But there are many potential pitfalls with these stocks, and getting in on the ground floor carries considerable risks for investors.


FREE REPORT

The closer we get to October 17 and legalization, the more you need the kind of straight advice—and research—you’ll see in our free report.

Shares of established marijuana producers such as Canopy Growth, Aphria and Aurora Cannabis continue to attract the interest of investors looking to add to the aggressive portion of their stock portfolios.

But prices of these stocks are way up since 2016—and those high prices may tempt some investors to look for the next “up-and-coming” low-priced cannabis stock.

There is a continual stream of new marijuana penny stocks. Most trade over-the-counter in the U.S., but Canadians can buy them through their brokers. These have come on the market aiming to take advantage of upcoming legalization in Canada and strong investor interest.

However, buying lower quality marijuana penny stocks is one of those moves that can appear to be successful before it goes wrong. Some investors get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.

It may be appealing to look for penny marijuana stocks to buy, but there will also be significant risks.

Penny stocks do sometimes pay off, but there are big pitfalls to avoid.

When you buy penny stocks you could have a big payday if you make the right choice. But the odds against success are high.

Be aware that many penny stocks are little more than very well executed marketing campaigns. Penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and paid sponsorships.

There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but not for investors looking for an unbiased opinion on a stock.

Penny stock promoters love to make deals—however minor or indirect—with major, well-known firms. These deals are aimed at gaining the trust of investors. For example, a cannabis penny stock may issue a press release announcing that some big marijuana producer has agreed to look at, say, their “revolutionary” growing technology. The promoters of the penny stock hope that the link with a major brand will give them instant credibility, even if the deal far from guarantees any sales or profits.

Follow these tips to profit from penny stock investing—including cannabis pennies

  • Avoid penny stocks that trade at unsustainably high prices because of broker hype or investor mania about the underlying commodity.
  • Look out for acquisitions. Acquisitions can bring “time-bomb” risk. Companies sometimes grow quickly by buying other companies. But it may also be the case that those selling the companies may simply want to bail out of a losing situation.
  • Look for earnings or cash flow. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.
  • Spread your penny stocks out across different market segments. When making a list of penny stocks, we recommend investing in a range of markets. This includes software, biotech, technology, mineral exploration and so on.
  • Apply our sell-half rule. Selling half your holdings after you double your investment is a good strategy for any high-risk investment, but especially so for penny stocks. This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly.

We haven’t found any cannabis penny stocks worthy of buying

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet.

Overall, we advise staying out of penny stock promotions. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.

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Cannabis-Connected

E-commerce stock set to profit as cannabis sales rise

There are many ways in which investors can profit from increasing cannabis sales without investing directly in cannabis stocks.

Benefiting from the exchange between consumers and cannabis retailers is one way. This tech company has experienced strong demand for its merchant-friendly software. Now cannabis growers and retailers are looking to its e-commerce platforms for help.


YOUR MARIJUANA I.Q.

What is the biggest Canadian marijuana stock by market capitalization (or market cap)?
Do you know the answer to this question? Take our Marijuana Investment Quiz and be ready for October 17.

SHOPIFY INC., $187.43, symbol SHOP on Toronto (Shares outstanding: 106.4 million; Market cap: $19.9 billion; www.shopify.ca), offers merchants of all sizes Internet-based software to design, set up and manage stores across multiple sales channels. They include both permanent and temporary retail stores, but also web, mobile and social-media platforms.

The software gives merchants a real-time snapshot of their entire business, including inventory, shipping and payments.

The company charges monthly subscription fees of $29 to $179. It also charges for each credit card transaction: With the $179-a-month unlimited plan, the fee for each transaction is 2.25% + $0.30. That’s on top of the regular credit card fees the merchant already pays.

In the three months ended June 30, 2018, and excluding one-time items, the company made $2.5 million, or $0.02 a share. (All figures except share price and market cap in U.S. dollars.) That’s compared to a loss of $1.1 million, or $0.01 a share, a year earlier. The $0.02 profit was better than the consensus estimate for a loss of $0.02.

Shopify continues to attract more merchants to its platform. As a result, its revenue in the latest quarter jumped 70.9%, to $222.8 million from $130.4 million a year earlier.

The company ended the quarter with cash of $1.6 billion. It has no long-term debt.

Despite the improved results, the shares fell after that quarterly release. That was primarily due to the declining growth rate for Gross Merchandise Volume (GMV). GMV is the total value of merchandise sold through merchant-to-customer exchanges. Shopify’s GMV for the second quarter of 2018 was $9.1 billion, an increase of $3.3 billion, or 56% over the second quarter of 2017. Still, that was below the 64% growth rate it recorded for the 2018 first quarter.

The company continues to expand its services to attract and retain merchants. These include Shopify Shipping and Shopify Capital.

Shopify Capital advanced $68.5 million in cash to merchants in the latest quarter. That’s 84% higher than the $37.2 million it lent in the year-earlier quarter. Since the launch of Shopify Capital, merchant cash advances have totalled almost $300 million, out of which $80 million was outstanding on June 30, 2018. Shopify Shipping, which assists merchants with their order shipping, is now being used by more than a third of total eligible merchants across the U.S. and Canada.

Meanwhile, cannabis growers and retailers continue to choose Shopify’s software and services to run their operations.

For example, the company has been selected by British Columbia to provide an e-commerce platform for the online sale of non-medical cannabis. The B.C. Liquor Distribution Branch will be the sole wholesale distributor in the province, although its retail locations will compete with private sellers. Shopify will create two separate websites to fulfil online orders: one for consumers, where the age of the purchaser will be verified, and the second for public and private retail stores. Couriers will also verify the age of buyers at delivery. At-store pickup of online orders is still under consideration. The B.C. distribution centre for orders will be located in a 6,500-square-metre facility in Richmond. The online store should open  for business when  recreational cannabis use becomes legal October 17, 2018.

In February 2018, the Ontario Liquor Control Board announced that it was partnering with Shopify to use its e-commerce platform for brick-and-mortar, online, and mobile sales within the province. However, in Ontario, the new government of Premier Doug Ford now plans to permit private retailers to sell cannabis, while it will exclusively sell online, at least for now.

Among licenced Canadian cannabis producers, Canopy Growth, Aurora Cannabis, Hydropothecary Corporation and, most recently, The Green Organic Dutchman, have signed e-commerce deals with Shopify.

The company’s contract wins with marijuana growers and retailers—including governments—represent only a small part of its current revenue. However, industry contributions to revenue and earnings should continue to rise after legalization given the company’s leading software and services.

We think Shopify shares have room to rise. Meanwhile, though, the stock trades at a very high 458 times the forecast 2018 earnings of $0.30 U.S. a share.

Shopify is a worthwhile hold.

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Cannabis in the news

It seems like everyone’s writing about marijuana these days, so we’ve combed through this week’s articles to select five with the potential to impact investors.

1. Manulife Financial Corp has unveiled a new benefits program that connects medical-marijuana patients with a team at Shoppers Drug Mart for guidance on dosage and other aspects of cannabis use.

Manulife aims to treat cannabis like any other drug, connecting clients with pharmacists who can answer key questions. For Shoppers Drug Mart, the agreement lets it join the conversation on marijuana dispensing practices. Today, pharmacies are generally excluded from that interaction: most patients buy their supply directly from producers or grow it themselves.

2. Cannabis-infused beverage initiatives by both Constellation Brands and Molson Coors will likely face competition from another leader in the alcoholic beverages market.

U.K.-based Diageo plc is reportedly the latest industry giant now ready to pursue a partnership with a Canadian cannabis producer.

The company is holding discussions with at least three major growers, according to BNN Bloomberg. The aim is to create marijuana-infused beverages as a way of capitalizing on coming consumer demand. Those non-alcoholic drinks are also seen as a way to lift stagnant alcohol sales for companies such as Constellation and Molson.

Partnerships with those alcoholic beverage giants can also lift the profiles of cannabis producers. Shares of cannabis grower Aphria Inc. jumped 23% Friday on speculation it is in talks with Diageo over a possible partnership to develop a marijuana-infused drink.

3. Municipal governments across Ontario may need to decide quickly whether to allow bricks-and-mortar cannabis retailers in their communities.

At a conference of Ontario municipalities earlier this month, a representative from the provincial ministry of finance told delegates they’ll soon have to decide whether to allow private cannabis retailers in their communities.

The Ontario government will provide a more-precise “opt-out” deadline before the municipal elections on October 22.

Richmond Hill and Oakville are among the Ontario cities that have already pledged to block pot shops from operating within city limits. They argue the ability to make cannabis purchases through Ontario’s online cannabis store provides adequate access.

4. The Federal government has now named the first roadside test approved to check saliva for drugs, including marijuana.

Justice Minister Jody Wilson-Raybould has approved the Drager DrugTest 5000 as the first saliva-screening equipment for use by Canadian law enforcement agencies. The system tests for evidence of THC, the main psychoactive agent in cannabis.

The decision to use the Drager DrugTest 5000 or opt for another system rests with individual police forces. Still, the manufacturer of that government-approved equipment will make it available to police departments in as little as four to six weeks.

In moving to legalize recreational cannabis, the federal government pledged $161 million over the next five years to fund police training and drug-testing equipment.

5. One in seven American adults used—mostly smoked—cannabis in 2017, according to a new study.

The report was published in the Annals of Internal Medicine and surveyed 16,280 U.S. adults on their cannabis use. While 8.7% said they had used the drug in the past 30 days, either medicinally or recreationally, 14.6% said they’d used cannabis in the past year.

Those figures went up in states that have legalized recreational use. Cannabis use was also greatest among young Americans, with those between 18 and 34 reporting the highest use.

Smoking marijuana remains the most prevalent way of taking the drug: 12.9 percent of those surveyed reported smoking pot, whereas 6% consumed edibles and 4.7% reported vaping. Another 1.9% said they had used cannabis concentrates, with just under 1% of respondents pointing to use of topical applications like creams.

That diversity of methods is expected to grow as more and more states legalize marijuana use. It also points to the need for uniform standards, says one co-author of the report.

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TSI Cannabis Quality Rating System

Our Cannabis Quality Rating (CQR) considers a range of factors to determine the investment-quality rating for a cannabis producer. Individual ratings range from a 1-Leaf CQR—for stocks we believe lack almost all of the fundamental quality markers of even speculative cannabis stocks—to a 5-Leaf CQR for the highest-quality cannabis stock.

All told, we look at 13 factors in determining the quality rating of a marijuana stock:

13 QUALITY FACTORS

  1. Does this cannabis producer have rising revenue?
  2. Is its revenue stream significantly diversified?
  3. Is the company currently in production?
  4. Does the company have a sound balance sheet—cash and low debt?
  5. Does it have international operations?
  6. Industry prominence?
  7. Is the firm free from high dependence on a single customer?
  8. Does the cannabis producer have a prominent client list?
  9. Is its cost structure competitive?
  10. Is the stock’s market cap in line with the company’s sales (not an outsized market cap in relation to sales)?
  11. Is the company focused on organic growth rather than growth through acquisition?
  12. Has the stock’s price risen in line with the market average (not gone up faster than the market average)?
  13. Is the company outside of the broker media limelight?

Marijuana producers with most if not all of those factors earn a 5-Leaf Cannabis Quality Rating (CQR) for their sound investment quality and reasonable valuation compared to their current price and market cap.

Companies with many of these factors, receive a 4-Leaf or 4.5-Leaf CQR. That means they offer reasonable investment quality, but are somewhat overvalued at their current price and market cap.

Companies with a 3-Leaf or 3.5-Leaf CQR have a few of those key factors, which suggests they have reasonable investment quality. Still, they are likely overvalued at the current price and market cap.

Companies with a 2-Leaf or 2.5-Leaf CQR have a number of investment flaws and are very likely overvalued at the current price and market cap.

Companies with a 1-Leaf or 1.5-Leaf CQR have little investment quality and are almost certainly overvalued at the current price and market cap

Note: Even a 5-Leaf CQR is not the same as a BUY recommendation. In a new market where production is just now ramping up and both demand and supply are uncertain, most of these stocks lack fundamental value. Plus, most move up or down on the latest swings in investor interest and momentum regardless of their individual quality rating.  

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Cannabis performance at a glance

The HORIZONS MARIJUANA LIFE SCIENCES ETF (Toronto symbol HMMJ) invests in North American firms that are legally involved in the cannabis industry. Canadian companies—including Aurora Cannabis (12.1% of assets) and Canopy Growth (11.0%)—make up 80% of the portfolio. As such the fund’s performance—specifically, its Daily NAV* and trading volume—reflects the ups and downs of this country’s cannabis producers.

*Net asset value (NAV) per unit is the underlying value of the ETF’s stocks and other assets at the end of each trading day divided by the number of outstanding units.

Read more on horizonetfs.com

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Comments

  • The Government adopted THC testing device is strictly “stop gap” and will eventually fail as it will not work in colder weather and will conflict with legal issues, as one N.E, U.S. state has already ruled. The smart money is waiting for a “breathalizer” testing device which is not invasive and the results are immediate just they have for alcohol.

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