This is a copy of the October 14th edition of our weekly Newsletter, which we have been publishing since October 2015.
At the New West Summit in Oakland this week, Adrian Sedlin, CEO of Canndescent, discussed the paradox of the U.S. cannabis industry being attractive for investment but filled with “expensive” investment options, at least among public companies. Quite simply, the demand for stocks is much greater than the supply of equity from high quality companies. Consequently, the valuations of some of the newly public companies seem far ahead of themselves.
It’s not surprising that good cannabis companies trade at expensive valuations, and we are reminded of the experience in Canada not too long ago, with very expensive stocks being derided by pundits and the media, like Barron’s, only to see them get even more expensive. Sometimes all it takes is a big strategic investor to change the perspective, as was the case with Canopy Growth, which recently went on a 1000% run from June 2017 to September 2018, but many other companies have managed to see stellar returns despite having “expensive” valuations. Take Aurora Cannabis, for example, as it is a textbook example of creating value for shareholders. The company has raised and deployed capital at progressively higher levels and also used its stock for acquisitions that have been accretive to revenue as well as strategic, in our view. Of course, Aurora Cannabis is not alone.
We were skeptical of the valuations of two recent new issues, Green Thumb Industries and MedMen, when they began trading in the summer. Following the example of the Canadian LPs, though, each company has boosted its stock price with capital raising that has left them with war chests (two deals for GTI, one equity and one debt deal for MedMen), and MedMen has moved aggressively to grow through acquisition, including this week’s announcement of the PharmaCann deal.
While it’s important to understand the absolute valuations of these companies, we think investors are better served to not make valuation the primary focus at this stage, as the public markets are just getting started in the U.S. Instead, assessing management teams and their business models, weighing access to capital and monitoring revenue growth (and potential growth), the main metric, and, increasingly in the future, cash flow and EBITDA growth are likely to be more valuable. We would also suggest that using pullbacks caused by capital raising is a great way to establish initial positions or add to existing ones. Of course it is imperative to understand the valuations, especially if the seemingly favorable regulatory outlook becomes less so, but applying a Benjamin Graham style of investing at this time seems unlikely to be a viable strategy.
MediPharm Labs, which recently began trading on the TSX Venture, was the first Canadian licensed producer to gain a license to produce oils without first receiving a cultivation license. The company has a singular focus on producing extracts and has signed up several other LPs that will be using its services. MediPharm Labs is also well on the way to becoming licensed in Australia.
To learn more about MediPharm labs, visit the company’s Investor Dashboard that we maintain on its behalf and click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- Aphria Sales Grow 117% in Q1
- Aurora Cannabis to List as ACB on the NYSE in October
- Canadian Cannabis Producer TerrAscend to Enter U.S. Market
- Exclusive: Canadian Medical Cannabis Clinic Prepares to Capitalize on Canadian Legalization and Growth in International Markets
- Colorado Cannabis Extraction Company Mile High Labs Raises $35 Million for International Expansion
- Cresco Labs Prepares to Go Public in Canada after $100 Million Capital Raise
- Green Acre Capital Cannabis Fund Raises Over $75 Million
- MedMen to Acquire PharmaCann for $682 Million in Stock
- MJ Freeway to Trade on the NASDAQ Following Merger
- Organigram Regains Organic Cannabis Cultivation Certification
The Cannabis Stock IPO and New Issues Tracker, managed by New Cannabis Ventures, tracks upcoming initial public offerings of cannabis companies within the United States, Canada and other countries. The tracker also provides data on upcoming RTOs (Reverse Takeovers). Companies must file with the SEC, SEDAR or their regulatory authority to be considered for inclusion.
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Alan & Joel