How Do We Choose the Winners?

There are currently over 650 companies globally that operate in the cannabis industry. Yup, you read that right. Since I started covering the industry 18 months ago I have personally seen so many stocks fly and so many of them fall…flat. I have seen multiple triple-baggers (a bag is a trading term for making 100% gain on a stock – so triple bagger – yup you guessed it – is making 300% gains on a stock) but I have also seen stocks plummet over 50% in just one day!

There is so much money to be made in this industry, but, and this is the biggest but of all, there is also so much money to be lost, if you do not know what you are doing. A lot of the stocks are what can be termed as "pump and dump". Remember the Wolf of Wall Street? Well, that's what they did. They would buy a large amount of a stock (any stock). Then, they would promote and promote that stock and sell it to all their clients and "pump" up the price of the stock. Once it got to a really high level then they would sell the stock they owned for massive gains. Essentially they would "dump" all of their stock back onto the market. And with it, the price would come tumbling down. I have seen his time and time again. I'll give you an example.

 Integrated Cannabis Solutions Integrated Cannabis Solutions

Integrated Parking solutions changed their name to Integrated Cannabis Solutions in April of 2014. The stock went from $0.05 per share to an all-time high of $0.75 before closing at $0.45 on the 5th May 2014 (a 900% (9-bagger) gain). All because of the name change (and new fancy logo). It currently trades at a measly $0.002 per share. It was, is and always will be, a terrible company. But that is the kind of irrational hype seen in the cannabis industry. Stocks are heavily promoted and the average investor knows no better and simply follows the herd. Don't get me wrong, there are many, many pot stocks that have done superbly well.

Consider Canopy Growth over the same period.

 Canopy Growth Corporation Canopy Growth Corporation

On the 1st April 2014, Canopy Growth was trading at $2.59 per share. At the time of writing this article, it is trading at $39.86 per share. I'll let you work out the gain on that (think Louis Vuitton store…lot's of bags).

So how can you pick the winners from the losers? Well, you could start by following The Green Fund. Year to date the Global Cannabis Index is 24.3% down while The Green Fund is currently 39.33% up and climbing.

So how do we do it? Understanding that we do a lot of research on every comoany in the fund (and continue to track and monotiro on a daily basis), we start from a simple foundational basis. 3 things. 3 key criteria we look for in any company in deciding if we want to invest in them or not.

#1 The Team

David Ogilvy – the founder of the Ogilvy Advertising Agency – famously said, "the people with the best people win."

We could not agree more. This is without a doubt the most important factor in determining whether we ultimately like (and hence want to invest in) a company. Think about it. You are giving your money to someone to run their company with. Surely it is of vital importance that you believe they can actually put your money to good use and deliver a return on your investment? If you do not have faith in them, or doubt their ability, then why on earth would you give them your money?

These are the questions we ask:

  • Does the management team have the necessary experience to execute on their plan?
  • Do they have the track record to back this up? (these two are different)
  • Is there anything in their past that might point to them not being 100% above board (especially in the cannabis industry, given it is so nascent)
  • Do they have the right people for the right strategy? (ie if medicinal marijuana is their focus, do they have the right medical and PhD personnel)

Remember, a company can have the best business plan, the best ideas and the best intentions, but if they don't have the right team to execute on that plan, then it is all for nothing. Ideas are great. Execution is immense.

#2 The Difference

The great Andy Warhol said, "to be irreplaceable, you have to be different."

I have mentioned on numerous occasions that the weed industry is still in its infancy but is growing and developing at a rapid pace. New Frontier Data has the industry growing at a compound rate of 15% annually for the next 5 to 10 years. That is huge growth. And with huge growth will come many, many new entrants to the global greenrush.

Overtime not all of them are going to succeed. In fact, more will fail than succeed. What will ultimately separate the winners from the losers are how they are able to differentiate themselves – in other words, make themselves irreplaceable.

To simply grow weed, extract CBD or open a dispensary is not going to crack it in the long run. In the long run, the companies that will be the most successful will be those that have built internal (and external) IP that can be monetised and protected. This IP comes in many forms.

  • Genetic strains for medicinal use (Canopy Health)
  • Child Proof Packaging (Kush Bottles)
  • Limited Licenses (Liberty Health owning 1 of only 13 licenses in Florida)
  • Global first mover advantage (Aurora in Europe and Australia)
  • And in some cases, scale too will do it (Canopy and their 5.6m square foot of production capacity)

We look for companies that operate in environments that have natural barriers-to-entry and companies that produce protectable patents and IP that can be monetised on a global scale.

And finally, #3 The Communication

"What we are we repeatedly do. Excellence then is not an act, but a habit." The wise old Aristotle said this in 80BC and it still holds true today. Does the company repeatedly and regularly report and update their shareholders on their performance and business execution?

This is vital. If a company does not do what it says and say what it does, then we avoid it like the plague. Take AMMJ (American Cannabis Company – great name by the way) as an example. They were meant to report their 10-K nearly 4 months ago (at the time of writing). Not only have they still not reported their 10-K but they have not even had the decency to update their shareholders as to why they have not reported it. Not cool!

We invest in companies that communicate with us. That respect the fact we have given them our money and value us as shareholders enough to always inform us (good and bad) as to what is happening. We invest in companies that are responsible in their reporting and communication.

The flip side to that is companies that put out press releases as you and I might use tissues. For any and all things. I am not going to name and shame, but there are some very promotional companies and these should not be confused with companies that are putting out the right information at the right time.

One very quick way to evaluate a company's communication (and associated policy) is to ask the company a question. That's right. Mail their IR person, or even the CEO if possible and see if they come back to you. If they don't (and no one does) well then they wouldn't get our money that's for sure.

And there you have it, the 3 criteria we use to evaluate companies we believe have and offer value. Obviously, there are many other factors and always remember – this is your money and thus you need to do your own homework. Read the filings, download the investor presentations, read through their company news, go through the financials (or get someone to help you do so) and ask them any questions you might have. Bottom line: read, read and read before making any investment decision.

And they told you money doesn't grow on trees.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

There are 2 Commentsin this post

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