After watching the publicly-traded cannabis stocks for more than five years now, I am extremely excited about some big changes that are taking place. Years ago I often referred to the sector as a “Wild West,” with very few companies that inspired confidence as viable entities. For the most part, there were shady penny-stock operators masquerading as cannabis companies, with no revenue and not even a real business. I spent most of my time warning investors, making little effort to do the type of investment analysis I had applied regularly in my pre-cannabis life.
The make-up of the publicly-traded cannabis sector has improved substantially, with some of the best-known operators and brands now embracing the public markets.
Today’s environment is radically different. Companies are posting tens of millions of dollars of revenue, raising hundreds of millions of dollars in expansion capital, and attracting Canadian investment bankers. There is an IPO market and even mergers and acquisitions. Several stocks are now trading on the Toronto Stock Exchange, Canada’s highest, and a few have listed on the New York Stock Exchange or NASDAQ. We are even seeing institutional investors invest in the sector.
For those who may have looked at the sector in the past but balked at the low quality of the companies, recent and pending changes suggest those on the sidelines might want to take another look. It’s now possible to invest in some of the best cannabis companies, in my view.
Some Interesting Newly Public Companies
Two well-known multi-state vertically-integrated cannabis operators recently began trading in Canada in June after conducting reverse-mergers, MedMen (CSE: MMEN) (OTC: MMNFF) and Green Thumb Industries (CSE: GTII) (OTC: GTBIF). MedMen operates in its home state of California, exclusively in SoCal, and is one of ten licensed producers in New York, with operations in Nevada and a pending acquisition in Florida. CEO Adam Bierman and the company were prominently featured on CNBC’s The Profit last year. The company last raised capital at C$5.25 but has spent most of its brief trading history below that price. Sales in Q1 were over $7 million.
GTI began trading shortly after MedMen and has been a huge success, with the stock doubling from its last capital raise. Based in Chicago, the company has operations in Florida, Illinois, Maryland, Massachusetts, Nevada, Ohio and Pennsylvania. It has stood out for its ability to win licenses in highly competitive states with a limited number of licenses available. While it has a medical focus, the company will cater to the consumer market as well. Sales in Q1 were almost $11 million.
Stay Tuned for These Soon-to-Be Public Companies
4Front, a multi-state operator that has roots in consulting, is especially interesting. Earlier this year, the company announced its intentions to go public by listing on the OTC. Instead, it is now pursuing a listing in Canada. The company recently raised $13.4 million. 4Front has evolved from a leading consulting firm to an operator in Illinois, Maryland, Massachusetts and Pennsylvania. (Full disclosure: 4 Front is a client at my firm New Cannabis Ventures, and we just published an interview with CEO Josh Rosen.)
Brands are big, and Bhang is one that has captured attention in several states and even in Canada, where it recently inked a licensing deal. The company, which began in edibles and expanded to vape pens, is in the process of going public in Canada through a reverse-merger. The terms of the deal require it to case at least $C7 million. Bhang agreed to sell 60% of the company to a publicly-traded Menotr Capital in 2014 for $39 million, but the deal ended up in a legal battle that was finalized earlier this year when Bhang returned an initial payment plus interest.
Stanley Brothers Holdings, which sells Charlotte’s Web-branded CBD derived from industrial hemp grown in California and was featured prominently on CNN’s original ‘Weed’ documentary with Dr. Sanjay Gupta in 2013, is in the process of going public in Canada through the IPO process. It posted a preliminary prospectus that indicated sales of $40 million in 2017, with an Adjusted EBITDA of $14.5 million, and it is off to a great start in 2018 with sales in Q1 of $13.1 million. The company has provided guidance that it expects sales of at least $120 million in 2018.
Tilray, which is majority-owned by the parent of Leafly, Privateer Holdings, is a leading Canadian licensed producer that is pursuing an IPO on the NASDAQ underwritten by investment bank Cowen and Company, with no listing in Canada. The company issued a preliminary prospectus in mid-June that indicated it generated sales of C$20.5 million in 2017, with an operating loss of C$7.5 million, with 55% growth in Q1 from year-ago levels to C$7.8 million. This level would mark it as the sixth-largest among the Canadian LPs during the quarter in terms of revenue. The company has operations beyond Canada in Latin America, Europe, Australia, and South Africa.
Bottom line: The make-up of the publicly-traded cannabis sector has improved substantially, with some of the best-known operators and brands now embracing the public markets. Almost every new stock from an American company is likely to be listed in Canada, but the companies seem to get a dual listing on the OTC rather quickly, making it easy for any U.S. investor to buy. As I always like to remind readers, cannabis stocks are very risky for many reasons, so be thorough in your diligence before diving in.
Next up: I discuss how to play potential consolidation in the Canadian cannabis industry.
