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I approach investing as a social theorist and a cultural historian. As a result, I am a contrarian. Studying the history of financialization, I have to agree with value investors like Seth Klarman, George Soros, and John Quiggin that markets are ultimately inefficient. However, I am not an... More
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  • A New Take On The Medical Marijuana Industry 14 comments
    Feb 17, 2014 5:55 AM | about stocks: HEMP, MDBX, PHOT, ENRT

    Since January 1st, 2014, Pot Stocks have witnessed extraordinary gains. If you were one of the lucky ones to have bought before January 1st, you would have made some nice returns. Stocks like CBIS, HEMP, PHOT, RFMK, MJNA, MCIG, PLPL, ENRT, and CANN have shot up from 300% to 3700%. Now what?

    Did you sell? If the answer is no, why not?

    And if you are new to this industry and are deciding whether or not to invest, have you considered who you are buying those shares from?

    I think it is too easy to either be bear or bull on this industry. I believe one can still make money as long as they understand that this is still a "greater fool's game."

    The industry is very real. Companies like Growlife Inc, (OTC:PHOT) and Medbox Inc, (OTCQB:MDBX) are attempting to capitalize on this emerging market. And MDBX has made return on equity. But investors are wrong to play this market long.

    The pattern of these stocks follows very closely to the dot.com boom, the junk bonds fiasco, even the Tulip Mania. Even though these events left many people penniless, a few were able to profit handsomely. And you still can too. As long as you understand that making money at this point will depend on finding a greater fool.

    Anyone that has been tracking this industry closely must have realized that by just making a press release disclosing that the company plans on capitalizing on the multi-billion dollar marijuana industry has jumped dramatically. For instance, Enertopia Inc, (OTCQB:ENRT) announced January 16, 2014 a that they planned to sign a joint venture Agreement with the World of Marihuana Productions. The stock trading at .15 cents has jumped to .44 since, a 293% gain. This stock has seen less momentum than many of the more recognizable tickers such as MJNA, HEMP, or PHOT. It will probably see continued interest as investors catch on that the company plans to capitalize on the marijuana industry. In contrast to some of the better known companies, ENRT has only seen at most $300K volume whereas HEMP last friday enjoyed $11.5 million of investment dollars.

    ENRT is one of the few companies that sound legitimate. Unlike many of the other pot stocks, they have not yet diluted their float. They have currently 46.61 million shares outstanding out of the 200 million authorized, 24.8 million are held by retail investors. The company has a current market cap of 16.78 million with an volume average of 300,000. In contrast, Hemp Inc, (OTCPK:HEMP) has an average volume of 63 million and a short interest of nearly 75%. ENRT benefits from the new Canadian MMPR program, which allows for licensed producers to grow and sell marijuana for medical purposes. That is, if it gets its license.

    ENRT is one of the many companies that sounds great until you dig deeper and realize this is just another greater fool's play. Originally a Metal Mining company called Golden Aria Corp until 2010, this company's recent growth in share price affirms that by merely mentioning interest in becoming a Pot Stock is enough to make investors flock in droves.

    Nevertheless, ENRT could be a solid bet so long as it can be trusted to use capital efficiently. As a mining company, ENRT has operated at a loss. Buying stock in this company means buying their debt of 400k. Now, CEO Robert McAllister has decided to enter in the Medical Marijuana game hoping to finally turn a profit. ENRT has recently made a lot of binding agreements relating to the marijuana industry that could pay off. It recently a LOI to acquire E-Cig technology from wisplite.com and a LOI to purchase a 60,000 sq. ft. facility to grow medical marijuana. The question is, do you trust ENRT to use your investment efficiently? Without demonstrating efficiency this company will unfortunately be subjected to pump-and-dump players until it posts a profit.

    There are two clear plays for ENRT: play for the pump and sell before the dump, which could happen as this company gets more coverage. Or you could wait for a company that has already established a profitable medical marijauna business before deciding to go public. This is investing 101.

    Although obvious, I think investors have forgotten investing 101. Companies go public in order to raise capital. Usually, a company has to demonstrate a strong business model to potential investors before selling off the ownership of their company. Otherwise, the company risk losing the value of their company by the short-sellers. In evaluating Pot Stocks, you have to consider whether the company is efficient at utilizing capital and why they have decided to go public.

    For most of the pot stocks listed, they have yet to figure out how to use their capital efficiently. According to their disclosure, HEMP has made a gross profit of a $1,000 for 2012 but have acquired nearly 16 million in debt. Investors have poured almost $300 million into this company on the fact alone that plans on capitalizing off the legalization of hemp for industrial purposes. Even though this company plans on capitalizing off this new industry, are the people running it capable of doing so?

    CEO of HEMP, Bruce Perlowin, thinks so. Part of HEMP's $16 million liabilities is the $1,181,249 owed Perlowin himself as of their September 30, 2013 filing. This number has nearly doubled from $671,231 as of December 2012 and will continue to do so even though HEMP has yet to make a viable return on equity.

    One company that plans on going public, Tweed, is a licensed Canadian MMPR producer has already established a viable business. Unlike its competitors, Tweed established a profitable business first before going public. It will be traded on the TSX Venture Exchange. However, like most Pot Stocks, this company will see high volatility and will be considerably overvalued until this Pot Mania blows over.

    Why so bearish? I'm not. I just think investors should understand the game and play it accordingly. However, value investors should stay away from this industry. But for those who want to play the greater fool's game, I recommend buying stock in a company as soon as it announces that it plans on joining the medical marijuana industry. It doesn't matter how many times the company has changed its name or business model. As long as the trend keeps up, you'll find a greater fool to take your "dope" off your hands.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: short-ideas Stocks: HEMP, MDBX, PHOT, ENRT
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Comments (14)
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  • remix20
    , contributor
    Comments (328) | Send Message
     
    "Did you sell? If the answer is no, why not?"

     

    For a few companies in the sector, selling now would be a big mistake. I recommend digging deeper into TRTC, PHOT, GWPH, FULL.

     

    As in the tech boom, some companies thrived and many others busted. Research and continued due diligence is the key to discerning the good from the bad. And be cautious of any person who might label an entire sector as not worthy of investment, as they have not likely done enough research into individual companies or not completely understand the path to success they may be on.
    17 Feb, 02:03 PM Reply Like
  • Mikie713
    , contributor
    Comments (230) | Send Message
     
    I agree, Remix, aside from the MJ, $PHOT and $TRTC both appear to be good plays for a "micro-farming" revolution, a movement that is growing out west and any place the individual wants to take control of the foods they ingest. The movement, I believe, as just as much of chance of becoming a burgeoning industry as MJ. $MDBX has opportunity to dispense other things besides MJ, it's reasonable to believe you'll find this in your doctor's office soon. So, even without the MJ hype, there's promise in some of these companies.
    17 Feb, 02:58 PM Reply Like
  • Matthew Finston
    , contributor
    Comments (584) | Send Message
     
    Author’s reply » Of course the industry is there. And I agree $MDBX could see future revenue growth. But even with a company like $mdbx that has demonstrated profitability, have investors overvalued $mdbx's current valuation? $mdbx has nearly tripled its equity since 2011 but this is only 3 million versus its cap of 459 million. And recently sales have dipped. It think it is a bit too optimistic to say that pharmacists are going to be replaced by vending machines. There are too many hurdles that would prevent this from happening in the near future. If $mdbx cannot expand its market base, will investors continue to stick around?

     

    I am not bear on this industry. But I think investors have to play this smart. They should understand that current valuations are over-optimistic and thereby creating high volatility that will be unsuitable for the value-investor. And currently, no player in this industry has demonstrated a "margin of safety" worthy of investment, with the possible exception of $mdbx that is clearly overvalued. At this point, any investment is purely speculative. And I believe you can be "bullish" on a "greater fool's speculation."
    17 Feb, 05:50 PM Reply Like
  • Green&Golden
    , contributor
    Comments (39) | Send Message
     
    I recently went heaviest on $PHOT, some on $TRTC and a little on $FITX. I'm going to stay long on these companies. However, I stayed away from $HEMP and a few others due to some comments on these pages in previous articles and lack of transparency of their financials.
    Maybe the author was right about these valuations and how to play it.
    Tuesday again, all the fresh money is coming to play. Where will it go on Tuesday...where's the hype? I know I have seen a lot of headlines over the weekend.
    Luckily I caught the news on Friday and had to finish my stock purchases after the GREAT banking news - I was waiting for a dip in PHOT...oh well...got it at .37
    This sector is heating up, but be diligent. Research those that will be likely still around. I thank the contributors at Seeking Alpha for their ideas about what these companies are up too. I think many of us who are careful will make a nice profit!
    17 Feb, 09:14 PM Reply Like
  • cmcfarling
    , contributor
    Comments (75) | Send Message
     
    ENRT looks very interesting. Their projections look WAY more realistic than what FITX is throwing out. They could be one of the undiscovered gems in the cannabis sector.
    18 Feb, 01:36 PM Reply Like
  • yrao
    , contributor
    Comments (14) | Send Message
     
    ENRT is hidden gem. Low float, low market cap. SEC filing company. If things go well, it will generate weed revenue in next few months.
    18 Feb, 08:35 PM Reply Like
  • Cozz
    , contributor
    Comments (6) | Send Message
     
    Thanks Vanderbilt for the write up. One question as I'm a newbie in all this. HEMP is in debt for $16M or $300M? If investors poured $300M into HEMP, why is it only $16M in debt.

     

    If $16M in debt was from setting new infrastructure then I don't see how that's a bad thing. Especially when it's own CEO puts his own money into it.
    19 Feb, 08:25 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (584) | Send Message
     
    Author’s reply » The 300m referred to was Hemp's market capitalization when I wrote the article. That number has decreased to about 270m. That represents the total paid in capital from investors. When you buy shares you are adding to that figure. That makes you a partial owner of that company. If the company were liquidated, shareholders could expect to get the company's assets minus any liabilities. If the company has a lot of liabilities and no assets then the shareholder can expect to get less money than his initial investment.

     

    Bruce Perlowin is not putting his own money into the stock. He is not only paying himself a six-figure annual salary, he is also diluting current shareholders stocks to pay for its ongoing debts.

     

    Stocks are being issued at par value at .00001 and being bought as of late at .15 cents per share. The difference is considered "additional paid-in capital" which can pay for HEMP's liabilities. one of those liabilities is Bruce Perlowin's salary.

     

    The company has roughly 1.649 billion outstanding shares. It is authorized to sell another 1.351 billion at par value of .00001. The company isn't actually making money through their business. It is accumulating debt and then paying for it by issuing new shares.

     

    The only way any of this can be justified is if Hemp was delivering a return on its assets. So when you are buying Hemp you are buying a mountain of liabilities without any historical return. That is why I call this the greater fool's game.
    20 Feb, 12:57 AM Reply Like
  • remix20
    , contributor
    Comments (328) | Send Message
     
    Vanderbiilt, Excellent break down on HEMP^^

     

    I do think however that if you look deeper into PHOT and TRTC, that you would find they have much more going for them and stand apart from most other companies in the sector.
    20 Feb, 01:46 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (584) | Send Message
     
    Author’s reply » I've avoided $PHOT for the sole fact that I don't believe their business model was going to be that profitable. The main product, the personal hydroponic unit, seemed unlikely as a candidate that will see continued sales. Specifically, how will they maximize profits from consumers? A consumer buys a unit and now can grow marijuana, saving money on the dispensary overhead. Now what? Okay imagine everyone that wants to grow hydroponic marijuana buys a "Phototron." What is the maximum profit that can yield? Maybe because of a lack of imagination, but I just can't see how that can be the future leader of the industry. Possibly if they were skilled marketers and could convince consumers to purchase annual "phototron" upgrade units. I can see that replacing lightbulbs will keep revenues steady. But overall, I think they need to devise a more creative business model.

     

    Nevertheless, I think I was wrong for underestimating their potential to expand their consumer base. And the deal with $FITX seems promising. Amazon started off selling books with free shipping. Maybe PHOT can find a way to be the main player in the market.
    20 Feb, 03:44 AM Reply Like
  • ROI Investor
    , contributor
    Comments (5) | Send Message
     
    The key thing you forgot to mention is that the facility that was leased is operating under the current MMPR program.
    20 Feb, 09:43 AM Reply Like
  • Matthew Finston
    , contributor
    Comments (584) | Send Message
     
    Author’s reply » Yes, you are correct. It looks like $enrt is creating a partnership with green canvas ltd. who is applying for the mmpr license. http://bit.ly/NdiZoA. If someone has information on their profit margin as a private grower that will be useful to determine future profitability for enrt.
    28 Feb, 04:21 PM Reply Like
  • asms
    , contributor
    Comments (38) | Send Message
     
    Matthew Finston is the Cannabis men.
    30 Mar, 09:24 PM Reply Like
  • Matthew Finston
    , contributor
    Comments (584) | Send Message
     
    Author’s reply » Think this instablog has relevance again.
    12 Apr, 12:11 PM Reply Like
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