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Matthew Finston
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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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  • The Hidden Gem Of The Marijuana Industry 10 comments
    Feb 28, 2014 12:48 PM | about stocks: CBIS, HEMP-OLD, ATTBF

    In previous posts, I have offered some words of caution to Pot-Stock investors. Since January 1st, marijuana stocks prices have skyrocketed. Many of them have also dropped dramatically. As most of these companies are still in development stage and/or penny stocks, speculation rather than value has been driving prices. Investing in pot-stocks for the last couple of months has therefore been merely a "greater fool's game."

    That being said, an attractive opportunity has recently emerged in Canada's Abattis Bioceuticals Inc, (OTCQX:ATTBF) (CSE: ATT). There are several reasons why this could be an attractive play for investors.

    Business Model

    Abattis is a specialty biotechnology company with capabilities through its wholly owned subsidiaries of cultivating, licensing and marketing proprietary ingredients, biosimilar compounds, patented equipment and consulting services to medicinal markets in North America and Canada. The company is uniquely positioned to benefit from Canada's recent MMPR law, which allows for licensed producers to sell medical marijuana to registered patients.


    Steve Forbes has argued that investing is first and foremost about people. In previous articles, I have warned investors that companies like Hemp (OTCPK:HEMP) and Cannabis Science (OTCPK:CBIS), while appearing attractive through their recent price spikes, are nonetheless run by managers who have been dumping their shares and diluting common stock to pay for their six figure salaries. Especially with pot-stocks that have limited information, sometimes the only litmus test is whether the managers are buying or selling, diluting or investing.

    First the people:

    Dr. Terence Fealey has over 30 years of experience of bioscience research in the consumer packaged goods industry. In particular, he acted as Vice President of corporate research and development of The Coca-Cola Company where he led the creation of The Coca-Cola's strategic technology platforms to support newly established global growth objectives. He also served as Senior Vice President of Global Food and Beverage Strategic Planning for Procter and Gamble Company. He was the Chief Innovative Officer and Senior Vice President of Martek Bioscience Corporation, which netted an annual 300 million in profits before being bought by Royal DSM NV for $1.09 Billion. He received his Ph.D. in inorganic chemistry from Georgetown University and his MBA from University of Chicago. He wrote his Ph.D. on Polymeric Ruthenium Ammines. Dr. Fealey's expertise and experience in both the biosciences and consumer products will be a watershed for the future of cannabis research and development. His presence on Abattis Biosciences should give potential and current investors confidence in the future of this company. In contrast, CBIS's president, Dr. Melamede, while knowledgeable, lacks sufficient experience to take his company to the next level. Amongst the various boards of directors within the pot-stock arena, Dr. Fealey proven record is unmatched. There has yet to be an entrepreneur within the marijuana bioceutical companies with the same level of experience as Dr. Fealey.

    Mike Withrow is the CEO and President of Attabis. He has two decades of experience in financial markets, related technology and nutraceutical IP, formulation, and product development. As president of Abattis, he has recruited a stellar team. Although Abattis might be Mr. Withrow's first time running a publicly traded company, his vertically integrated business model of "Grow, Dry, Extract, Refine, and Sell" (GDERS) enables Abattis to streamline the process from botanical to product.

    Raising Revenue and Shareholder Value

    Unlike other players, Abattis is not issuing new shares to pay for its operations. Rather it has been giving incentivizing stock options to consultants and employees. Most recently, it has granted 110,000 stock options at an exercise price of .36, which is above the current trading price. Furthermore, the company has acquired from Green-Gro Garden Productions Ltd. (not to be confused with GRHN) certain valuable intellectual property relating to organic and hydroponic fertilizer formulas for 300,000 shares of Abattis.

    This strategic usage of shares is a smart move. By issuing stock options at current stock price valuations and trading shares for intellectual property, Abattis is boosting its share value. These moves instill a collective incentive for the continual growth of shareholder value. Furthermore, it is using shares to acquire valuable assets, providing underlying equity. Whereas Dr. Melamede has been dumping his shares after making PR stunts for CBIS, Mr. Withrow is giving incentives to business partners and consultants to develop a profitable company.

    Stay Cautious

    "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - The Buffett

    Even though this report might sound glowing, I caution potential investors from overestimating the future value of this company. The financial records are still spotty, which is to be expected from venture-capital bioceutical companies. This stock has seen a substantial increase in volume in the last few days. On Thursday February 27, 2014, ATTBF went from having an average share volume of 100,000 to 2 million. Additionally it went from having an average monetary volume of $30,000 to $600,000.

    Abattis has a lot of potential to thrive as a vertically integrated bioceutical marijuana company. Unrealistic speculation could drive the price of the stock up past its underlying value and create unnecessary volatility. The point is to have the company grow in value and stay that way. So only buy ATTBF, as Buffet would say, if "you'd be perfectly happy to hold [it] if the market [were to] shut down for 10 years."

    Disclosure: I am long ATTBF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Although I have an incentive in the future value of this stock, I stress that I did not write this post to pump up investment.

    Themes: long-ideas Stocks: CBIS, HEMP-OLD, ATTBF
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Comments (10)
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  • paperkutt
    , contributor
    Comments (2) | Send Message
    Good honest closing Matt that why I follow you, you weigh the good with the bad.
    2 Mar 2014, 10:25 PM Reply Like
  • Chefboy6969
    , contributor
    Comments (12) | Send Message
    I am in Canada and have been following this company for a year now. I am also VERY familiar with the system in Canada. The old MMAR and the new MMPR and kind of involved in the MMPR. I will not disclose anymore. But i will say this. You are totally spot on.


    Good job, I have a small position that I bought a month ago and it has since gone up 150%. I am hoping for another 300%-400% on top of what i have already gained. But i am being realistic. There are other players at play, and there is lots of competition, in this new Canadian system


    good luck to all
    2 Mar 2014, 10:50 PM Reply Like
  • Chefboy6969
    , contributor
    Comments (12) | Send Message
    i also forgot to mention the most exciting aspect of Abattis...


    Canada has YET to allow concentrate( DABS)...but I feel that this will be allowed soon because of the huge benefits it has for the sick and Abattis has positioned themselves for being a leader in that field.
    3 Mar 2014, 12:59 AM Reply Like
  • Alan Brochstein, CFA
    , contributor
    Comments (7826) | Send Message
    Nice stuff, Matthew.
    3 Mar 2014, 12:33 PM Reply Like
  • remix20
    , contributor
    Comments (379) | Send Message
    Matthew, I really appreciate the balanced perspectives in the writing I've read of yours so far. I know we disagree on PHOT but keep up the good work.
    3 Mar 2014, 02:40 PM Reply Like
  • Matthew Finston
    , contributor
    Comments (961) | Send Message
    Author’s reply » Thank you, Remix20. I know that PHOT has an annualized growth rate of 264% compared to last year. But investing is not just about revenue. It should be able to make positive returns on shareholders' investments. See PHOT made 1,313,399 for the quarter ending in Sept 30 2013. That's great! But the cost of revenue (cost of materials etc.) was 1,051,776. Okay that leaves 261,623. It is still profit! But on top of that the company also incurred 902,813 in "general and administration costs." These expenses as far as I can tell seem legitimate. It includes advertising, consulting fees, salaries, rents, repairs, etc. All normal business expenses. This list of expenses/liabilities isn't exhaustive. (the total net income loss for sept 30 2014 is ~1,804,713).


    My concern is that the PHOT has begun making substantial revenue (for a pot-stock) but hasn't been able to net a profit. As the hype wears off, will this company still have a market cap of 260 million? What is going to keep investors and attract new ones? Perhaps the company figures out how to make a profit. Assuming they can reduce their administrative costs and other long term debt, the gross profits after cost of goods sold does not look pretty. yes they made 1.3 mil. But it cost 1 mill to make. Is that worth investing 260 million in?


    The biggest concern in buying now is that investors will jump ship and just look for the next best thing. If PHOT is cheaper I'd buy. P/E should be closer to 15:1. It can sometimes be a bit higher. FB is at 104.34:1, but that is high. Assuming PHOT kept its 261,623 gross profits that is an EPS of .00041 and a P/E of 853.66 (@ .35 a share and 644,706,947 shares. I believe they have now 744 million shares outstanding). This is an optimistic estimate. If we were to take into account losses the numbers are a lot worse. EPS is actually ~0.0028.


    The question is whether PHOT is still in developing stage and we should all be awed that it is making revenues even at this stage, or whether this is something we should come to expect regularly going forward.


    I am still on the fence when it comes to PHOT. If a company is beginning to see revenue, I'd like to see some net income (and a cheaper price). This of course is looking only at one quarter. I am sure the numbers look different from an annual perspective or even a lifetime perspective.


    Furthermore, numbers don't tell you everything. Athena Health (ATHN) which trades on the NASDAQ, has a p/e of 10,861.06. To me, this looks overvalued. But the market has been bullish on this stock. It trades at 193 and Stern Agee gave it a PT of 236. To me this sounds irrational. But markets are not rational. That is how investors make money.
    3 Mar 2014, 05:29 PM Reply Like
  • remix20
    , contributor
    Comments (379) | Send Message


    I think our biggest disconnect is that I view PHOT as absolutely 100% in the development stage at this point. Also, I understand the concern of the "hype" wearing off as there is no doubt that since CO went legal Jan 1, that excitement over companies that even mention the word hemp in a press release have been sky high.


    I would say though that with WA beginning recreational sales this Summer, Alaska voting on recreational later this year, and election cycle in November where MJ will likely be a big topic, that we will continue to see MJ in the media cycle. Combined with Congressional talks and state bills swirling around, I am expecting that the topic of MJ stays in focus for the foreseeable future.


    That said, your number crunching here is not near as debatable! I would only add that PHOT's quarterly report is due by the end of March and I anticipate that it will reveal an increase in revenue, both from storefront sales and recent online acquisitions. This is my own speculation of course but I do feel that these new numbers will likely have a positive impact on both pps, and sentiment towards the company's future.


    With the GIFT program, its stewardship by an outstanding and highly vested management team, a future focused on collecting perpetual profits from growing operations, and RXNB drug pipeline in the works, I have to declare that I am very bullish on Growlife's future.


    I do believe it to be one of the best players in the game right now but am always on the lookout for other companies that I think will benefit from the changing legal landscape in both the US and Canada. That said, PHOT is certainly not my only 'pick to win' as we move forward in this highly speculative sector in 2014.
    3 Mar 2014, 06:31 PM Reply Like
  • Matthew Finston
    , contributor
    Comments (961) | Send Message
    Author’s reply » I think your analysis is sound. If it is still in development, I can also see a long term potential, especially as states deregulate/legalize marijuana. In that case, posting revenues at this stage is promising.


    Also, I think you captured the right word for this industry: "speculative." As a speculators game, a company doesn't need to actually make money for the value the stock to go up. As long as people believe that PHOT or MDBX or CANV is the right play, you can make a lot of money. And seeing 'green' (pun slightly intended) makes others want to buy in.


    I think it is great that even though you still feel phot is the 'best player in the game' you have diversified your portfolio. This will mitigate against risk.


    What I find great about the marijuana industry is that as the market is down, Pot stocks can still go up. Main stream analysts have shrugged off this industry b/c it is small and it trades on penny stocks. But while the major markets were down, the marijuana-index was up by 1.95%. Not by a lot. But still better than the three major indices (see Not many investors can say that they are able to beat the market. That is a big win.
    3 Mar 2014, 09:32 PM Reply Like
  • remix20
    , contributor
    Comments (379) | Send Message
    Thank you and I agree that the main stream analysts are largely shrugging off the industry at this time. (Props to Alan Brockstein and godspeed to Jim Cramer!)


    I would add that most analysts are grouping all pot stocks together, which is a mistake I see very clearly after researching this sector for the past year now. While there is every right to warn that there are many terrible companies with no present or future value, and some that are scams or otherwise perpetrators of fraudulent accounting, the talking heads are over generalizing and seemingly blind to the fact that there truly are some "hidden gems" in the space. Not only that, but some of those gems I do believe have very bright futures! At this point, too few people are working to uncover the truth about which companies may be the best opportunities while the main streamers continue 'throwing the babies out with the bathwater.'


    I also agree with your insight into pot stocks often playing counter to other indices. I also have witnessed this on many days and know others are seeing it as well.


    Thanks for the writing and conversation! I will look forward to reading more of your perspectives in the future.
    3 Mar 2014, 10:37 PM Reply Like
  • Dsharma_toronto
    , contributor
    Comments (7) | Send Message
    When TWD [tweed] will be listed in TSX?
    30 Mar 2014, 02:38 AM Reply Like
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