Towards the end of January 2014, I let it be known that I had initiated a position into Growlife, Inc. (OTCQB:PHOT), which was my first dabble into the marijuana sector, a sector that includes a wide array of different initiatives and company focus.
Since that time, I have been looking for an additional company or two to diversify my sector position and find a company equally capable of significant growth over the next twenty-four months. For super-speculative investments, I always provide myself a window of twenty-four months, and the most important screen that I must therefore use to make an investment decision is to achieve a high degree of confidence that the stock I am investing into will make it that far.
- They are a fully reporting company
- They have a specified business plan
- They have immediate access to capital
- The stock has a consistent volume and liquidity
- The company management communicates to shareholders on a regular basis
Now, those standards should be part of any investors screening process, but often when playing micro cap stocks, investors tend to neglect the discipline required to be successful for the long term. Day trading these stocks can be quite lucrative for many, but I am more willing to park some money, set it and forget it, keeping appraised of all company developments and reevaluating my position on a regular basis, as the plan develops or fails to develop. For Terra Tech, my cost average to this point is forty-eight cents. The week of March 11, 2014 makes me glad I entered the stock when I did, as the move higher has been swift.
I never expect any investment to trade sharply higher without appropriate consolidation. Therefore, although I purchased TRTC at prices slightly above current levels, I am not surprised to see ten percent moves on this stock in any direction on a given day. Because I do not try to time the market, I take a position and do not get shaken easily from it, especially from non-news related swings in the price.
Before I rolled a big fat position into Terra Tech, I needed to understand what Terra Tech actually is doing now and what strategy they plan to execute in the near future.
Terra Tech is currently earning revenue through their subsidiary, Edible Garden. The revenue is being supported by partnership, wholesale, retail and license agreements with several premier retailers, including ShopRite, Fairway, BJ's, Gro-Rite Garden Centers and a new seventy store placement with Market Basket.
The fruits of these deals are expected to materialize soon. Terra Tech has been focusing on their hydroponics business since 2008, developing partnership and distribution agreements designed for immediate revenue without significant dilution to shareholders. In May of 2013, for instance, Terra Tech management simplified strategy to focus on partnerships rather than developing additional property locations. By aligning themselves with urban farmers who want to cultivate using the Terra Tech standards, Terra will market and sell through their distribution network and earn a fee associated to the gross revenue sold.
This is a hedge for my investment thesis. I understand the initial stages of business development, and I know that it will not be easy. But, with anticipated revenues of over ten million dollars expected in 2014-2015 from herbs and hydroponic produce, it provides me comfort while I wait on the development of the hemp and hydroponic equipment and associated opportunities related to marijuana.
The existing infrastructure becomes a catalyst to gain a dominant early position into the marijuana industry, inclusive of hemp, equipment and seed-based strategies. With a foundation already in place, which includes land, sales channel agreements and an aggressive Growmass program, I see TRTC as a budding winner as we progress through 2014 and beyond.
In December of 2013, Terra Tech expanded upon my "hedge" when they signed a deal with Heartland Growers, who will develop a line of Edible Garden hydroponic produce that will be sold throughout the Midwest market.
In this deal, Terra will provide the marketing and sales channel support, and Heartland will provide the cultivation, packaging and shipping of the product for retail sale. Remember one thing, as many small companies in this sector do pressers about what they will grow and sell, many do not have a single buyer waiting in line for product. That is a huge difference and a reason why I chose TRTC. They can grow it and they can sell it.
Then again, in December of 2013, Terra Tech signed a distribution agreement with Gro-Rite Greenhouse and Garden Centers, whereby Terra completed the development of an 8000-square foot hydroponic grow facility to grow herbs and plants for retail distribution. The pair plan to develop an additional 27,000 square feet of hydroponic grow space in the early part of 2014.
In late January of 2014, Terra Tech announced the completion of their new five-acre hydroponic greenhouse. As well, Terra provided an open house to the public, an important fact for me, because it proves tangible value to me, not a plan for tangible value. This greenhouse project will allow for the expansion of the hydroponic line throughout the northeast corridor of the U.S. The projections are that each acre can produce up to two million dollars of produce annually to serve upwards of 12,000 retailers throughout the local market.
But, what about the marijuana, you ask. Well, in January of 2014, Terra Tech management told us that they have secured a team of Nevada lobbyists to assist them as they apply for a Medical Cannabis permit in Nevada. The former ACLU lobbyists should act as a strong intermediary as Terra pushes their move into the cannabis industry forward.
Coming off the back of that filing was an announcement that Terra has formed a strategic partnership with Inergetics to form a new line of CBD nutritional products, inclusive of hemp and oil-based products.
Then, remaining aggressive and focused, management launched what they call the Growmass program, a program designed to offer grow permit winners in the state of Massachusetts the opportunity to purchase high-grade cultivation equipment and support with deferred payments for up to one year. This program, similar to one at Growlife, is aimed at securing an early and loyal user base for grow and cultivation equipment from the rapidly-developing and competitive permit market. Now, although the $6.5-million project is funded through a convertible debenture instrument, the terms are well in line with my expectations for what an emerging company can expect to negotiate. The dilution is quite manageable, not at all similar to other companies currently in the sector.
Growlife, which I own shares of, will dilute up to two billion shares, if necessary, in their race to secure a dominant seat in this massive and emerging industry. To me, not necessarily unreasonable if managed correctly. Trading shares for value-added synergies is perfectly okay with me.
We all need to keep in mind that Terra Tech and Growlife are planting the seeds for growth in the future. Dilution, managed properly, is not an enemy to the investor. Terra Tech, for instance, is well-positioned for expedited revenue streams. Even though fundamentally sound, they will still need to tap equity markets for capital as they continue to execute on large-scale initiatives. Managed properly and with integrity, I do not fear the dilution.
But, recognizing that seeds for growth need to be planted is an important fact to cope with, as difficult as the short-term ramifications might be. Any person that expects a multi-million dollar revenue-generating company, based solely on marijuana or hemp-based products, is not quite grasping the reality of where we are in the cycle of this sector.
Some companies in this industry will survive, but most will fail. The same principles of start-up business will apply, with less than 50% survival rate within three years. Thus, I am looking for the companies that are taking the right steps at the right time, not the ones who pump out enormously speculative press releases that lead a reader to believe that huge rewards are only a quarter away.
True, money can be made by selling on the news on some of the high-profile names, but why not just take a position in a company and watch their development. Timing a stock can undoubtedly backfire, and often does.
Remember, I said I have a twenty-four month plan, and now you understand the reason. I need to play a long-term time horizon because this industry is barely in its infancy. In fact, I would venture to say that for a good part of the emerging companies, most have not even made it out of the press release stage, yet, they are commanding generous valuations. Be careful, there.
Eventually, though, companies like Terra Tech will move two steps forward as these micro cap press monsters slowly evaporate like smoke from a pipe. It's inevitable that the industry will begin to regulate itself in order to stay credible, and whether the SEC moves in to take a closer look at some of these small, non-reporting companies, or whether the investment market begins to focus only on the strong, many will be quickly weeded out.
Still, many who are investing in this sector want a sexier outlook with "got to have it now" tangible results. Well, I look at Terra as a company blazing their own trail at their own pace. Others in the industry, like PHOT, continue to release pressers that tell investors that they will embark on a huge integrated plan and will earn money on everything marijuana-related.
That is a good thing, especially for my investment in PHOT. But in reality, I happen to believe that with what Terra Tech is doing by building a network of distributors, partners and grow facilities, they will emerge a huge winner.
In February, Terra Tech announced the expansion of their Edible Gardens brand into DeMoulas, a ten-acre distribution deal with a Florida-based farm, Sunshine Growers, to distribute the full line of Edible Garden products. To me, the green light is still on for Terra Tech, as these deals can be immediately accretive to revenue.
Terra Tech also has interest and management from the Vanda Vrede family. Terra Tech has partnered with one of the largest grow property-owners in the region. The potential to develop upon additional acreage in Belvidere, New Jersey and to utilize over 180,000 square feet of greenhouse space is available to expand upon their hemp growing initiative.
And, that is the key difference to me. There is fast money available from fast-promoting companies, who may or may not actually achieve any of their initial goals. In contrast to them, there is Terra Tech, laying the pieces for a strong foundation, accretive partnerships, an acceptable financing package and a growth plan that is extremely feasible.
With indoor growing, they maintain a position to grow the most consistent and high-quality product. Remember, while we wait on the marijuana laws to materialize, Terra Tech will be realizing revenue from Edible Garden. To me, getting paid to wait is a beautiful thing
Terra Tech reported 123 million shares outstanding as of October 28, 2013, and they also recognized 14.75 million shares of Series B Preferred stock. These numbers, in comparison to several of the current high-flyers, is well within reason and certainly does not raise any red flags with me. The Series B Preferred stock dates back to the reverse merger and represents fair value of the transaction. Currently, the stock trades with a healthy average daily volume and the bid/ask liquidity is adequate for efficient trade execution. The expected dilution from the Growmass deal is baked into the share price as well.
To put it all together, Terra Tech Corp remains a top pick for me as a diversification play in the hemp, marijuana, hydroponic equipment and hydroponic grow arena. They have arranged many of the key pieces required to build a durable company, and look to be keenly focused on their strategic business plan.
Well-diversified and insulated from any sudden legislative impasse, Terra Tech is a solid long-term investment that will allow revenue recognition while the longer-term hemp and hydroponic plans develop.
As disclosed, I own PHOT as well. I actually consider my investment in Terra Tech to be my long-term winner, while PHOT will bring me potential swift gains.
Do your research and set your plan accordingly. This is certainly a sector that deserves investment attention, but being prudent is essential for long-term survival.
Disclosure: I am long TRTC. 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.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.