The BAK Portfolio: Moving Beyond Canadian Cannabis

|
Includes: ACBFF, APHQF, AUSCF, CGC, CRON, CVSI, ITHUF, LHSIF, MPXEF, TDRYF, TLRY
by: Bay Area Kid

Summary

The United States is rapidly progressing toward cannabis legalization.

I've decided to take Canadian profits and initiate positions in cannabis companies operating in the United States.

The current state of the portfolio.

Who Is Bay Area Kid?

I am a 28-year-old Marine veteran currently enrolled in the MBA program at the University of Nevada, Las Vegas. I've been managing my own portfolio since 2010 and purchased a rental property in 2016. My long-term investment goal is to make enough money on the stock market to allow me to buy more rental properties, with the end result of an early retirement funded by my monthly rental income.

How I Built The Portfolio

The BAK portfolio was started in March 2017, with the primary goal of capitalizing on a number of emerging industries, most notably cannabis and AI. The only rule I have for the portfolio is that no single stock can make up more than 15% of the entire portfolio. You can read more about the creation of the portfolio in my original article The BAK Portfolio: Making Money On Cannabis And Tech. Starting with this update, I'll be focusing exclusively on my investments in the cannabis industry.

Legalization Is Upon Us

On October 17th of this year, Canada will become the first developed country to legalize cannabis for recreational use. The Canadian legal cannabis market is expected to generate more than $5 billion in annual sales. Licensed providers such as Canopy Growth (CGC), Aurora Cannabis (OTCQX:ACBFF) and Tilray (TLRY) have seen their market cap explode in recent months, mostly due to the Canadian legislatures vote to legalize and Constellation Brands (STZ) $4 billion investment in Canopy Growth. This recent run up in Canadian cannabis companies has resulted in most of them becoming overvalued and has prompted me to take some profits and begin to invest in companies operating in other countries.

Opportunities In The United States

As I wrote about in my article Cannabis: The New Consumer Staple, the United States Congress is currently working on no less than four pieces of legislation meant to bring cannabis closer to legalization. This legislative momentum leads me to view the United States much like Canada was 2-3 years ago: still a ways from legalization, but there's strong support in the legislature and the general public. To capitalize on this opportunity, I've decided to take profits from my two largest Canadian positions (Canopy Growth and Aurora) and initiate new positions in companies operating in the United States.

Just A Taste Of Tilray

Like most investors in the industry, I was eagerly anticipating the IPO of Canadian licensed producer Tilray (TLRY). I initiated my position the day of IPO (July 19), at a price of $20.80, with the intention of holding it long term. The stock had small but steady gains until August 14 (the day Constellation Brands invested in Canopy Growth), when it jumped from $24.25 to $29.10. One week later, it was sitting at $39.94. Not expecting the stock to run up this fast and wary of a downturn, I decided to wait one more week, then, depending on the share price, I would sell half my shares to lock in my profits.

Sure enough, the share price continued to run up and, on August 28, I sold half my shares at $51.86. I then proceeded to watch as the share price appreciation accelerated. One week later I again sold half my shares, this time at a price of $75.66. At this point, I firmly believed that the share price would begin to go back down to more reasonable levels. Over the following 3 days, the share price rose to $90, fell back to $77 and rebounded to over $80. At this point, with the share price up ~300% from where I bought in just over a month prior, I decided to sell my remaining shares at $82.75. At the time I sold my remaining shares, the company was valued at over $6.2 billion, but only booked revenues of $9.7 million for the quarter ending June 30, for a price-to-sales ratio of ~160.

All told, my total ROI from TLRY was 225%. While I did not sell anywhere near the peak, I managed to more than triple my money and avoided the inevitable correction. If the share price falls below $40, I will likely initiate a new position.

New U.S. Positions

Using the profits from my Tilray trades, as well as the profits I trimmed from Aurora and Canopy, I initiated a position in a number of companies focusing on the U.S. market. The main draw of these U.S. companies is their valuation. Compared to the leading Canadian companies, the market cap of U.S. companies are much, much lower. These smaller market cap companies present increased risk compared to larger companies, due to high volatility and less analyst coverage. Their revenues and price-to-sales ratios are based on their latest quarterly filings.

Australis Capital Inc. (OTCPK:AUSCF)

Market Cap: $177 million

Revenues: N/A

Price to Sales: N/A

A spin-off from Aurora Cannabis focused on investments in the U.S., Australis began trading on September 19th. As part of the spin-off, Aurora issued Austalis shares and warrants to Canadian citizens, while U.S. investors were to receive a cash dividend (I'm still waiting on this dividend). My plan was to buy on the day of IPO then sell after the expected run up. Unfortunately, things did not go as planned. The extreme amount of interest in the stock resulted in it opening at $10, while Aurora issued warrants priced at $0.25. As soon as Canadian investors received their shares, they sold them and the price tanked. Less than one hour after I purchased my shares, they had lost 80% of their value. While the IPO was, in my opinion, very poorly managed, it's ultimately up to the individual to make sure they know exactly what is going on. Lesson learned.

Canopy Rivers (OTCPK:CNPOF)

Market Cap: $806 million

Revenues: N/A

Price to Sales: N/A

Canopy Rivers is the venture capitalist arm for Canopy Growth, which owns ~30% of shares. The CEO of Canopy Growth, Bruce Linton, is also the CEO of Canopy Rivers. While Canopy Growth is mostly focused on producing cannabis products for the Canadian market, Canopy Rivers is investing in media & lifestyle companies, consulting firms and international cannabis operations.

CV Sciences Inc. (OTCQB:CVSI)

Market Cap: $439 million

Revenues: $12.35 million

Price to Sales: 35.55

CV Sciences Inc. operates two different business segments: pharmaceuticals and consumer products. Both segments rely on the same product: hemp-derived CBD oil. While its pharmaceutical division is using CBD oil to develop medications to treat specific ailments, its consumer product products divison sells the very popular Plus CBDOil brand. Plus CBDOil is a health and wellness brand that allows costumers to consume high quality CBD oils via sprays, drops, balms, capsules and softgels. Unlike most cannabis companies, CV Sciences has posted positive net income three quarters in a row.

(Source: Investor Presentation)

Liberty Health Sciences (OTCQX:LHSIF)

Market Cap: $359 million

Revenues: $869,000

Price to Sales: 413.12

Liberty Health Sciences is a vertically integrated cannabis company primarily operating in the state of Florida. In addition to their operations in Florida, the company is also operating Massachusetts and looking to obtain licenses in Michigan, New Jersey and Ohio. The company has heavy ties to Aphria (OTCQB:APHQF), with Aphria co-founder Cole Cacciavillani acting as Chief Agronomist, while Vic Neufeld (Aphria CEO) and John Cervini (Aphria co-founder) serve on the Board of Directors.

(Source: Investor Presentation)

MPX Bioceutical Corporation (OTCQX:MPXEF)

Market Cap: $296 million

Revenues: $14.5 million

Price to Sales: 20.41

MPX is a vertically integrated cannabis producer with operations in Arizona, Nevada, Massachusetts and Maryland, with plans to expand into New Jersey, Pennsylvania, Ohio and the Canadian province of Ontario. The company currently has fully-funded production of 9,000 kg of flower and 2,000 kg of extracted oil. They are also operating 10 retail locations.

Tidal Royalty (OTCPK:TDRYF)

Market Cap: $26.88 million

Revenues: N/A

Price to Sales: N/A

As its name suggests, Tidal Royalty is a royalty financing company focusing on the U.S. cannabis market. The company was founded by Paul Rosen, who co-founded The Cronos Group (CRON) and is currently on the Board of Directors for iAnthus Capital Holdings (OTCQX:ITHUF). With negotiations ongoing in at least 7 states, the company is one of the few that will have a presence on both coasts, as well as the midwest.

(Source: Investor Presentation)

Current Portfolio

Plans For Q4 2018

In the next few weeks, the largest U.S. cannabis company, Acreage Holdings, will IPO. When it does, I'll have one more round of profit taking from Aurora, Canopy and Aphria, and put the proceeds in Acreage, which will make it my largest position in the portfolio. I've heard that the IPO will come sometime in November, but the company has not confirmed anything quite yet. When they set a date and their prospectus is available, I'll be publishing an article that dives headlong into their operations.

Conclusion

The Constellation Brands and Canopy deal saved what had been a very ugly 2018. Fortunately, the alcohol conglomerate decided to jump into the industry head first and spurred a huge rally in the sector. Unlike the rally at the end of 2017, I decided to take profits on the way up and put those profits to use by investing in companies that I believe will be at the forefront of the U.S. cannabis industry.

Thanks for following along and, as always, any feedback is greatly appreciated. Good luck in Q4 and happy investing!

Disclosure: I am/we are long CGC, APHQF, ACBFF.

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.

Additional disclosure: I am long all stocks in the portfolio

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.