Listen on the go! Subscribe to The Cannabis Investing Podcast on Apple Podcasts or Spotify.
- 2:50 – 420 Investor’s origin story
- 8:30 – Cannabis investing timeline – now is not necessarily the time for everybody to buy cannabis stocks
- 17:50 – Ayr’s (OTCQX:AYRWF) debt and executive changes
- 24:00 – Tangible book value and how to gauge cannabis stocks
- 29:00 – Planet 13 (OTCQX:PLNHF) a business that’s managed well
- 34:40 – Still bullish on WM Technology (NASDAQ:MAPS)
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Transcript
Rena Sherbill: Alan, welcome back to The Cannabis Investing Podcast. Thanks for taking the time on a long holiday weekend. Appreciate your time.
Alan Brochstein: I’m happy to be here and very grateful to you for hosting me again.
RS: Happy as always to have you. It’s exciting times for us at Seeking Alpha. You officially joined our — I could say rejoined, but joined in a new way to one of our Investing Groups, 420 Investor officially launched at Seeking Alpha.
I’d love to start there, kind of share what’s going on? How does it feel to be back in the community in that way, through 420 Investor, not just writing some articles? And then also maybe share what you have kind of going on over there what you’re sharing with subscribers, or what the discussion is revolving around a little bit.
AB: Sure. And for those that don’t know me, 420 Investor is going to be 10 years old very soon.
RS: What?
AB: I know. Wow, am I glad to be at Seeking Alpha. So let me tell the whole story. February of 2013, I read at my favorite financial portal Seeking Alpha, where I was a big contributor, about a cannabis stock. I was like, wow. I said, wow, for two reasons. Number one, is much as I was pro-cannabis, I hadn’t really paid attention. I didn’t realize that two states, Colorado and Washington had legalized.
But number two, holy crap, these companies are terrible. And so, I started writing on Seeking Alpha about how bad the publicly traded cannabis stocks were. In fact, they weren’t really cannabis stocks for the most part. And most of those companies are gone now, and they were almost all scams. I liked GW Pharma, but the rest of them no.
And some of the readers accused me of being paid off by big alcohol or big pharma or big tobacco for bashing on the cannabis sector. They didn’t really understand. No, I am very pro cannabis. And in fact, I didn’t talk about it. But I had been a cannabis consumer in college and when I moved to New York City. And after I got married in 1990, I had not used cannabis at all. So it had been quite some time, more than two decades of no cannabis.
And worse than the no cannabis was I didn’t know about cannabis, all the medical benefits, the legal complexity, all that. So I turned to Benzinga and I asked them, would you be interested or would you allow me to run a cannabis-focused service? And they said, let us call you back. Two minutes later, they called me back and said, yes. And the rest is all history.
So to answer your question, I am so happy to be at Seeking Alpha. I’m not happy, and we talked about this in February. The times are very tough right now for cannabis investors and cannabis companies. And no, I’m not happy about that. But I’m also not the kind of person that’s going to tell everybody, you’re going to buy cannabis stocks right now? No.
And so what am I doing at 420 Investor, a lot. I’m keeping my subscribers informed. I’m reading all the filings, sharing all the press releases on now 28 names that I keep on my focus list. And I’m giving previews of their earnings reports with one – year-end price targets, which I’ll change to one year at mid-year. But right now, I’m focusing on year-end 2023.
I’m running two model portfolios. One’s called — these are easy to figure out, one’s called Beat The Global Cannabis Stock Index, where I’m trying to Beat the Global Cannabis Stock Index, which is maintained by New Cannabis Ventures. And that’s old. I had it under a different name at Benzinga. And I actually had two model portfolios, 420 Opportunity and 420 Quality that were pretty much the same thing. And they were the exact same thing, ultimately, with different rules.
But – and then the new model portfolio is called Beat the American Cannabis Operator Index Model Portfolio, where I’m basically trying to beat that index. But I’m trying to beat (MSOS). And that’s been a tough model portfolio this year. And the other one on my head of the – you know, I’m doing my job. But I tell all my subscribers, I’m trying to go down less than other cannabis stocks or go up more than them when they’re rallying. And I can’t guarantee that you’re going to make any money, because if cannabis stocks go down, it’s hard to make money in cannabis stocks.
And so that’s what I’m doing right now, and trying to think what else. I do 10 videos a week. I’m sharing four of them are on a weekday afternoons for the next day. And then every morning, an hour after the open, I give what’s called My AM video. So 10 videos a week. And for the nine that aren’t on the weekend. They’re 5 to 15 minutes, and they’re mainly technical, but one on the weekend, I know that a lot of subscribers are busy living their lives, and they don’t have time to read everything and I try to take that into account. And I try to make sure that not only am I covering the charts, which I think are very important, but I’m also trying to share valuation and news updates as well. I think that’s all.
RS: I think that’s all. Yeah, not too many things. Just a couple.
AB: It’s a full-time job.
RS: I bet it is. I know that it is. I know that it could be four full-time jobs. There’s so much to take in. So I want to kind of pick apart a little bit in terms of the timeline of investing or whether or not investors should get in. And this is something that’s bandied about quite a lot in various circles and at various times.
And a lot of people that we have on the podcast always kind of highlight the fact that the timeline for cannabis investing should be long. It should be something that you’re looking out at the horizon in terms of when it’s going to — the fundamentals are going to match, kind of what it looks like in the marketplace and the prices that are reflected.
So how are you — I know you said that you’re not going to say what time it is it, whether or not it’s time to get into the market. But what would you say to investors is the time? Is it — I know you’ve spoken a bit on this podcast and also recently about 280E coming down and uplisting that the timing of that is unknown. But would you point to those things as catalysts that investors can kind of look out for?
AB: Yes. So let me just state clearly for our listeners. Now in my view is not necessarily the time for everybody to buy cannabis stocks. I wouldn’t short them. I don’t trade cannabis stocks, as I’ve explained to you in the past why. But if I were a long-term investor, I would recognize A, the cannabis stocks are really cheap. B, the two good things that I shared with you last time that you just repeated, are the only two good things that I can come up with still, which are the elimination of 280E, which we can talk about more, or the ability to trade on the NASDAQ for American cannabis companies, which we can talk about more.
Those are really the two only things that right now that I’m really focused on. And at the same time, I used to not be so concerned about the debt levels for American cannabis companies, but I am now. The market is down a lot. And I’m sure your listeners know this. But we’re down 21.4% year-to-date. And it’s bad. It’s not ending. This is a bear market that started in February of 2021, and here we are 27 months later. And it’s still — we made a new all-time low Friday, it is still a bear market.
And so I think if you’re going to buy the dip, you have to get the timing right. I was wrong. After my tragedy, I saw the prices have fallen. I’m like, whoa, what a great deal. It’s a greater deal now. And so, I think it’s really challenging for people to see a good deal and to try to get the timing right, when is a good deal not going to be such a good deal anymore. And so, I’m not seeing anything right now. And we talked last time about some of the problems in the market are technical. And the volumes remain very low, trading volumes, unbelievably low.
And even when it rallies, it’s very low. And to me, right now, it looks like pretty much a fully retail investor base, because the institutions aren’t involved right now, for the most part, is kind of out of time and out of money. And they’re not looking to buy anything. And when I write an article on Seeking Alpha, I do a good job, in my view, and in the view of some others, of sharing both positive and negative ideas. And no, if I write something positive, the stock doesn’t necessarily go up. And if I write something negative, like I did last week on Tilray (TLRY), you know what happens? I get whacked by the readers.
They don’t accuse me of being paid off by big alcohol, big tobacco or big pharma, they just accused me of being — you can read the comments. They make some pretty nasty… a lot of them get deleted, but some of the ones that stay up are pretty nasty. And the way I look at it is this, that the retail investors don’t want you to say anything bad about the stocks that they’re way, way down on. And I don’t care. I mean, I feel bad for them. But I want to share a good long-term perspective.
And so I’ve been very critical of two stocks in particular. We talked about them last time. And I said, I don’t like either of these stocks. They’re down so much since then, Canopy Growth (CGC) and Tilray. And if I criticize them in their article, wow, do people get bent out of shape?
RS: Yeah. I want to get into the debt conversation. I – first, I think we should keep it broad as we’re getting into it. I’m interested to hear your perspective on how you think 280E gets taken out of the system? And what, if anything, replaces it and what that looks like?
AB: Yeah. And so sadly, there is no legislation being introduced to take 280E out. Should we be surprised? No. For the federal government, this is free money. And there are people out there that think it’s wrong. There are politicians, but they don’t have any power. And it’s going to be hard for Congress to just make things right for the cannabis industry.
So the reality remains. Right now the way the law is, if cannabis is moved from Schedule 1, which is kind of silly by the DEA, I mean really silly, we can all agree on that even, when people are talking about medical cannabis, they’re like 90% of the people are in favor of it. So it should not be Schedule 1. But if they were to move it to Schedule 2, it wouldn’t matter. The way the law is written now, written then I should say, currently and then, if it’s scheduled 3 or higher, then 280E goes away.
Now, as I said last time, Biden has never proven himself to be a friend of the cannabis industry. And I think I understand why. I think it has to do with his son’s addiction problems. And I don’t think they were related to cannabis. But he’s not pro cannabis. He did come out in December and say some things that were kind of pro cannabis, but that government, under his leadership, hasn’t really done anything. But he did suggest that the DEA should review the scheduling. And so there is a chance that they listen and that things change. But I don’t think the government is going to change 280E otherwise.
The way I operate, Rena is, I’m aware of what’s important and I look out for it. So if I see something that would point to 280E going away, A, I know that how big that is; and B, I can very smartly communicate that with my subscribers or with my readers at the right time. But I wouldn’t be betting on that. No. But is it going to happen? I can’t rule it out.
RS: Right. I think we’ve seen if we try to bet on any political maneuver vis-à-vis the cannabis industry, it’s a fool’s kind of game.
AB: I was against people getting excited about SAFE Banking. And this has been a lot of times that Congress just passed it and the Senate hasn’t voted on it. And most recently, the Senate did have a discussion, and people got all excited in advance of that. And then they listen to it, I guess, and nope, they’re not excited.
And I think if you really look at SAFE Banking, I think, there are a lot of desperate people that are either investors or people that are paid by investors or companies that anytime they see something that could maybe possibly make a difference, they get all excited, and I just don’t understand it.
From my view, SAFE Banking is very fair and should pass. Will it pass? I have no idea. Will it help Curaleaf (OTCPK:CURLF), GTI (OTCQX:GTBIF), Cresco (OTCQX:CRLBF)? No. They all have bank accounts already. And I know some people will — they’ll say some other things like, well, maybe custody will take place. Well, maybe. But A, it’s – it may not even pass; and B, I think we have time to react if it does.
What you said is right. I mean, never get excited. Oh, Germany is about to legalize. Does that help? No. I haven’t seen anything from the government, not even Minnesota is about to pass legislation. The governor is going to sign it soon, and they’re going to become a legal state. And no, I wouldn’t get excited even about that.
RS: So speaking of not getting excited about things, let’s talk about debt for a second. You were on last time in February talking about Ayr (OTCQX:AYRWF) and contextualizing its debt and saying that it’s not necessarily worrisome. We had [CEO] David Goubert on. Did you know about that announcement before it was announced to the public? I felt like listening back to that conversation, you knew that David was coming on as CEO before it was announced? Am I wrong on that?
AB: No, no, I didn’t know. I saw when it happened, and I thought it was good. I’m not going to say anything negative about him, except I haven’t been impressed at all.
RS: In what way?
AB: And I will say, well, I can say that a lot of people didn’t like his predecessor. And so, Jon Sandelman stepping away could be a good thing. I would also say, I went and reviewed our conversation from February, and I was complaining at the time about out all the lawyers and financial people running these companies. And that doesn’t mean that they’re not good leaders, but it’s a big question mark.
And so this guy, I can’t really find out if he was good in Neiman Marcus. I used to like Neiman Marcus as an entity, but he comes from out of industry. And so, on the one hand, it’s good. He’s not a financial type, or a lawyer. But on the other hand, there have been great examples of people showing up in the cannabis industry and having a very tough learning curve. And I’ve listened to him. I’ve listened to your podcast with him as well and I’m just not impressed yet. And he may get there. But I think he’s struggling with the learning curve, if I had to guess.
RS: I want to ask a question for one second, how would you contextualize Jonathan Sandelman’s era at Ayr? I know we just saw huge turnover, not just in the CEO role.
AB: Yeah, it’s scary. How much — how the people just left.
RS: Yeah. Would you…?
AB: They are not a client anymore. So I’ll tell you something, I wouldn’t have said when they were a client.
RS: Okay.
AB: Jon Sandelman shushed his CEO or Co-COO on a call. And I was highly offended by that. And – but first of all, it was a man shushing a woman, which I don’t like; and B, I don’t like any CEO shushing any executive officer. And that was just an example of Jon Sandelman’s problems, I think, with being a leader there. And he was, I think, a financial executive in the financial investment world at Bank of America, but he falls in that camp of not really being a proven CEO. And he lost some, I think, good people, I don’t know. But I…
RS: Do have an issue with the compensation because I know that that’s pointed to not just at Ayr, but that’s one of the things levied at them. Do you have an issue with the compensation levels that are — or at all in the industry?
AB: So that’s a fair question. And I used to be really focused on that. One of the things I did before starting 420 Investor, was I was working for a company called Management CV, which is an independent research firm based, I think, in Maryland. And I would look at the leadership, how they were paid, and a lot of other things as well. It wasn’t just that, and try to evaluate management teams, management changes. And I can tell you, one of the people that I did an evaluation on, was none other than Irwin Simon. And it was a very negative review that I wrote. And basically, very high pay, and he sold all the stock or a lot of the stock. He was making so much money selling stock.
RS: Just what you want to see as an investor.
AB: Yeah. And so, I think your question is good. I have not really looked into that. And I think in the cannabis industry, it’s kind of tough, because a lot of these — the people running the companies are the founders. And so how do you break apart equity stakes that are ownership versus equity stakes that are leadership. And I think it’s hard, and so no, I haven’t done that. And I know, I could do that. And overtime, I will do that. But I think right now, there are so many bigger issues. And that’s what I focus on right now.
RS: So just furthering the point on Ayr, what would you point to as something that you would like to see from David Goubert or that you would like to see from Ayr out in the marketplace?
AB: So I took this very well. I was loaded up on the stock in my model portfolios. I own zero now. After that spike, I got out, not at the very top, but higher than it is now. And I would buy it back. I’ve shared with my subscribers exactly where. It’s way above the low, but way below where we are now.
And to answer your question, what I would like to see is more exit from markets put themselves in a better position, that the debt isn’t really a problem. And I know on the last time we talked, I said that their debt is very high to their market cap and I think the answer is their market cap is too low.
Well, their market cap is higher now. And — but their debt is still there. They have taken some very bold steps. They walked away from M&A deal in Illinois that could have been tough. They sold their Arizona assets. So these aren’t easy things to do. And you’re basically saying, we’re going to be a big cannabis company, but we got to take a step back. And I agree with that. And I’d like to see them just make further progress on shoring up their balance sheet.
RS: In terms of how you’re looking at stocks, Jerry Derevyanny was on the podcast a couple of months ago talking about how he’d love to have a conversation with you about book value and how he doesn’t feel that that’s one of the top metrics that he would use to look at cannabis stocks. What would you say to that?
AB: So I would agree, huge. And I use tangible book value. And I’m one of the only people that I see writing on Seeking Alpha for cannabis, talking about tangible book value. And I can — we can go into a big story right now in my mind about it. And just for your listeners that don’t know what tangible book value is, book value has a big flaw. When a company does an acquisition, it creates goodwill, and the goodwill goes on the balance sheet as an asset. And so, if you are looking at equity, it can be inflated by goodwill. And that’s not the end of the world. But tangible book value is the equity value less the intangibles less the goodwill.
And the big story in my mind, something that should be top of every cannabis investor’s mind, in my view, is how there are in Canada, some LPs that are trading way below tangible book value, way below. And I have — I just wrote an article for Seeking Alpha that will be published today or tomorrow. And it talks about the three that I own. 45.7% of my Beat The Global Cannabis Stock Index is in alphabetical order, not in my position sizes: Cronos Group (CRON), Organigram (OGI) and Village Farms (VFF).
And I explained in that article exactly what turns me on, and I’ve written articles about each of them on Seeking Alpha. And they represent about 10.5% of the index. And in fact, the LPs as of Friday, it’s – there are 8 of them that are in that index, 8 of the 27 names. And they currently make up 25.9% index. This is a huge bet. And I’m telling you this because it comes to your question. The price, or book value is very low for these companies.
And just to give you the highlights, I think that the big problem with tangible book value is that it doesn’t take into account debt. Not a problem here. Cronos Group and Organigram, tons of cash and little debt or no debt. And even Village Farms, they have a little net debt, emphasis on little, and comparatively now Canopy Growth is trading below tangible book value, ton of debt, burning cash. And Tilray, which I wrote a negative article about a week ago, and then they priced the convertible note. I had already written a negative article right before they reported in April – on April 10.
And that company, there’s a lot of challenges. A, are trading way tangible book value with a lot of debt and net debt. And in a lot of it’s due soon, and that’s why they did this convertible note. So that’s Canada, the Canadian LPs,. you can find examples of companies that are in, I think, good position that have very low price to tangible book.
When you look at the U.S., au contraire, for the operators, I like Planet 13 (OTCQX:PLNHF), we talked about that last time. I told you I bought it in my model portfolio at year-end, but I had exited it. Now I own it again big time. And it’s not in the Global Cannabis Stock Index.
But they — I can look it up to tell you exactly what the answer is right now. They have cash, no debt. Book value on Friday was 1.05 times. That is unbelievable to me. And absent that I like the company a lot. And if you compare that to their peers, which are mainly the larger companies, no. A lot of those companies have negative tangible book value and a lot of debt.
And I think Planet 13 is a very safe investment. We could talk more about the other reasons to like it. But to answer your question, I think, yes, investors should pay attention, especially in a struggling industry, which ours is right now, to tangible book value.
RS: And how would you synthesize – maybe it’s what you said the other reasons to be bullish on Planet 13. But how would you synthesize how Planet 13 has been so successful in getting those really kind of high-quality numbers?
AB: Yeah. So first of all, I don’t know if they’re the best business people ever, but it’s run by two real business people. And that’s the first thing. The second thing is they’ve done a good job. They were pretty much 100% in Nevada, right, when — they were 100% in Nevada when the pandemic hit. And Nevada was really impacted by the pandemic. This company did a lot of good things in Nevada, which still hasn’t recovered really. And – but they’re much more than that now.
I’m not sure about the way that they went about getting into California. They opened a store there and they were growing — they did M&A. And I don’t want to sign off on it completely. But I will say, I think California, which is the world’s largest cannabis market, and it’s doing very poorly now, but getting better maybe, I think that is going to be a good thing in the long-term. And they have a lot of opportunity in that state, which is legal for adult use.
And importantly, Florida, they bought the Harvest asset, because Trulieve (OTCQX:TCNNF) when they bought Harvest, had to get rid of it. And that has contributed zero revenue so far. And I have some problems with Florida that I could share with you. Not that it’s so bad, but I get a little cautious about Florida. And…
RS: In terms of what, just really briefly?
AB: Okay, sure. So the Florida patient growth is about 13% year-over-year, which sounds good, but it’s the lowest it’s ever been. And they started off with a pretty strict program. But now they have edibles and they’ve moved way beyond flower, the edibles were the most recent and flower was the second most recent. So it’s a maturing market and with big participation already. And oh, by the way, Florida really benefited from the pandemic. People left other places and went there. And that’s part of it.
The other part is Florida is weirdly a vertical market. Everybody has to make what they sell, and they can’t make and sell it to someone else. They got to sell it themselves. And I think Planet 13 will do fine there. But where they’re really doing well there is if the state goes adult use, then I think it – well, if they go adult use and it stays vertical, they’ll be able to do that. And they have a lot of experience with superstores. I’ve been in the Nevada store. And it’s not my kind of place. But wow, do I respect what they’ve done there? And I think that kind of store will do great in Florida. And so that’s Florida.
And then the third part — fourth part is or the third good reason to like them, oh, I guess it’s fourth, Nevada coming back, California expanding, Florida, Illinois, and they had a deal with a minority person that they bought out. And it’s for one store and the analytical, Alan, one store who cares? And I never really gave it much thought.
But they announced that it’s going to be near the border of Wisconsin, which is not legal for adult use. And RISE, which is GTI, has a store that’s not as well located. And they just shared on their last conference call how well that store is doing. And this store with a better location, close to the highway, close to Wisconsin border, should do really well.
And they shared — I think what they said was $15 million a year, which is really a who cares. But I think on the call, they said, we think we’re being very conservative. We think maybe it could do 50. And I thought about it, yes. And so, they’re a small company, $50 million of revenue from one store, which I think is possible, would really be a game changer. So I like the company, debt free right now. Nobody seems to care. In the past, they cared a lot about that. And so that’s Planet 13.
RS: It’s interesting, the productivity per store is something that Dan Neville, the Co-CEO of Ascend (OTCQX:AAWH) was on here talking about. I know Ascend is a company you like. And he was saying that one of the reasons he likes it is because they have stores that are doing super well by that metric. But what you’re saying, I think, can really point to that, even if it’s not doing — even if it’s not a high number of stores, and – but relative to what’s happening, it could really change the face of that. Is that also something that you pay attention to productivity at this point?
AB: I understand what you’re saying, but I don’t really track that so closely. I track more financial things, like not on a per company basis, but how — what’s the valuation look like this year? What’s it look like next year? That’s really what I’m looking at. And what’s the net debt, things like that. But I mean, there’s nothing wrong with that. I just don’t track that so closely.
RS: Yeah. Another company that I’m interested to hear you share with our audience is WM Technology (MAPS), who, you’ve been on a few times talking about why you’re bullish on them. They went through a CEO change also that I felt like was surprising. I just talked to Chris Beals, their CEO, and I was surprised that that he was gone so soon after that. I’m curious what – how you would articulate your bullishness on them.
AB: So for anybody that wants to read about my bullishness, A, I shared a very bullish point of view in a group piece that Seeking Alpha published earlier this year. But more recently, I followed it up, and I can look at the title — hang on a sec.
RS: By the way, we will be sharing all these articles in the podcast show notes.
AB: Yeah. So the article was titled — it was written on May 1, so this month. And it was published, I should say. It was written in late April. “Put WM Technology on your Cannabis Investing Map.” Wow, was that well timed? I could brag about my Tilray article from last week predicting a lower price being well-timed. But this was even better. The stock went up a lot after I wrote that, not because I wrote that. And I think that’s the best thing I can tell your readers is, read that article, if you really want to know what I think about it.
But to get to your point, they don’t have a new CEO. They have an interim CEO, who’s a Co-Founder. And I told my subscribers, this is kind of a risk or an opportunity. If they can get a really good CEO, it could help. But I do worry about that too. What if they can’t? But the current person running it, I think can do a fine job. And I think it’s a good company. And I wrote right before my tragedy a year ago, an article about why, for my subscribers at Benzinga, at the time for 420 Investor about why Leafly stunk compared to WM Technology.
And in hindsight, they both stunk. But I was right. Leafly (LFLY) really stunk. And I think WM Technology has done better stock-wise and performance-wise, operationally. I think they’re very California-centric. And that’s been a challenge because that market has been just terrible. And — but I think that they have really good technology and sticky revenue. They are losing some clients. But that’s because the clients are just going under. It’s hard to keep a client when they go under. But – so I would just tell your listeners to read that article, if you want to know more. And I would conclude by just saying the stock looks really cheap. I think it can more than double.
RS: And what did you or what do you attribute that spike to?
AB: The spike recently?
RS: Yeah.
AB: I don’t know.
RS: Yeah.
AB: I think that to answer your question, Rena, I think, okay, I sold the stock on the spike. And so, what I want to communicate is, if you’re in cannabis stocks, and they go up and you can’t figure out why, sell them. There are plenty of cheap cannabis stocks to buy.
RS: Yeah.
AB: And I didn’t buy Leafly. I’ve been buying Hydrofarm (HYFM). And is it working? No, no.
RS: There’s that actionable insight where we always promise that’s an actionable insight. Yeah, I mean…
AB: And I do trade a lot in my model portfolios. And I tell my subscribers, you don’t have to do them all. You can just check once a month and reweigh them they might be — who knows, I might start the month and in month, exact same, but there’s a lot in the middle. And I am in my favorite model portfolio that I’ve been running, really, for 10 years now, beat — it used to be 420 Opportunity, and then also 420 Quality, but now it’s called Beat The Global Cannabis Stock Index. I am doing that. And it’s not so great right now. I’ve had some problems.
As I always like to say I’m not perfect. I don’t know the future. And I can be intellectually right, but realistically wrong, because things in the cannabis market or in the stock market in general, don’t necessarily work out the way they should immediately.
RS: Salient point. We are fallible people. And also, reality is not linear. It doesn’t work like that. I wanted to ask you to expand on your thoughts about California. You said it’s doing better. Would you attribute that to pricing? Or what else would you attribute? Why you think it may be doing better? With a huge qualifier that, like we just said, who the hell knows what’s about to happen.
AB: Well, and I was going to say it differently. I was just going to say, it’s not just because I was there with my wife in December, celebrating my miracle, our miracle. And we had a nice time, and we visited Lowell Farms (OTCQX:LOWLF), which I know I talked to you about last time as being a debt heavy company. Well, it’s still pending, but their debts about to get wiped out. And I don’t think investors are paying attention to this, but I’m not trying to really pitch Lowell.
RS: Do you like that deal that happened…?
AB: No, I don’t like George Allen leaving the company. He is one of my favorite people that I’ve met and kind of goes against what I said. I’m kind of leery of financial types, running these companies. And that’s what he is. That’s what he was. But he also was operational at Acreage, which he was smart enough to get out of, if you ask me. And so I don’t like that he’s gone. But I think I like who’s there? And I liked what I saw there.
But to answer your question, I think, we see this with investors. I think the industry has the same problem, too much optimism and then too much pessimism. And I think California has been very poorly regulated. And everybody has assumed it, it will always be poorly regulated and I don’t know if that’s true. And I think prices just got too low. And I think the real problem there has been this faceoff between the legal market and the illicit market. And the illicit market has been — not going away.
And Humboldt County, especially where there’s a lot of brilliant brilliance there, and those people– when I was at Lowell, I met their head grower, and he told me, and so I don’t think I’m telling the world anything that’s not known. He told me that he was in Oregon, running a company where it’s — I don’t remember if he was working at a legal or an illegal company. I don’t want to say it was illegal. But he left that company in Oregon and came to Lowell. And I asked him, I said in California, so many people are leaving the legal industry and going back to the adult — to the illicit industry. Why? Do you like this? And he explained it to me, and I really respect him in that view.
And I would say there that a lot of folks are — okay, so a lot of the company’s kind of have two doors. One they sell to the legal side, one, the illegal side, which you can’t do. And two, I would say a lot of people that are in the legal cannabis industry kind of see a better deal in the illicit market and I think that’s been a big problem. And I don’t know if I — that it will go away. But I don’t think it can get much worse. And so, I don’t really have a forecast.
I don’t track, California, but I can watch it. And I know I’ve been reading stuff about the pricing getting better. And it was so low. And I follow a lot of companies there. And this is good to see getting better.
RS: Yeah. Yeah, I was also at Lowell Farms last summer. And I was also really impressed with what was happening. And I know, as a brand, I still feel that it’s a really strong brand in California. I really love those Lowell 35’s. Do you — what would you say to investors in terms of their debt getting wiped out? How are you — just because we’re – we’ve talked about that company on the show, and I also really like George Allen and think that he had a lot of insightful things to say about the industry. How would you just briefly kind of go over your thesis there?
AB: So I would warn people, it’s very small. It’s not in any index. It’s very illiquid. But I would also say, look at George Allen. Yes, he’s not running it, but he owns a lot of stock and he’s not going to sell it. I suggested to him, I don’t think he did it yet. But did they publicize an agreement that that he’s not going to sell it. And so I think that would help. The deal is not done yet.
So I need to be very careful. If they don’t get that deal done, it’s a zero, in my opinion, it’s a lot of debt. And – but I would summarize it is, I think, debt-free. The stocks really cheap, and trading way below tangible book value. But as you and I discuss there’s a lot of that out there, especially in Canada. And so, is that a reason? Not until they can prove their profitability and no, right now, they don’t look very profitable. It looks like they’re okay cash-wise after this deal, and they just did a sale leaseback. Does that solve their problems? No, but it gives them a nice runway.
RS: I just spent some time in California. And I think one of the players that analysts talked about there,
AB: You’re going to say Glass House (OTC:GLASF).
RS: I’m going to say Glass House. You know it, what do you – do you have thoughts about them?
AB: Well, I do have thoughts. And Kyle Kazan wants me to go and visit and I want to visit.
RS: You got to go. I went there and it’s super impressive. It’s crazy to see, to be honest.
AB: Well, I haven’t been there. But I will say just from my understanding, the way they’re going about it is a little questionable.
RS: Okay.
AB: Having one big room. And just from what I’ve learned, I’m not a technical expert, but I’ve read a lot, not about them, but about that idea of having one big room is not the right way to grow cannabis.
RS: Because if there’s a problem, then…
AB: If there is a problem, it’s going to be a big problem. But I will say, I think Kyle Kazan, who I like personally, I’ve talked to him, I think that he gets a bad rap, because he used to be a cop that would throw people in jail. But he’s not that person anymore. He has come around, and he’s 180 degrees different. He really believes, and I think some of the people that aren’t fans of the company think he’s gone a little too far for being pro cannabis. I don’t think that either.
But I’ve never met Graham Farrar, who I think is kind of the operational brains. So I’ve never been there. I do pay attention to the company. The stock is way down from that $10 price. But technically, it’s up a lot. And if I can get past the valuation problems that I see right now, I will tell you that a lot of the people that like the company, are getting excited about something I don’t think is going to happen, I could be wrong. And if it happens, I can change my view and probably still buy it. But I think that a lot of their investors are counting on California being an exporter, interstate commerce, and I’m just not seeing that right now.
And we talked earlier about it. You can’t invest based on things that might happen. Things are very slow to happen for the cannabis industry, and that’s a really difficult situation.
RS: I have met Graham Farrar, and I do just want to point out that that I feel like I would concur that the bad rap that they get on that side is a bad rap that’s undeserved in terms of, I think, what they’re trying to bring to the marketplace. But in terms of your point about interstate commerce, what do you think it looks like?
AB: California will only consume California. They’re not going to be able to export it to Oregon, not anywhere. And I could be wrong. I will adjust my thinking, if and when that happens, but I’m not planning on that happening.
RS: How do you think that it plays out in the next couple of years? What’s your viewpoint?
AB: So I think that — okay, as you know, I think, I really paid close attention to Canada early. And I still follow it very closely. And that was a big deal. It was a huge country to have a federal medical cannabis program with some good points and some bad points. And when they decided that they were going to go legal for adult use with Justin Trudeau elected on that, people got overly excited. And you can look at the stocks and see what they did. And that deal almost failed at the second reading, or whatever it was, it almost failed.
And then the third reading, people were nervous, but it passed. And what a disaster adult use has been in a lot of ways in Canada. We can talk more about the problems there, but the market is big. C$400 million about US$300 million a month in adult use sales, that’s big. And there’s a lot of problems there. But I think the thing that I learned from that, Rena, is the United States is much more complex. We don’t have any federal medical cannabis. And to go to an adult use program, legally for federal is going to be a big challenge. And A, to get it done; B, every state is different.
And if the federal government is going to have a federal adult use, they’ve got to solve this problem and have it be uniform across the state by the rules, vertical integration, not vertical integration. Edibles are not edible. There’s a lot that has to be worked out. So my takeaway is, it’s going to take a long time, and it took Canada — what year was Justin Trudeau elected, ‘16?
RS: I was going to say 2016. [Ed: It was 2015]
AB: Yeah. And it wasn’t till the end of 2018. And that was a much easier situation. Was it easy? No. It proved not to be easy, but much easier than the U.S. would be.
RS: Yeah. There’s so many things to keep to keep up with. I appreciate you coming on, Alan. This is another chapter in this conversation. Always appreciate talking to you. I feel like once again, I could bend your ear for another three hours. And I don’t think the insights would stop. So I’m going to put a pause in the conversation for now. I appreciate you taking the time on a holiday weekend. And I look forward to the next one.
AB: Thank you so much, Rena.
RS: And everybody can find Alan’s writings on Seeking Alpha. If you look for Alan Brochstein 420 Investor is how to find his investing group. Appreciate it. Alan, talk to you soon.
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