Grown Rogue Stock: Poised For Explosive Growth

The following segment was excerpted from this fund letter.

Grown Rogue International Inc.

On the face of it, Grown Rogue (OTCPK:GRUSF) looks tiny and insignificant. The stock is a penny cannabis stock and a very illiquid one at that, trading around C$0.23 per share. Its volume has recently risen from almost nonexistent to 53,000 shares a day. But even that is only about C$10,000 a day in total trading volume!

Why in the world would you buy a stock that is that illiquid? In a nutshell, the company has a competitive cost advantage over much larger cannabis companies when it comes to producing high-quality indoor cannabis flower and their growth is poised to explode from 30% year-over-year growth to potentially over 100% growth at a time when most cannabis companies are retrenching and showing little if any growth at all.

I believe Grown Rogue is the most efficient indoor cannabis cultivator that is publicly traded in the world. My research shows that it is operational excellence that is in short supply in the cannabis industry, not limited licenses, and that is what Grown Rogue has mastered and gives it a competitive advantage.

Grown Rogue produces the #1 flower in Oregon, a market with sophisticated consumers and a legacy market where if you don’t produce the best flower, it won’t sell. But Grown Rogue’s secret sauce is producing this high-quality flower for less than $600 a pound inclusive of all expenses. They’ve taken that formula and entered Michigan, where they are now around a top 5 flower producer. One advantage is that all Grown Rogue does is cultivate. They do not do retail and they do not do edibles.

Their recent earnings tell the tale of the company’s performance in a time of struggling cannabis companies. Grown Rogue recently reported record revenue, growing almost 30%, record EBITDA and free cash flow in their latest quarter. And now the company is on the move beyond Oregon and Michigan.

The company signed a strategic partnership with Goodness Growth, a struggling MSO, that needed help with their cultivation. Grown Rogue will receive at least 20% of any improvement in operating income from Maryland and Minnesota for the help in cultivation. That’s right, Grown Rogue is now receiving royalty income from two limited license states, one which just went adult use and the other which goes adult use in the next year or so.

I wrote about the opportunity and interviewed Grown Rogue’s CEO, Obie Strickler.

I believe that the Goodness deal is just the beginning for Grown Rogue entering another 10-12 limited license states with their Oregon quality flower, but more importantly at Oregon cost as well. I believe the company is on a path towards $40 to $50 million in EBITDA and $15 to $20 million in free cash flow on a current market cap of approximately $30 million. At that valuation, I couldn’t care less about the liquidity.

But it is even better for Mindset investors because we negotiated a convertible debt deal in December, where we get paid a 9% yield and can convert into the stock at C$0.20 CAD. The stock is currently trading above that at $C0.22 per share. Please note that we value our convert at our cost position for now to be conservative.

And now we are investing in Grown Rogue in another convertible that again pays 9% and converts into the stock at C$0.24 per share and includes an additional warrant at C$0.28 per share.

We are essentially getting paid while we wait for a company that has the potential to go up by more than 10 times in value.