Canopy Growth Corp (TSE:WEED) Obtains New York License: Ben Smith’s Weekly Cannabis Wrap

Midas Letter Lead Financial Writer Benjamin A. Smith breaks down the latest news in the cannabis space. Smith likes the large cap movement in the market currently, but notes that some of the surge might be due to retail investors rushing to take part in the January rebound. He highlights that Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) increased its market cap by $1 billion on the strength of the news that it had obtained an operating license in New York State. While Canopy is still on a slope of higher lows, Smith cautions that the company’s recent surge is not one in which to stake a long-term position. Smith takes another look at the proposed Green Growth Brands Ltd (CNSX:GGB) (OTCMKTS:GGBXF) takeover of Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E) and discusses the implications in terms of the Canada’s Cannabis Act. Smith is excited about the value proposition James E Wagner Cultivation Corp (CVE:JWCA) (OTCMKTS:JWCAF) offers, and cites the company’s appropriate valuation, branding strategy, and that it does not use an irradiation process as particularly appealing.

Transcript:

Benjamin A. Smith: Hey, guys, how are you?

James West:   Good, how are you doing?

Ed Milewski:  Hey, Ben.

Benjamin A. Smith: Not bad, not bad.

James West:   All right. So Ben, tell us, what are you seeing in the market that you like? Or dislike?

Benjamin A. Smith: Well, there’s a lot to like in the market right now. Big moves over the past few days in some of the Tier 1 cannabis names. Now, it seems that perhaps some of these moves are a little bit showing signs of some FOMO-ing action here; for example, Canopy Growth increased about $1 billion of market cap just on that New York hemp license alone – and there was about (unintelligible). So there were signs of FOMO-ing out there, but I feel good for investors oversold bounce is long due, and we’re just recovering some lost ground, here.

James West:   Interesting. So you think that maybe the cannabis market has gotten a bit ahead of itself, Ben. Do you think this means that we’re going to see a bit of a – well, we’ve already seen it in the chart for WEED that the angle of attack on the incline has started to drop a bit. Is that what you kind of see happening to the general trend in the cannabis space going into the next week?

Benjamin A. Smith: Yeah, perhaps. I’m not really ready to make that call right now, just because we haven’t technically received an hourly low in Canopy growth yet, so there’s still a slope of higher lows taking place, and there hasn’t been that lower high on the hourly. And for me, that’s really the benchmark of what to look for. So yeah, we could easily, you know, go up a little bit more, test the highs, perhaps another 10 or 15 percent. But when you start seeing market caps increase over $1 billion over a simple New York hemp license, which was very good news, don’t get me wrong, but moves like that are not usually the type that I would look to state long-term positions when those type of things happen.

James West:   Interesting. The Green Growth brand story in relation to their offer for Aphria, what are you gleaning from the sort of universe out there on social media? Is there any sort of dialogue on why it should or shouldn’t happen in a credible sort of context?

Benjamin A. Smith: I think a lot of investors are against it – that’s the read that I’m getting on the Twittersphere and some of the things that I’m reading, and I think that’s mainly because there’s a), skepticism about smaller company, an MSO without too much operation history, you know, bigging up their stock to purchase a Tier 1 Canadian. Nothing like this has really happened before, and no company has raised the concurrent financing to up their stock in order to be able to purchase stock of another company in a takeover.

So I think you have some skepticism there, and also some long-term Aphria holders in a higher price point. So I don’t think some are enamoured with the $11 all-share purchase, because it’s not even cash at this point, it’s just all shares. So of course there’s some concern whether, if the bid is approved, whether retail shareholders can get out of that price

So I would say it’s mostly negative right now, but let’s see if Green Growth Brands ups their bid offer in the coming days, which is rumoured that they might do that.

James West:   Okay, so, you know, when they first made that announcement, Green Growth stock was in the $4 range, and so making a statement that you’re going to raise capital at $7 a share or do the transaction at $7 a share was kind of a source of skepticism for many. And so I see kind of two different sort of things, constructs at work here: a), Aphria stockholders want more for their stock than $11, so they’re not happy. Green Growth Brands, you know, their share price is continuing to rise, so if I was a Green Growth Brand shareholder I would be like, well, why are we buying this now? If it’s this easy for us to get to $7, why don’t we try to do the deal when our stock is at $10 and have a lower cost of capital and less dilution as a result?

Benjamin A. Smith: Yeah, that make sense, that makes sense in a lot of ways. You could look at their appreciation in the sales price as not creating an urge moment to put out the offer now, and there’s some word that they were going to put out the offer last week and they didn’t do that. So maybe the delay is somehow tied with the stock price, you know, continuing to go up, which would boost the credibility of the deal, variable to, you know, bring their common share price close to that $7 range. But yeah, yeah, absolutely.

Now there’s some of the questions I have are whether a brands company makes sense with a company that’s really built for CPG, because under the Cannabis Act, as you know, there are stringent requirements for marketing, promotion, and that type of thing, even if it’s done in a country outside of Canada. You could still be sanctioned and lose your license for being here. So the one thing that never really made sense to me is, why is a brands company taking over an LP that’s about to produce 250,000 in Canada? So hopefully, they can explain that if there is an offer on the table, and, you know, get more people on board.

James West:   Sure. Well, given the sort of forward-k and forward-thinking historic thinking of the management of Green Growth Brands, if I was a betting man, I would say that they’re more or less positioning the company in terms of having a source of supply as well as a brand strategy. They’re positioning for a future iteration of the combined entity. That’s what I think they’re doing, and I don’t think they’re so concerned with the state of the union right now, as it were, because as you say, Green Growth Brands as a brand company is certainly not in a position to advertise as a Canadian LP. But, as a US brand company, should these states continue to fall to, I’m going to call it the regularization of cannabis laws, then Green Growth Brands increasingly is in a sweet spot to, you knowestablish destination brand stores in those markets as it has demonstrated expertise in doing.

The question is, how are they going to get the cannabis to those stores in the US from a Canadian LP? That still doesn’t make sense to me, either. But again, that’s why I look at the whole transaction and I think, well, I think this is an opportunistic play on Green Growth Brands’ part to take advantage of the weakness of Aphria as a result of the short strategists and in there and the stuff they’ve published to position the company for a future strategy. So that’s my takeaway on it.

Benjamin A. Smith: Yeah, you make a good point, you make a good point bout the kilograms being produced up in Canada; obviously, those aren’t transferable. There’s no way to bring that cannabis down south. So that’s sort of another thing that I’m trying to wrap my head around, but you know, definitely, the company has a great track record, as you say, and I’m sure they’re looking four steps ahead here, not what the current regulations are right now.

It’s just my understanding that, you know, what they do in Canada, or if they purchase a company like Aphria, it will actually affect their branding strategies down in America, too, because the Cannabis Act is bindable to what LPs do outside the country. So you have a whole bunch of licenses in Las Vegas, in Nevada, I believe, so it’s an interesting dynamic, for sure.

James West:   Finally, Ben, can you shed any light on, are there any opportunities you see in any LPs or near-LPs or cannabis-related companies that might constitute a discount to its peers in any sector, any companies out there that are catching your eye that are really flying under the radar right now?

Benjamin A. Smith: Yeah, there is. There is one in particular, and that’s the one I wrote about at the beginning of the year when I talked about the best junior plays of 2019, and that is James W. Wagner. Sorry, James E. Wagner cultivation corp. no, I like them for several reasons; first of all, on a valuation basis the company is only about $70 million valued on a fully diluted basis; their product doesn’t have to be, it’s not required for irrigation [sic], which is becoming more of a topic in the Twittersphere and out there because of, you know, irrigation [sic] actually can destroy terpene profiles which goes into the entourage effect of cannabis.

There’s the aeroponics growing and, you know, all of the growth cycles that they can initiate up to six growing cycles a year…it’s very pure, I like the branding strategy because it is not affected by the Cannabis Act. You know, similar to what happened with Whistler Marijuana, medical marijuana, how they got bought out by that $175 million premium by Aurora Cannabis, I think that has that same sort of potential because of the way they’re constructed and because of the potential organic certification that the company is looking to receive.

That may or may not happen this year, but a lot of catalysts going forward; you know, 32,000 kilograms by the end of the year annualized, and they should be cash flow positive in the next three or four months, when they go from seven grow rooms to 24. So if you’re looking for value, if you’re looking for, you know, pretty good upside, maybe 2, 3 times upside in the next 18-24 months, I would have to say James E. Wagner would be my top play right now.

James West:   Good to know.

Ed Milewski:  Hey Ben, Ed here. What do you think of the move that Tilray had just prior to all that stock becoming free trading, major move the upside and then, right on the day it comes free trading, the stock drops almost the same amount.

Benjamin A. Smith: Yeah, that was interesting. You know, these free trading moves, they always play out in different ways, and I think what Tilray did and their majority shareholder, Privateer Holdings, did was actually very brilliant. So they came out on Friday January 11^th and they said that basically they will not be selling in the first half of 2019 – and they own about 75 million shares, by far the largest majority shareholder. So that boosted the stock price up, you know, –

Ed Milewski:  20 percent or something.

Benjamin A. Smith: Yeah, maybe it was even more, 20 percent, something like that.

Ed Milewski:  25, yeah.

Benjamin A. Smith: But that doesn’t mean when the lockout actually occurred on the 15^th, yesterday, it doesn’t mean that there’s still – that all the shares are going to be locked out. There’ still a few million there, took advantage of the high prices to bring that back down. But the brilliant part is that Privateer Holdings created this buffer where that, you know, they created this, you know, sort of artificial, you know, boost in share price, and that was buffered by the fall that occurred when the lockout actually occurred.

So the net effect is sort of, you know, a breakeven point. So it was a good way to get some selling out of the way without, you know, having a net effect of a stock price not really moving anyplace, if that makes sense.

James West:   Sure. All right, Ben, thanks very much for joining us again today. We’ll come back to you next week, and have a great weekend, we’ll talk to you soon.

Original article: Canopy Growth Corp (TSE:WEED) Obtains New York License: Ben Smith’s Weekly Cannabis Wrap

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