Cannabis Investing in the U.S.: Why Location, Measured Growth Matters

Body and Mind Inc. (CSE:BAMM) President and CEO Mike Mills provides investor tips on cannabis investing in the United States.

SmallCapPower | September 25, 2019: On Day Two of the 2019 Money Show Conference in Toronto, we got a chance to listen to Mike Mills, who give some cannabis investing tips when buying shares in U.S. companies. Mike Mills is CEO and President of Body and Mind Inc. (CSE:BAMM) (OTCQB:BMMJ) and has spent over 25 years in senior management positions in industries spanning manufacturing, media, technology, and finance.

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Canada took a huge step becoming the first G7 country to fully legalize cannabis for recreational purposes. However, there are a couple of things that Canada could have done better. For example, the rollout of retail stores has been very weak, with the black market still controlling ~70% of cannabis sales. In Toronto, you see a ‘wack-a-mole’ game, where the police are closing black-market dispensaries, but they are opening just as quickly as the police can shut them down. In the U.S., dispensaries have similar problems, with the black market controlling up to ~80% of sales in states such as California. As a result, cannabis companies are having a challenging time meeting the high revenue expectations, which they set for themselves and this is why their shares have seen a downturn recently.

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Why should investors be looking towards the U.S. market? Mike Mills mentioned that the U.S. market is over 10 times the size of the Canadian market, with California alone expected to have sales comparable to Canada. In California, the illegal market is worth $3.7B and this is expected to reach $4.2B by 2020. There has not really been a shift of investors moving their money from the Canadian to U.S. cannabis market. However, he believes this should happen soon, as the Canadian market is fully priced in. The U.S. market, he said, is currently consolidating, with the Department of Justine (DOJ) holding up some key mergers. The general consensus is that these mergers will go through but they might take some time.

The most important things to consider when investing in the U.S. are locations and licenses. For example, in Washington State, the state government allowed unlimited dispensaries, which substantially lowered the value of a dispensary license. Oregon, which was historically a farming state with a strong farming lobby, gave anyone who wanted to cultivate a license to do so and, as a result, the price of cannabis dropped from 1,100/ lbs to 500/ lbs and at one-point Oregon had a seven-year supply of cannabis. One state that has limited licences is Nevada, which currently has only 66 dispensary licenses as well as Ohio, which has only six dispensary licenses.

Some questions investor should be asking. Investors need to keep management accountable, i.e. is management executing on their business plan and achieving the milestones they set out for themselves. What is the company’s pace towards positive free cash flow and profitability? It is also important to look at the company’s cash balance, as companies are beginning to run into problems raising additional capital as the fast money in the sector dries up. What is the company’s debt balance? Has the company been doing smart M&A? As we move forward, technology and intellectual property (IP) will be a game changer, and it will be important to invest in companies with solid IP and technology. Additionally, Mike mentioned that investing in companies that have operations in states that will be having ballet initiatives for recreational cannabis in 2020 could lead to positive returns. Florida is an example of a state that could be putting recreational cannabis to a vote and New York is another state in which people will be paying attention.

Eventually, the cannabis world will look like CPG or liquor and people will gravitate towards brands, but brands are always changing. Some California black market brands that were very popular pre-legalization, ended up failing. Trulieve Cannabis Corp. (CSE:TRUL) and 1933 Industries Inc. (CSE:TGIF) are examples of U.S. cannabis companies that could meet the criteria that Mike outlined above.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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