Not all IPOs are created equal. The biggest winners, the next Tilray, are going to thrive in at least one of three key areas of focus. These are areas where companies can truly differentiate themselves from the crowd.
It’s about that time of year to start looking ahead at what the big stories of 2019 will be.
One of the top storylines of at least the first half of the new year will be more of a continuation and an acceleration of a trend than something brand new happening. I’m talking specifically about cannabis IPOs (Initial Public Offering).
Dozens of companies waited out the rush to public exchanges in 2016 to work on their businesses and teams. As a result, many were better prepared to pursue an IPO – or an RTO (reverse takeover) as a backdoor way to begin offering stock faster. They’re better, more investment-worthy because of it.
Many of these have made it to market already. Names likes Tilray Inc., MedMen Enterprises, and Acreage Holdings were headline-grabbers because of their impact on the industry in Canada, the United States, outside of North America, or all of the above.
Many more will follow. I remember sitting down in New York this summer with an executive from a cannabis pick-and-shovel play that we eventually recommended for my Cannabis Investor’s Report portfolio. He said at least 100 cannabis-related companies would go public within a year. The prediction seemed bold or even rose-colored then. But not now.
By my count, there are at least three dozen companies – including some real gems – officially in the process of going public. That doesn’t count many more that are still kicking the tires and weighing options. IPO expert Danny Brody and I track them diligently for the Institute‘s elite trading research service, The Cannabis IPO Insider.
When looking at the new or soon-to-become additions to public markets, there are common themes any investor needs to look for. You need to see a strong management team blend people with cannabis industry knowledge and important contacts with someone who has had success making money for shareholders in other areas (mainstream retail, operations, mergers & acquisition deals, etc.). You also want to know that there is a market for what this company is going to sell or do and that the product or service they’re offering is of high quality. Just as important, you need to see that the company has demonstrated expertise in branding or has a strong plan to build their brand from here on in a hurry.
That said, not all IPOs are created equal. The biggest winners, the next Tilray, are going to thrive in at least one of three key areas of focus. These are areas where companies can truly differentiate themselves from the crowd.
Let me show you where the winners are going to be…
Winner No. 1: The Immediate Acquisition Target
One of the reasons I want you to invest in the cannabis industry now is because big institutional money and the top players from Big Tobacco and Big Pharma are still on the sidelines, waiting to see how the federal regulatory environment will play out – something we already know.
But consolidation is coming.
It’s important to know that there is rarely a giant in any industry that didn’t get there by acquiring other companies, and they only stay there by continuously acquiring competitors and companies that bring them new business lines. To pick one example, over the years The Coca-Cola Co. has purchased Minute Maid juices, Barq’s Root Beer, Sprite, Dasani water, Odwalla fruit juices, Honest Tea, Zico coconut water, Costa Coffee, and more.
As companies like Canopy Growth Corp. and Aurora Cannabis fight to be at the top of the cannabis industry, they will have to acquire smaller companies with good brands and products.
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Even as companies go public, they have an eye on this. And it would be crazy for them not to – the sums of money that will be out there would have been unfathomable as recently as six months ago. But remember, in August, Constellation Brands handed over $3.8 billion to Canopy for just over a one-third stake in the business.
So the companies with something important to offer these big fish companies looking to make a buyout are the ones that can go from new IPO to fully absorbed in under a year.
We saw this with MedReleaf Corp. The Canadian company debuted on markets in mid-2017 with more funded capacity than some of its larger competitors and, importantly, smart deals to allow it access to European markets.
Aurora coveted that capacity and those smart deals, and in July 2017 – 13 months after MedReleaf first traded – bought out MedReleaf. Any investor who got in on the MedReleaf IPO price of CAD$9.50 got a return of 248% in just over a year.
And that’s for a stock that stumbled out of the gate in the first days of its IPO. The stock immediately sold off 21% the first day of trading and was quickly – and foolishly – written off as a “failure” by the mainstream. Some of my researchers from the Institute worked with technology stock expert Michael Robinson, a founding member of the NICI advisory board, when he was preparing to recommend MedReleaf pre-IPO. And they can tell the happy tales of customers who were patient during the early losses.
The road to cannabis investing fortunes is, of course, not always a straight line up.
Winner No. 2: The American Unicorns Are (Still) Coming
Several big name, big cap, multi-state cannabis companies from the United States have gone public this year.
Almost all of them have gone to the Canadian Securities Exchange (CSE). This includes one of the newest to public exchanges, Acreage Holdings. You probably already knew that name because Acreage made several high-profile acquisitions, beefed up management, raised $119 million of capital from private investors, and brought in former Speaker of the House John Boehner as a board member, spokesman, and high-profile advocate.
Granted, Acreage also went public with a price that was too high at $25 per share, and the initial reaction from investors was poor. It dropped 19% on its first day of trading. That said, like a handful of other American companies, it is an extremely well-run company overall and it will be continue to grow as one of the top forces in an American cannabis market still ready to pop.
More companies like Acreage, but smaller, are on the way. Just last week one of them went from a privately held underdog to a real competitor to Acreage when it listed on the CSE and merged with another company to greatly increase its ability to be one of the big players.
Whether these companies will catch fire now or down the road a bit remains to be seen. But they can take a lot from the experience of MedMen Enterprises Inc.
In May, MedMen showed a path to listing in Canada – they did so with a successful RTO.
MedMen runs high-end cannabis retail facilities in the U.S., mostly on the coasts. Additionally, through its joint venture with Cronos Group, MedMen can now open retail stores, with their upscale look and feel, throughout Canada.
This focus on customer experience is paying off. One way to see this is through the revenue they generate per square foot of floor space and compare that to other high-end retailers. And its sales are significant. In the second quarter of 2018 alone, MedMen generated $19.2 million in sales and got on the track to generate over $100 million in sales per year.
As for its move to public markets, MedMen raised CAD$143 million at $5.25 per share, giving them a market cap of CAD$2.14 billion, or USD$1.76 billion – making them a marijuana “unicorn.”
With its template – and now others in its wake – there is no reason for American companies to remain on the sidelines as underfunded private companies.
Winner No. 3: Finding The Niche
The “middle ground” in the cannabis industry is evaporating.
The short version is we’re in the early days of an industry-wide shakeout right now. There will be big companies that get bigger through mergers and acquisitions – and this is where most of the market share and market caps will be. But, similar to the craft beer industry thriving throughout North America, well-run smaller producers with elite-level products will be able to carve out a space by going after niche customers.
These companies aren’t looking to become the biggest thing in cannabis. They’re looking to hit a corner of the industry that isn’t being served well or at all, and they want to make sure they keep doing it better than anyone else.
An IPO that broke new ground in this regard was for The Green Organic Dutchman (TGOD), of which my colleague Danny Brody is a vice president.
TGOD focused on high-end organic cannabis. In some ways, they’re the anti-Canopy.
It debuted on the Toronto Stock Exchange on May 2 of this year for CAD$3.65 per share with a CAD$115 million raise, the largest raise by a cannabis company at the time. And the money wasn’t institutional – Brody and co. believed that their targeting of a lucrative niche would bring out private investors in droves. It worked.
A real advantage for the company is the 30% premium that organic cannabis commands. As in other sectors, consumers like the organic and sustainable themes and are willing to pay up.
As a licensed R&D company, the company focuses on intellectual property development around oil extraction techniques and cannabis genetics and breeding programs. Organic and sustainable production runs deep in their corporate veins.
It doesn’t hurt that TGOD is also one of the lowest cost producers in the industry. At less than $1 per gram, its production cost paired with their premium pricing gives The Green Organic Dutchman showed potentially attractive profit margins down the road. And investors came running to this stock after it went public.
The lesson learned here is that companies don’t have to be focused on world market domination to be a great IPO to target.
The companies that are coming public now are keenly aware of all of these recent success stories.
The template is there. The interest in cannabis investing is sky high. And the regulatory atmosphere has never been more accommodating – with more help on the way.
Thanks for being an important part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors