|Shares Out. (in M):||102||P/E||0||0|
|Market Cap (in $M):||205||P/FCF||0||0|
|Net Debt (in $M):||3||EBIT||0||0|
|Borrow Cost:||Hard to Impossible 50%+ cost|
A wave of ballot initiatives (most notably CA but also AZ MA ME MV and for medical use in FL again) have set off a second major bubble in marijuana related stocks. As textbook examples of trading sardines, it will not conclude differently than the last one in early 2014 following CO’s legalization. These companies haven’t been able to capitalize on current legalization and are unlikely to benefit from new markets either. If anything, a more favorable legal environment will bring in more legitimate competition intent on actually selling weed and services to growers, not just stock to gullible retail investors. With the “sell the news” event just 12 trading days away, there are already classic signs of blowoff parabolic moves in the volume leaders suggesting most of the stocks have already over front run this catalyst creating an opportune entry for a basket short.
Pre Election Rally Pattern
There has been a predictable and consistent pattern of October rallies in recent years into ballot initiatives. As shown in the below charts of the leading cannabis index, both 2014 and 2015 showed rallies in the context of what was otherwise a brutal bear market (every other month from March on in 2014 was down for this index except the 5% october gain). This year there are far more significant ballot initiatives showing very good odds of passing so the much stronger rally is “logical” in comparison to these weaker ones but is certainly at this point overdone (index is up 127% since 8/31 and that includes many less illegitimate companies making more modest advances) . Between ballots passing and the laws going into effect there is likely to be a long dead zone of news and pumping justification (while shares outstanding and unlocked grow).
I don’t want to get too in the weeds given how exhaustive the red flags and issues with these companies are, but here are some brief details on the best shorts. In the interest of providing actionable ideas, I limit the research to stocks with worthwhile market caps, decent trading volume, and trading prices (margin requirements can be burdensome on stocks trading <$1.00)
Shares are hard to locate on many but are available if you fish around (making some more appropriate as pa trades). While some rates are in the 100% range having repriced recently I believe these are costs worth incurring for what should be a relatively quick unwind in the major movers. With many names still up 3-8x, getting a 50% unwind in 1-2 months (or less) even 100% rates are manageable.
Cannagrow is likely the most outrageous of all the stocks currently both in terms of “valuation” and business model. All one needs to know about this “business” is that of the 275k of assets in their last disclosure prepared by a company insider, 250k is an intangible asset for a license for something called a Candwich (which is exactly what it sounds like, a sandwich in a can). These non existent assets, where cash is a whooping $613 are against $3.2M of liabilities. The company is essentially without revenues so while they claim to be providing licensed growers with turnkey growing facilities it seems a moot point.
After 102M shares outstanding there are convertible preference shares that balloon the fully diluted share count to 531M, giving CGRW a valuation over $1 billion.
Cannabis Sativa (CBDS)
CBDS is an ambitious start-up seeking to create a proprietary process to maximize the “cannabinoid concentration” of marijuana in edibles for medical marijuana use. Their goal is to make recipes that take effect in 5-15 minutes so clients need not wait around for their weed to kick-in. The company is led by a few interesting characters including CEO Mike Gravel, former Senator of Alaska, and company President, David Tobias. If you have been following the weed sector since 2014, you likely recognize Mr. Tobias who is involved in about half a dozen different marijuana related ventures. He is currently the President of not only CBDS, but also Wild Earth Naturals; additionally, he’s on the Board of Directors of Grow Condos and Rocky Mountain Ayre.
Mr. Tobias was previously the President of HEMP, a popular name in 2014 that once hit $3.40 and today trades under a nickel. Tobias’ partner at HEMP was CEO Bruce Perlowin, who had previously served 15 years for felony charges before starting the venture. In June of this year, the SEC filed a complaint against Perlowin for security violations related to HEMP issuances. The primary business of Hemp, Inc. was holding stock in other weed-bubble companies, including Medical Marijuana (MJNA), one of Tobias’ original enterprises. MJNA now trades for approximately $0.10 while Rocky Mountain Arye (RMTN) sits at $0.20 with nearly 0 volume.
If you need more reason to short CBDS, David Tobias has sold shares 337,076 of CBDS this year alone, for a value of approximately $730K over the course of 57 separate sale transactions. This isn’t surprising considering the run CBDS has had to over $7.00, but he began in the first quarter at $0.60 - $0.70. Not a vote of confidence from the company’s President. The financials are hardly worth mentioning, but it should be noted that the company has less than $1.0M in tangible assets against a market cap of over $120.0M, and $59.4K of those assets are held in digital currencies: “Hempcoins” and “Garycoins” (no, I’m not making this up, you can check the 10-K), which essentially convert to shares in Rocky Mountain Arye.
General Cannabis (CANN)
CANN claims to be a “one-stop-shop” for the budding weed entrepreneur, providing commercial real estate space, consulting, security and financing services all geared towards the marijuana industry. Compared to other market cap leaders like the prior two names, CANN is a financial giant with a respectable topline of $2.7M during the trailing twelve months ended June 30, 2016. Unfortunately, gross profits of $0.7M have been dwarfed by $4.5M of SG&A and other income/expenses, leaving net income from continuing operations at ($6.5M) over the past twelve months. As of June 30, 2016, CANN has just $54K of cash and total assets of $3.5M. However, $1.4M of these assets were intangible and the company’s net tangible equity is negative.
The company’s obvious liquidity issues were temporarily solved in September when CANN issued a $3.0M senior secured promissory note along with 9.0M warrants to be converted at strike prices of $0.35 and $0.70. The company received a net of $2.5M after accounting for existing debtholders who rolled their positions, in exchange for approximately 37% of the post-dilution ownership of the common (there are currently 15.5M shares outstanding).
General Cannabis appears to be taking a shotgun approach to gaining exposure to the rapidly growing legal weed market. By providing real estate, security, consulting and even financial services, you would think they could capture this fledgling industry’s growth one way or another. However, their own SEC filings state that the Colorado legal weed industry did over $960M in sales in 2015, and yet, CANN only managed revenue of $1.8M in that year. Instead of being a “one-stop-shop”, CANN is more like a jack-of-no-trades. With marijuana legalized in CO for nearly four years and other states adopting similar reforms, there is no reason large scale real estate investors, consultants, security firms and financial service companies cannot compete with the likes of CANN. They simply do not have a tangible value-add, and that has been proven by their lackluster financial performance over the last three years.
Just like the prior examples, investors can expect more dilution ahead for CANN. From their most recent 10-Q:
We had an accumulated deficit of $18,952,081 and $16,427,378, respectively, at June 30, 2016 and December 31, 2015, and further losses are anticipated in the development of our business. Accordingly, there is substantial doubt about our ability to continue as a going concern.
On October 13 issued the following PR that OTC Markets Group notified them of stock promoting in their stock, which combined with stock sales leading to a 50% intraday crash.
Lastly, CANN’s financials were audited in 2015 by Hartley Moore, a specialist in seedy OTC companies. Some of their other clients can be found here; the list speaks for itself:
United Cannabis Corp (CNAB)
CNAB is reminiscent of failed biotech companies that are unable to produce a drug for a given condition so they desperately start running trials on other medical issues to keep hope alive amongst investors and have an excuse to sell more shares. The company’s own description provides the obvious red flags:
The company focuses on developing therapeutics, including Prana Bio Nutrient Medicinal products for supplement deficiencies related to the endocannabinoid system, including pain, neuropathy, arthritis, MS, IBS, autism, seizures, eczema, sleep, anxiety, head trauma, opioid dependency, and clinical endocannabinoid deficiencies; and Prana Aromatherapy Transdermal Roll-on line that provides targeted and large surface relief with combinations of aromatherapy.
So essentially CNAB intends to cure nearly every ailment under the sun with weed, sounds like a good business plan! It doesn’t take too much digging to see the flaws in this stock, which has run +700% since July of this year, so here are the main bullet points:
The company had $9K of cash as of June 30, 2016 and has lost an average of $473K per quarter on a GAAP basis over the last twelve months (dilution likely)
Net tangible equity of ($2.4M) as of June 30, 2016
There are three full time employees presently working at CNAB
Earnest Blackmon is currently working as the Chairman of the Board, the CEO, President and Principal Financial & Accounting Officer, he’s a busy guy
In regards to the technicals, this is one name where there is a bit less certainty of whether the topping range has been completed, so i would advocate a bit more caution for now, but the end is certainly near (days).
CV Sciences (CVSI)
Formerly known as Cannavest (CANV) and highlighted on VIC by urban in the last weed bubble, this continues to be a share dilution scam. Nothing has changed but more losses and the share count has gone from 7M in 2012 to 65M today. Refer to the previous writeup for more background as it is the same father/son team doing nothing but paying themselves and issuing more shares.
Regardless of how the election results go (and it would only count as a surprise to the downside given polling), fervor should die down as we get past November 8th. While it is probably safer to wait until after November 8th, I believe it has been so front run at this point that the priority is in securing borrows.
Also, these companies all need cash and will likely take advantage of these conditions to sell more stock.
Beyond that, the catalyst and timing for the trade really becomes technical, which is probably beyond what people consider valid analysis on this site. I would just say that all of these stocks have finished classic major parabolic blowoffs (especially CANN which was arguably the leader of the move, was the first to crack when the pumping disclosure and insider selling was announced on october 13th). With these blowoffs completed it would be unlikely for there to be a further expansion of the range even if a slightly higher high on some names is reached. While far less scientific I’ve found that penny stock promotes and things that catch the largest retail gambler frenzies (such as BTUUQ NVFY SPU OPTT MGT VLTC KBIO LAKE APT PLUG to use some recent examples) typically see a blowout from the base in the 10-15x range. It’s usually a good bogey for an upper limit on the liquid promotions/momentum frenzies and most of these names have hit that threshold.
|Subject||Really entertaining -- and sad...|
|Entry||10/27/2016 09:26 PM|
This was incredibly entertaining -- and sad for two reasons:
1) I could only find a partial borrow on one of them -- and the neg rebate was 83%; and
2) I feel badly for the individual investors who are getting incinerated in these scams. Why does the SEC allow these stocks trade???
|Subject||Adding on to the list|
|Entry||10/28/2016 12:16 AM|
Unfortunatley borrow is very scarce here