GOING HIGHER: The Marijuana Gold Rush (RBI Associates Report)

Ok, Ok, talking about Marijuana investing lends itself to some cliché expressions and we will resist the temptation. Clearly it is an exciting time for this industry and without making any specific recommendations let’s try and outline some fundamental issues to avoid some pitfalls.
Probably a good way to look at this industry is to liken it to a big gold mining discovery and the stages it goes through. Let’s say a small mining company makes an initial discovery and its stock price goes from a price of $1 to $5 in the first few months (Stage 1). Further drilling results keep expanding the size of the ore body over the next few months and the stock price rises to $25 per share (Stage 2). At this point the large multinational mining companies start negotiating to take a major stake and a bidding war ensues. This both legitimizes the discovery and continues the speculative frenzy and the stock now goes to a peak of $50 per share. A deal is struck with a major mining company and the ore body is delineated (and theoretically valued) over the next few months. The stock reaches a high of $60 (Stage 3). Now over the next 4 to 5 years the mine is developed. There are environmental studies, government regulations to deal with (inevitably some kind of legal issues) and metallurgical studies. During this long process the stock is exposed to the vagaries of the Gold price and other market sentiments. The stock price moves in a downward zigzag and reaches a low of $30 per share (Stage 4). Now as the mine approaches the start of production the stock price steadily climbs until, when the mine starts production and makes the profit that was long expected (not always the case) reaches the high of $60 that it had reached 5 years earlier (Stage 5).
Obviously, the only really wrong time to buy in the above scenario was at the end of Stage 3, the peak of the speculative and bidding process. So where are we with the booming Marijuana industry? We believe we are, in general, at stage 2. Plenty of money remains to be made but certain companies have already reached Stage 3. Any company with a market capitalization of over $5 billion USD should be avoided, or at least approached with extreme caution. We do like the idea of the Vertically Integrated Company (cultivation, processing and final sale) but feel it is over hyped. There is simply too little, or rather not a big enough, barrier to entry in this industry to protect early players from what is already shaping into an ultra competitive marketplace. There are so many regulatory and legal issues that have to both initially be ironed out and also evolve over time. Another over hyped issue is touting the “land under cultivation” or contract for Marijuana production. This is an important gauge, but again, what is to stop a well funded hedge fund from buying up or contracting thousands of acres for cultivation. There is no real scarcity even if some regional governments put limits on allowable acreage.
Another very important concern is a lack of universal standards regarding the valuation of assets and inventory. This is something that Regulatory Agencies and leading companies are presently trying to resolve. Existing rules for valuing agricultural assets don’t cover the unique peculiarities of the cannabis business. There may well be the need for five or six grades of assets depending on potency and/or other factors.
So generally we feel it is best to buy established companies with a Market Capitalization of less than $2 Billion USD. We, of course, do have some recommendations that should go a lot higher.
John D. Alant, Director of Research. RBI Associates

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This release was published on openPR.