When an investment sector reaches a point of scorching hotness, bullshit becomes monetized. We saw it with Japanese real estate in the late 1980s, with dot-com companies in the late 1990s, and with American housing in the mid-2000s.
Two cannabis company just tripled in value. Supposedly. What’s really going on here?
We’re living through that moment in the cannabis space.
In both deals, the estimated value of each company tripled overnight. Nobody in the mainstream media bothered to note that fact, or to question the numbers in play.
But we should. Not because the High Times investors are grifters. We need to question it because when cannabis company valuations become untethered from reality, it helps the fly-by-night schemers and hurts entrepreneurs building real, solid, American cannabis companies.
In late July, Hightimes Holding Corp., owner of the venerable magazine, announced that the company had entered into a merger agreement with Origo Acquisition Corp., a special-purpose acquisition company, or SAC. SACs are shell companies, formed by known investors, that go public with the intention of buying or merging with an existing company-to-be-named-later that may have difficulty going public on its own.
Once Hightimes Holding Corp. merged into Origo’s publicly traded shell corporation, the media release stated, “High Times will be a publicly traded company.” The value High Times placed on its equity was $250 million. The details are in this SEC filing.
If you look into other SEC documents, though, you’ll find that Origo had only about $21 million to its name three months ago.
Look, I can tell you I value my 2003 Subaru at $1.2 million. Should you invest in my sweet, sweet ride based on that claim? Probably not. At least wait until you see the bill of sale I file with the state.
High Times isn’t operating a scam. The company has viable assets and brand value. But $250 million is too big, it’s too round, it sounds like a wishful figure somebody wanted on the cake at the deal celebration.
When the California ghost town story came across the wires, I knew we’d reached a point of bubbliciousness.
To recap: American Green struck a deal to buy Nipton, CA, for a reported $5 million. Company officials said they planned to turn the site, a collection of dusty desert buildings a few miles from the Nevada border, into a massive canna-tourism attraction. Plans include, they said, express rail service from Los Angeles and housing for 2,000 employees.
American Green’s fantasia was taken at face value by national outlets like CBS News and NPR, which loved the quirky “weed ghost town” story. Marijuana! California! Wacky!
I have a more cynical view of the deal.
American Green is a penny stock. It trades on the OTC markets for less than one cent per share.
Check out what happened to the company’s stock price after the ghost town announcement:
American Green tripled. It moved from $0.0011 to $0.0037 before settling back down to $0.0023.
Those are infinitesimal values. But they become real when you add them up. On its busiest day of trading, 3.5 billion shares of American Green swapped hands. That’s 25% of all of the company’s 14.5 billion issued shares. If you bought one billion shares at $0.0011 and sold a few days later at $0.0037, you made a profit of $2.6 million.
Did anyone actually make that profit? I don’t know.
What I do know is that “American Green” is only the latest incarnation of this company, which was incorporated in 1998 as Ti-Mail Inc. Two years later it changed its name to Desert Winds Entertainment. Two years after that, it became SunnComm Inc. In 2002 it became SunnComm Technologies. 2004: SunnComm International. In 2007 it became The Amergence Group. Four years later it became the Altitude Organic Corp. In 2012, it changed into the Tranzbyte Corp. Two years later it became American Green Inc.
This is the penny stock equivalent of that revolving strip mall storefront: Karate-4-Kids to Fro-Yo Frenzy to Betty’s Bronzing Spa to The Vaporium to Cedric’s Fidget Spinner Circus.
Anything else to know? Oh yeah: The terms of the Nipton deal required American Green to put only $100,000 into escrow. If American Green officials find something they don’t like about the properties, they can back out of the deal and get their $100k back. But the stock price spike is a fait accompli.
To gain a little perspective, I got Alan Brochstein on the line.
What we’re seeing may be the last gasp of a three-year trend.
As a Houston-based financial analyst, Brochstein may be the most read and trusted voice in the cannabis investment space. He’s been skeptically scouring cannabis stocks for years, having founded both New Cannabis Ventures and the 420 Investor subscription service.
Brochstein told me that what we’re seeing is nothing new. In fact, it may be the last gasp of a three-year trend. Cannabis penny stocks have been extremely high risk since 2014, he said. Cannabis stocks earned such a bad rep “that a lot of legitimate people didn’t want to go public” and become soiled by association.
“There are still plenty of companies out there pumping themselves up and saying fluffy things,” he told me. “People still fall for all that crap.”
But finally, he said, the cream is starting to rise. Smart investors are separating the solid companies from the paper tigers. Brochstein ran this item in New Cannabis Ventures last month: “Publicly Traded Cannabis Stocks Are Beginning to Look Like Real Revenue Producing Companies.”
He created a Public Cannabis Company Revenue Tracker to watch the top revenue-producing cannabis stocks with sales of more than $2.5 million per quarter. Here’s his latest tracker:
What changed? Why are cannabis stocks finally stabilizing? Brochstein had a simple answer. “Canada,” he said.
Federal legalization of medical marijuana gave Canadian cannabis companies the full legitimacy their US counterparts still lack. “Canada showed that legitimate companies can be cannabis-related and make money for investors the right way,” Brochstein told me. He pointed to a company like Canopy Growth, parent company of the well-known Canadian MMJ brands Tweed and Bedrocan. Canopy saw 127% year-over-year growth, and its stock is listed on the Toronto Stock Exchange, not on the penny stock pink sheets. Companies like Canopy have employees, infrastructure, capital. They have real products, real customers, and real growth.
Those Canadian companies are now using their experience, legitimacy, and access to capital to make a push into the American market. Brochstein mentioned a handful of Canadian companies that have quietly partnered with existing cannabis concerns in Arizona, Massachusetts, New York, and Florida.
What they aren’t doing is buying up ghost towns in the California desert and gushing about building the Six Flags of cannabis on top of an old-timey desert saloon.
When it comes to cannabis stocks, you can get rich quick and you can get poor quick. You can gamble or you can invest. Right now the smart money is doing the latter, eh.
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