Go long on Khiron and go short an equivalent amount of PharmaCielo
Khiron Life Sciences (TSXV: KHRN), my favorite in the Colombian medical cannabis space, is a Business-to-Consumer (B2C) operator. KHRN is primarily focussed on the patient, their needs and expectations and on the development of a safe, consistent and high quality product that brings well-being to people’s lives and relief to their families.
PharmaCielo (TSXV: PCLO) a Colombian based medical cannabis company commenced trading on January 18, 2019. The shares opened at almost $5.00, traded up to $6.40 per share and closed at $5.85 per share. PCLO intends to be a low cost producer and buyer of cannabis and cannabis oils and extracts marketing primarily internationally. This is essentially a Business-to-Business (B2B) approach although PCLO plans some consumer oriented sales as well.
The reason this attracted my attention is that PCLO has a market cap approximately five times greater than KHRN. ($475 million compared with $94 million). I am not commenting on or criticizing PCLO’s valuation. It is what it is. What I am thinking, however, is if PCLO is priced fairly, I would argue that KHRN’s market cap should easily be double or triple where it is now. Because I know KHRN very well and I admire and have confidence in their management team, I could argue that KHRN is worth more than PCLO in my opinion.
As a caveat, I should point out that PCLO has only been trading for one day. I have not had the time to gather all the material on PCLO I would like and I have not yet spoken to management. But here is what I see.
(a) Management: a lot of my investment decision making is driven by my assessment of management. I have met them on several occasions in Colombia and once in Vancouver. Starting with Alvaro Torres, CEO and Chris Naprawa, President and going down the line I cannot conceive of a better team to manage KHRN’s business plan. Since going public in May 2018, they have added Dr. Maria Fernanda Arboleda, an internationally recognized medical cannabis specialist as Medical Director, Chris Naprawa, a well-respected and senior capital markets expert as President and Mr. Vicente Fox, former President of Mexico and international cannabis advocate who joined the Board of Directors. All three of these people joined the Khiron team because of their belief in what the company is doing and how they are doing it.
Back in June 2018 when PharmaCielo first came to my attention, Anthony Wile was listed as co-founder and CEO. Wile has a rather checkered past in the stock market and had previous issues with the Securities & Exchange Commission. As they were going for a listing on the Toronto Venture Exchange, I felt this was going to be a problem. I notice Wile is no longer listed as CEO. So I guess that matter was tidied up.
(b) Business Plan: it seems to me the difference between KHRN and PCLO is simple. I believe in the long term, KHRN will be a recognized manufacturer of branded medical and consumer products in Latin and South America. In the short run, this may be slower and more difficult to establish but once there, it is much harder for competitors to displace them. It is also a higher margin activity. In the long run, PCLO is headed toward being a farmer in a commoditized segment of the cannabis industry. In the short run, I believe exporting cannabis to most parts around the world will be a difficult proposition. In Canada, a market that I know best, I cannot see the Canadian government allowing the import of low priced cannabis extracts to compete with domestic production.
Conclusion: if I was into short selling, which I’m not, I think I would go long KHRN and go short an equivalent amount of PCLO. What you would be strategizing is that KHRN is undervalued relative to PCLO and if the valuation differential declines, you will be rewarded with an outstanding return. You could pursue a similar strategy using put and call options if liquidity develops in the options markets. In any case, I think the PharmaCielo listing as less of the presentation of an attractive investment opportunity and more another indication of the undervaluation applied to Khiron Life Sciences. That’s why I like KHRN so much and believe it merits a spot in portfolios.