New Recommendation: 1933 Industries (CSE:TGIF)
My latest addition to The Cannabis Report Model Portfolio is 1933 Industries (CSE: TGIF). I think if you have been following me for a while, you will notice TGIF has the same characteristics as I identified in Khiron Life Sciences (TSXV: KHRN) and Sunniva (CSE: SNN). Please read on.
In the current market there are five characteristics I look for in a successful cannabis investment. These are:
Management: regular readers know this is my key to any investment. Whether it’s Alvaro Torres and Chris Naprawa along with many others at Khiron or Dr. Anthony Holler and Leith Pedersen as well as the entire team at Sunniva, leadership is crucial.
Cannabis stock rebound: I have been urging readers to wait out tax loss selling season expecting a rebound will follow. That appears to be happening and now is an excellent time to respond.
International operations including the U.S. to outperform Canadian based operators: I anticipate companies with assets and operations in the U.S., Latin and South America and Europe to outperform those with a focus on Canada.
Revenue generation and financial strength will increase in importance: I expect revenue generation and financial strength will increase in importance in 2019. If a company doesn’t already have it, they better be able to get it soon.
Medium to smaller cap companies will outperform: I believe mid to small cap companies will outperform the billion dollar plus market cap companies.
TGIF is a perfect fit given my outlook. It is 5 for 5 on the points I have listed above.
(1) TGIF management: my contact to date has been with Brayden R. Sutton, President, Chief Executive Officer and Director of 1933. Brayden has a long and distinguished background in the cannabis industry having been Vice President Business Development of Aurora Cannabis and Executive Vice President and a co-founder of The Supreme Cannabis Company. He is also a Director of Waterfront Capital, Cannabis Growth Opportunities Fund and First Light Capital. I have been very impressed with Brayden’s knowledge of the industry, his clear vision for 1933 and his ability to explain that vision with clarity and enthusiasm. There are other members of his management team that I haven’t had the opportunity to meet yet but I will correct that in short order. But based on my opinion of Brayden alone, I believe management is one of 1933’s strengths.
(2) Recovery in the Cannabis Group: I forecast caution for many weeks leading up to the end of tax loss selling post-Christmas. I held the opinion the cannabis stocks would not bottom out until this time. But I added that after the effects of tax loss selling ended, I believe there would be a strong rebound. The chart above left is the Let’s Toke Business Composite Index and shows this turn seems to be starting. The chart to the right shows the turn in a little more detail. This is the daily Canadian Marijuana Index managed by MGIC. This index hit its low point on December 24, 2016 and rallied strongly thereafter. So I think the recovery appears to have started and I believe will continue as we move forward into 2019. In other words, if you have held cash in portfolios as I have in The Cannabis Report Model Portfolio, this is the time to act. I believe this is an excellent time to re-enter the cannabis group and especially a stock like TGIF using cash built up as I suggested.
(3) Outperformance by the U.S. and internationally based companies: in the December 14, 2018 Let’s Toke Business newsletter, I explained why I believe the Canadian cannabis stocks will lag the international oriented companies. The chart to the right shows the relative performance of the U.S. Marijuana Index relative to the Canadian Marijuana Index. If the line declines as you move from left to right, it means the U.S. Index is underperforming the Canadian Index. If it rises to the right, it means the U.S. group is outperforming. What the chart shows is the U.S. based cannabis stocks have been outperforming the Canadian companies for the past year.
Looking ahead, I think this trend will continue. It seems to me that the U.S. stocks are about where the Canadian companies were two years ago. With the Democrats taking control of the House, I think there will be a major breakthrough in the U.S. in 2019 toward legalization. It may not be full legalization as happened in Canada in 2018 but it will be an important change in direction toward more broadly based acceptance of cannabis for its medical benefits and for adult use.
In the meantime, Canada remains mired in the problems every jurisdiction has experienced in the early stages of the legalization process and a series of scandals including the short sellers attack on Aphria (NYSE: APHA) that raised some apparently factual matters that Aphria has not yet addressed. I would avoid Aphria, Liberty Health Sciences (CSE: LHS) and Xanthic Biopharma doing business as Green Growth Brands (CSE: GGB). Remember, GGB that wants you to believe they can take over Aphria wasn’t even a company at this time last year and did not commence trading as GGB until November 13, 2018.
(4) Revenue and Financial Strength: TGIF recently reported their first quarter 2019 results for the three months ended October 2018. Consolidated quarterly revenues were $4.6 million, an increase of 46% over same quarter the year earlier. This represents revenue at an annualized rate of $18.4 million. I expect internal growth and growth from expansion will drive revenue toward the $25 million mark for the year ended July 2019 – only some seven months away. TGIF is well on its way to developing a strong base of revenue and positive EBITDA from current operations. As at October 31, 2018, the company had $15.2 million in cash and total assets of $56.5 million.
(5) Smaller Cap Group: the chart to the right shows the LTB Low-Priced Marijuana Stock Index compared to the LTB Marijuana Composite Index. This shows that if you pick the smaller, lower-priced stocks at the right time, such as from the spring of 2015 to the fall of 2016, you will be richly rewarded. But at other times such as from the fall of 2016 until just recently, you can experience significant underperformance. In my opinion, since the smaller cap, lower-priced cannabis stocks have been underperforming for such an extended period of time so the recent turnaround is likely to continue.
So TGIF scores five for five. Here is how they do it:
A 91% owned subsidiary, Alternative Medicine Association (AMA) owns and operates a licensed medical and adult use marijuana cultivation and production facility in Las Vegas, Nevada and produces its own line of cannabis-based extracts including shatter, live resin, wax and oils including vape oils, flavored vape oils, terpene enhanced oils, and clear distillates. It also manufactures other third-party brands of similar products. In the first quarter October 2018, AMA contributed 48.9% of revenue.
Infused MFG is also a 91% owned subsidiary based in Nevada. Infused MFG provides legal hemp-derived and cannabidiol (CBD) products. Infused and the Canna Hemp brand have shown strong growth and success in Nevada, California and Colorado. After the passage of the Farm Bill, Infused MFG announced plans to begin processing hemp into CBD extracts for the production of an array of oils and other products. CBD production by Infused from hemp is expected to increase tenfold. The Farm Bill is a major benefit to TGIF. Infused MFG contributed 49.3% of first quarter revenue.
Spire Global Consulting is a consulting company that provides services related to security, intelligence and due diligence. Spire Global contributed 1.8% of first quarter revenue.
Conclusion: 1933 Industries commenced trading as Friday Night (CSE: TGIF) on June 16, 2017 and changed its name to 1933 Industries (CSE: TGIF) on October 1, 2018. The low and high in the stock on a trailing twelve months basis is $.30 - $1.29 per share. The company has approximately 249 million shares outstanding so at $.36 per share, the market cap is a relatively modest $86 million. At $.36 per share, we are getting it Very close to its 12 month low.
As was the case with many cannabis stocks, TGIF was under tax loss selling pressure for the past several weeks as shown in the chart. For a cannabis company that meets all of my five criteria and is in a position to benefit from the recent passing of the Farm Bill in the U.S. and a relatively modest $85 million market cap, I think 1933 Industries is a very attractive buy for portfolios.