Time to be a buyer of Khiron Life Sciences (TSXV: KHRN)

QUESTION: “Khiron is a joke! There have been conversations online that the cartels are using these South American companies to launder money and grow illegal cannabis such as the one that got caught. Why do they think their cosmetics will sell? I wouldn’t use it.

All your favorites are blowing up one by one.”

S.P. from Charlotte, N.C.

ANSWER: As you might suspect, I have received a lot of letters like this. Just change the name of the Company and the identity of the sender and everything else is generally the same.

I have been doing this for a long time so I understand what is happening. I am not thick skinned which implies criticism doesn’t get through to me. It does. But I don’t take it personally. I try to learn from what people express and share that knowledge and experience with all readers.

Here is a quote attributed to people ranging from ancient philosophers to modern writers. In any case, I think it certainly applies to this case:

“We don’t see things as they are, we see things as we are.”

This statement means that when something happens, in this case a declining cannabis stock market, people’s responses are influenced by their own experiences, personal circumstances and emotions. This is clear in our Question of the Week which I said is one of many.

The points made are:

1. The price of Khiron’s stock has gone down.

2. Therefore, Khiron is a joke.

3. Therefore, Ted Ohashi is a joke.

In fairness to Khiron (TSXV: KHRN) the names are interchangeable. For the previous two weeks, Sunniva (CSE: SNN) (USOTC: SNNVF) dominated my inbox. For the two or three weeks before, the target was CannTrust (TSX: TRST) (NYSE:CTST). In a bear market, most stocks go down so just about everyone is a potential target.

The price of a company’s stock price going up or down doesn’t make the company better or worse. It is most often the other way around. Investors discover something good about a company and the price of the stock goes up. The company isn’t better than it was. It is being recognized for what it was. It also goes the other way. Investors find out something is wrong with a company and the price of the stock goes down. That would be the case with CannTrust, for example. I assume this is the company the reader refers to as “…the one that got caught.” For your information TRST is a Canadian company growing illegally in Canada, run by Canadians and regulated by Canada. Khiron, on the other hand, is a Canadian company operating according to the laws in Colombia and other counties it has interests in, and run predominantly by hard working, well-educated and honest Colombians with the help of some Canadians and Americans in key positions.

In terms of the stories about the “cartels” and “money laundering” and the rest, I am yet to see or read one shred of proof that such a thing is happening with public companies. Quite frankly I haven’t even heard such an allegation. I mean are you going to tar all Americans with the brush of Al Capone and the mafia? I’ve met the Khiron people several times and I believe them to be honest, trustworthy, hard-working people. There are millions more Colombians who grow coffee, cut flowers and bananas who I haven’t met but I will wager the vast majority of them are just as honest and trustworthy.

Measured by the homicide rate, the U.S. city St. Louis ranks 15th and Baltimore ranks 23rd before you come to Palmira 27th and Cali 31st in Colombia. Detroit at 46th and New Orleans at 50th are also in the top 50. Rated by countries having the most dangerous cities in the top 50, the United States ranks 4th with four behind Venezuela that ranks 3rd and ahead of South Africa in 5th. Colombia is tied for 6th and 7th with Honduras with two cities each. Colombia, like any country, has its problems but it is not the country of twenty-five years ago just like the U.S. is not the country of prohibition.

Let’s look now at Amazon (NasdaqGS: AMZN), a true American blue chip stock. In the past twelve months, their shares have traded at a high of US $2,050.50 per share to a low of $1,307.00 per share - a range of 56.9%. Is it reasonable to believe the true value of Amazon’s businesses fluctuated 56.9% in the past year? I don’t think so. The fact of the matter is that the value of most companies changes far, far less than the price of its stock in the short run.

Cannabis companies are generally much smaller than Amazon and less well established. So they are more volatile both in business value and in the price of their stock. A cannabis company might sign a contract that adds substantial value to the company and their shares. Or in the case of CannTrust, the possible loss of a cannabis cultivation license or a loss of sales and/or biological assets can cause a major reduction in the value of the business, and, of course, the stock price. AMZN, on the other hand, has a stock market value or market cap of over $870 billion. So it is much harder for AMZN to be involved in an event that will produce a major, overnight change in its value.

What investors try to do whether the stock is AMZN or KHRN is buy if they believe in the potential for the company and especially at those times when the stock is probably trading below its true value or at the lower end of its price range. At least that’s what they should do.

The other thing we have to learn about stock prices is they tend to move in trends. This happens with the world’s largest companies listed on the New York Stock Exchange and the smaller, cannabis companies as well. These are called bull markets, when prices rise over an extended period of time, and bear markets, when prices fall steadily for many months. During these trends, the vast majority of share prices move with the trend – up or down.

For virtually all of 2019, the cannabis stocks have been in a bear or declining market.

At any given point in the marketplace we have many companies with stocks trading above and below true value. For that reason, if I see a situation like CannTrust Holdings and every bone in my body tells me this is a disaster waiting to happen, I will jump up and down and pound on the table to warn readers. By the same token, if I find a company like Khiron run by great people, doing things the right way with a disciplined approach, I will also shout from the rooftops that this is a company to own. And that’s what I’m also doing with 1933 Industries (CSE: TGIF), Cannabis Growth Opportunity Corp. (CSE: CGOC) and Lexaria (CSE: LXX) (OTCQX: LXRP).

There are two key times to keep in mind during stock market cycles. At the end of bull markets; after an extended period of rising cannabis stock prices, we end up with most stock prices trading above true value. Similarly, after a bear market, an extended period of declining cannabis stock prices, we wind up at a point with most cannabis stock prices trading below true value. It is at low points in the cycle that people can become overwhelmed by negative emotions and sell their stocks in a combination of anger and panic. That is where I think we are, or are close to, today.

I first raised the warning flags about the cannabis stock market cycle on February 22, 2019 and have identified it as a bear market for several months. The Let’s Toke Business Marijuana Composite Index is down 17% so far this year and down 29% over the past twelve months. The Canadian Marijuana Index owned by MJIC is down 13% year to date and down 47% over the past year.

Bear markets for the New York Stock Exchange or the S&P Toronto Stock Exchange Index are generally measured as a drop from high to low of at least 20%. Because the cannabis stocks are less seasoned and for reasons described above, more volatile, I would pick a somewhat arbitrary standard of double that amount or a minimum decline of 40% from peak to trough. On this basis the LTB Index is down 49% and the MJIC Canadian Index is down 62%. So we are at a level where a bear market could bottom out.

Your final point is you would not use the Kuida® line of CBD infused cannabis cosmetics. In fact, I don’t believe you represent the target market for Kuida® products. I am not an expert but I have seen several presentations in Colombia and Colombian stores to know there is a population of people called Latin American, Latino, Latina, South American, Spanish American or Hispanic who have unique and special needs from their cosmetics. The Kuida® line was developed especially for them. The Joint Venture between Khiron and Dixie Brands even specifies that distribution in the U.S. will target Latin American women. In the United States, the Census Bureau defines people of Hispanic or Latino ethnicity as “…a person of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin regardless of race.” This group now represent the second largest ethnic group and the largest minority group in the United States. The numbers vary but it appears there are over 50 million Hispanic or Latino people in the United States. This represents a very large market for Khiron and Kuida®.

Because the reader asked the question with reference to Khiron, I have answered in terms of Khiron but please understand my answer applies to just as well to 1933 Industries (CSE: TGIF) (OTCQB: TGIFF), Cannabis Growth Opportunity Corp. (CSE: CGOC), Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF) of course, Lexaria’s (CSE: LXX) (OTCQX: LXRP) and Sunniva (CSE: SNN) (USOTC: SNNVF).

So Khiron is the company I have been describing and it continues to become more attractive day after day as management and the employees come to work each day to move the company forward. If a company’s stock price falls as its business grows, the value available to shareholders increases at a very rapid pace. That has been the case with KHRN for the past six months or more. The bear market is within the range that it could end and this reduces investor risk even further at this point. This is definitely the time to be a buyer of Khiron and other well managed, well operated cannabis stocks.