Why you should invest in Cannabis Growth Opportunity Corp (CSE:CGOC)
Last week I read an article titled “How to Make Huge Returns from “Pre-IPO” Investing.” It was written by Matt McCall, editor of Early Stage Investor and I saw it in an email under the name InvestorPlace Digest. I wasn’t overly impressed with the content of the article that basically recounted how Cronos (TSX: CRON) (NASDAQ: CRON) went up 10,000% since it commenced trading in mid-2016. Then it asks a critical investment question: Do you want to own a beach house or a Porsche?
Well, I think I’ve got a better idea for improving your returns from investment in private companies.
However, first let me explain that investing in a company before it goes public can be a very profitable experience. The reason is most new companies realize a sizeable gain when they go public. It’s called a ‘lift.’ The Initial Public Offering (IPO) price of a common stock is often a multiple of the price of the shares in the most recent financing as a private company. So it is often very profitable if you get in on the ground floor.
But investing in pre-IPO companies is also very difficult, especially for the average individual investor. First, you have to find a private company in the cannabis industry looking to raise money. Then you have to judge their chances for success before they’ve actually accomplished very much, if anything. Third, you have to make such a judgement on your own because most investment advisors don’t follow private companies. Then you have to negotiate the terms of the investment you will make. Finally, you have to surrender liquidity until the privco has a liquidity event which may or may not happen. So for an individual and often novice investor to complete all those steps successfully is highly unlikely and fraught with risk.
But here’s my better idea. It’s called Cannabis Growth Opportunity Corp. (CSE: CGOC). This is an investment company that holds around 60% of its portfolio in public cannabis companies and 40% in private cannabis companies. Both portfolios are managed by professionals. The public company (pubco) portfolio is managed by Bruce Campbell, Founder and Portfolio Manager of StoneCastle Investment Management and manager of the Redwood and StoneCastle funds. Campbell is a highly respected investment manager that you have seen on BNN’s Market Call and Market Call Tonight as well in the financial media including Bloomberg, the Globe & Mail and Small Cap Power.
Jamie Blundell, President and Chief Operating Officer of CGOC has over 25 years of experience as a senior-level executive in both the private and public sectors. Blundell has extensive experience with mergers and acquisitions, private equity risk management services and large corporate divestitures and is responsible for investing the 40% of the portfolio that is dedicated to private companies (privcos). It takes a while for privcos to incubate but in the year or so CGOC’s private company investments were first made, two were acquired by major Canadian Licensed Producers and one privco has gone public. Independent of CGOC, two privcos have been highly recommended to me that are also in the CGOC privco portfolio. One is expecting to go public in early June and the other just after Labour Day.
Why invest in CGOC? The Company’s Net Asset Value (NAV) per share on May 15, 2019 was published as $3.41 per share. The shares closed last week on the Canadian Stock Exchange at $2.06 per share so the stock was trading at a 40% discount to NAV. By my calculations, of the $3.41 per share NAV on May 15, 2019, I estimate the pubcos were worth around $2.05 per share and the privcos were worth around $1.36 per share. Now there are a couple of ways of looking at an investment in CGOC at $2.06 per share:
You are getting $1.00 worth of cannabis investments for every $.60 you invest. I call that buying dollars at a discount – a 40% discount.
Another way to look at it, you are buying CGOCs pubco investments at fair market value and getting the privco shares for free. That has to be a good way to go.
In the next three months, I think at least two privco holdings will have a liquidity event and make a material contribution to the NAV.
I believe the 40% discount to NAV is too high and I have been engaged by CGOC to consult on different ways to reduce the discount. I think the discount should be more like 10% to 15%. As a long term investor, your rate of return will be increased by 25% to 30% points if the discount to NAV shrinks as I expect.
In any event, that is why I think I have a better idea. I believe CGOC has the potential to provide outstanding investment returns because cannabis is a great industry to invest in, the investment portfolios are professionally managed by managers with a strong track record, we will likely see a bump in NAV over the next three months as more private companies owned by CGOC go public and because I believe the discount of market price to NAV will decline over time. Finally you do not have to surrender total liquidity. You have the option of selling your shares on the market at whatever that price might be.
For a more complete write up on CGOC see Let’s Toke Business edition 265 May 3, 2019.