If you heard me speak a year ago at any number of medical marijuana investment conferences around North America, and I spoke at many, the gist of every presentation I made was pretty simple; growing weed is dumb business, especially if you’re planning to do it in Canada.
It’s basically just farming, but (up here especially) it comes with added security costs, compliance and distribution issues, power needs, more bureaucracy, weird legal framework… and the stuff isn’t getting any more expensive as a commodity as more and more companies, individuals, and Grateful Dead followers are given the nod to toss seeds about on both sides of the border.
In Canada, the scene is particularly dire as hundreds of would-be growers are waiting, with their multi-million-dollar built-out grow houses, for Health Canada to deem them suitable to visit for a license inspection. Some have been waiting for 18 months or more. Growing the stuff sucks, but spending millions hoping to grow and not being allowed to… that’s the worst.
Either way, weed will be wheat soon. It’ll be a buck a gram in time, it’ll be in plentiful supply, and it’ll still be costly to produce, at least to a pharmaceutical standard. And, let’s be honest, if it’s medicine, that’s the standard required.
By the time most of those applicants get their shot at growing, the market will be all but worthless. It’ll be millet.
So with that in mind (and nothing that’s happened over the last year has nudged me towards changing that opinion), the question becomes, how do you make the big phat money on weed that everyone has been gunning for all this time?
The formula, as far as I’m concerned, is three-fold.
You lock down your own supply. If you grow it for your own use, distribution doesn’t matter and low prices aren’t going to kill you.
You buy that supply, rather than build it from the ground up, so you can get in the game quickly.
You find a value-added product and start using your supply to feed a nice plump margin. Don’t grow the coffee, own the coffee shop, you know?
This shouldn’t be rocket science, and yet it appears the vast majority of the Canadian weedspace has set themselves on spending $5m on a facility and waiting maybe three years for bureaucrats to maybe, kinda, hopefully let that facility licensed, rather than spending $11m just buying one that’s already good to go.
Abba Medix (CSE:C.ABA, Forum) may make many mistakes in the next decade of their business, but those mistakes will never be more important than the wizardry they cast in getting Redecan to sell their licensed facility to them for $11m.
Highway robbery. That’s a called shot into the left field bleachers. I don’t know if the Abba Medix execs had incriminating pictures of Redecan management playing kielbasa tag with a Ukrainian hooker battalion, but if they don’t, I’ll bet the Abba Medix crew are still high-fiving each other over this deal.
Side note: Don’t play kielbasa tag. Someone will put out an eye.
Recently, a rather large, huge, stonking big Canadian weedco met with a much smaller, yet to turn a profit, funds kinda dried up but, hey, nice guys Canadian weedco and offered them $35m in stock to get lost. That offer was rejected.
That company was no larger than our $11m friends at Redecan.
So what the hell is Abba Medix? They’re a group of guys that wanted to get a medical marijuana grow application in to Health Canada, nice and early like, nice and professional like, and met the same wall of bullshit that every other applicant (bar the 17 lucky ones) have met.
So they didn’t moan about it. They didn’t give up or wait or whine. They just went out and bought a going concern, then backed it into a CSE RTO (for our American friends, the CSE is our version of the OTC, more or less, and an RTO is when you merge with an existing listing that’s doing nothing, change your ticker and name, and hit the market without all that prospectus, analysis, due diligence stuff the kids were so into in the 70’s).
Now, you never know, that Abba MMPR application may just get picked by Health Canada at any time to hahaha… sorry, I’ll try again.
Any time now, Health Canada might approve the Abba Med… sorry, I can’t say those words without busting out in giggles. The very notion Abba Medix’s original application will be approved any time soon is hilarious, mostly because pretty much everyone is in the same boat. Betting on any application getting Health Canada approval is like trying to pick which 100-1 shot will win The Derby. Sure, it’s possible, but let’s not be silly waiting for the freaking trifecta to drop.
And Abba Medix knows that, bless ’em. The Redecan buy was a workaround, and a beautiful one. It took them to a $23m market cap, at half the cost.
Of course, they need something to do with all that Redecan weed and, what do you know? Vape time.
Now, I hate vape plays like I hate rare earth plays. If all your company has is a vape play, your company has nothing, as far as I’m concerned. Call me when your device is sold in 7-11’s, but until then, you’re dollar store destined.
When I’m at a party and someone yanks out a vape device, I feel like throwing the Doritos over them, yelling “who’s with me?” and joining eight or nine like-minded folks in gut kicking the offender until he just learns to smoke like normal people.
BUT. The proposed Abba Medix vape play is an add-on, not a reason for being, and it’s a clever add-on that grants them a quick in when, in the next few weeks, Health Canada lays out its rules for allowing oils to be sold to consumers by the likes of Redecan.
Forget the equipment. Think about what’s going in it. Think about the customer funnel; Customer wants medical weed, customer would love it to go in his cereal or coffee or, “oh, you have a vape product you can toss in to my order? Huh. Okay then, I guess that’d be fine.”
$300 of cannabis oil and a $150 vape product to use it in? Margin, baby.
Tweed will be diving into cannabis oil too, to be sure. So will Aphria and Mettrum and Bedrocan. But Abba Medix has the equipment in stock.
They’ve also got patient referral deals feeding them customers. That’s a lot of work completed, in just a couple of months on the exchange.
Now, I don’t generally tout growers as companies to invest in because, well, all of the above. Tweed has size and muscle but struggles on the return customer front and hasn’t exactly been a rocket share-wise. Organigram has promised a lot but their stock hasn’t ever looked like going up after its giant open. Bedrocan is rock solid but the value in that thing is now based on Tweed’s ownership stake. Mettrum? Aphria? Pharmacan? Let’s be honest, the value in grow stocks has come and gone, for most of them. It’s either baked in already, or may never come.
But consider Abba Medix. Market cap: $23m. We’ve already talked about how their $11m investment became a $23m company, and frankly I think that would be a nice valuation.. if that deal was all the company had.
But the patient referral deal is nice. The vape company would be a solid $10-15m by itself if it was spun out. And the existing MMPR application is worth about $2-4m, going by comps in the space.
So the company could easily be at around $35m and still have room to grow, if the real value was baked into the existing share price.
That’d be a share price of $0.54, compared to the $0.35 at the time of writing, if the market caught on in even a small way.
It should be said, the market hasn’t caught on yet. My job isn’t to sugar coat and you’re certainly not blind – the Abba Medix share price has been on a long, slow, soft retreat for the last four months as the company has struggled to tell it’s story, and struggled mightily to separate itself from the concrete block tied to its leg that is the Canadian sector at large.
But that’s actually your bonus. The company has previously touched $0.70 when all it had was its own MMPR application to tell friends about. Now it’s a multi-pronged movement that is following vertical integration plays like Invictus MD Strategies in realizing that the future needs to have several income streams, all feeding and drawing from one another, if they are to thrive.
I haven’t talked to Abba Medix management yet. I wanted to do my digging before I got the sales pitch, frankly, and I’m glad I did.
The days when you jumped on a potential weedco unicorn over breakfast and took your 45% profit out by lunch are gone. We’re through the hype spike and now we’re into the trough of reality. Weed stocks are getting wailed on this summer but I’m not panicking, because there are companies out there that have a longer term plan to do interesting things in this business in ways that will pay off nicely over time, and that will leave their existing share price looking like a bargain when that time comes.
And I like the way Abba Medix has come together.
Don’t wanna buy it? I’m hip to that, and it’s good strategy to not get sucked in by what others are saying.
But watch this stock. They recently did a deal with Canadian investment bank Jacob Securities for strategy and analysis help, with that company’s main monster, Sasha Jacob, running the show.
Let’s put that into perspective; when Jacob Securities put on a medical marijuana industry event recently, THE ENTIRE CANADIAN INDUSTRY showed up. Jacob owns the space.
Watch for dips and take advantage when you feel there’s enough value to do so, because where it is right now is undervalued, and I’ve a feeling there’s going to be a lot more news come out, especially on the oils front… The trigger is tightening.
–Chris ParryDisclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.