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5 Overvalued Cannabis Stocks - Part 1: New Investors Seem To Go For Flashy Names

“There’s a lot of excitement in the cannabis industry right now after all the election victories in November. Yes, there is some uncertainty regarding the Attorney General [Jeff Sessions] and Cole Memo— things we’ve talked about before. But, it’s pretty clear to me an observer that there is a lot of stock promotion going on,” Alan Brochstein, founding partner at New Cannabis Ventures and founder at 420 Investor, told Benzinga in a recent interview.

“There’s also an overarching theme right now [...] it seems like new investors to the market that maybe aren’t particularly savvy. They gravitate toward names that have 'marijuana' or 'canna-' or 'cannabis' in their names. So, in particular, I want to warn people that just because a company has a certain name, that doesn’t tell you anything about the company, what they do [or] whether it’s a good company or not,” the expert pointed out before going into five overvalued stocks in the marijuana industry.

In an article published on Marketfy in November, Brochstein talked about General Cannabis, saying, “I didn’t think people really appreciated, at the time, the dynamic that’s played out.”

Brochstein: What happened is, the company was desperately running out of cash and was able to raise it; they issued these 12 percent short-term notes. With them, they issued 9 million warrants: 4.5 million with a $0.75 exercise price, and 4.5 million with a $0.30 price — which averages $0.525.

This is obviously a small fraction of where the price was then, and even now. These warrants are now freely trading, so there’s people that made these loans, which totaled $3 million. However, the warrants, even now with the stock above $3.20, have a ton of intrinsic value; right now $24 million of potential profits to exercise the warrants.

This is company that is not a scam, for sure, it’s a real company, so that part is clear. They have been very acquisitive, so they’ve built a company through some acquisitions [...] They are basically in a $3 million annual run-rate. So, if you assume that these warrants are going to be all exercised, and you also include some options, which are under $1, then you have about 33-and-one-third million shares. At a price of $3.31, you’re talking about a market cap in excess of $100 million, and that just seems really out of line with where the company is [...] Even thought their annual sales rate of $3 million, their operating loss annual run rate is about $4 million.

Benzinga: Do you still believe the stock will go down below $1?

Brochstein: I don’t think it should go down all the way to $0.52, and I don’t think the stock should get “cheap.” At $1 per share, it would have a $33 million market cap— I can find companies that have higher sales with a similar market cap. So, I don’t think that’s a particularly attractive level for that company, but I don’t know if it will actually get to below $1, but I still think it should, or most likely will [after we’re over the beginning of the year hype].

Benzinga: Why do you think the stock performed so well in 2016?

Brochstein: I think it was very helpful that they did that financing. They were able to borrow money through 2019, that basically kept them from going bankrupt. If you look at their balance sheet, they were insolvent.

Like I said earlier, they happen to be very well named, General Cannabis. I think they have been able to show growth, although it’s not a lot of organic growth, and they do have revenues. So, there are things that add to it. The whole idea of momentum— They hit a high of about $2.00 in April, and then they dropped to $0.50, so they lost 75 percent [...] But, when they got back through $2.00, at the beginning of October, they really took off. So, I think the traders really like that.

Then, the other reason is, there’s been talk about some big acquisition or something like that. I think that kind of fuels interest as well, because, theoretically, they can now deploy capital, especially if those warrants get exercised.

Want to know which other four stocks in the cannabis industry are overvalued? Check out Part 2 of our three-part series following this link coming soon!

© 2017 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.


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