Alan Brochstein, CFA is a well-known authority in the cannabis space offering an investor’s perspective on the industry for over 5+ years. Since 2013 he has been analyzing cannabis companies both in the private and public sector. As we make our way into 2018, I reached out to Alan to provide our viewers with insight into the cannabis industry, investments and his take on where the cannabis industry is going.
Interview with Alan Brochstein
Adelia: Alan, first off, thank you for all that you do. Being able to follow your insights and viewpoints has helped myself and many other entrepreneurs and investors along the way. Can you please share with our viewers a backstory on who you are?
Alan Brochstein: I am a native Texan with more than three decades of experience in securities trading, portfolio management, and analysis. I have been focused on the cannabis industry since 2013 and operate 420 Investor, an online community and due diligence platform for people interested in publicly-traded cannabis stocks, and New Cannabis Ventures, which is focused on cannabis business news from leading operators and investors in the industry.
Adelia: What is one thing you would like to share with our readers about you that they may not be aware of?
Alan Brochstein: Many are surprised to learn that I have never bought a cannabis stock. I have always tried to put the interests of my subscribers first, and I believe that running four model portfolios as I do would create a real conflict-of-interest if I had personal investments in the securities I included in the model portfolios. While I am not complaining, this particular decision has at times been a costly one for me!
Adelia: Can you share with our readers, your why, why did you decide to launch 420 Investor?
Alan Brochstein: In early 2013, I stumbled onto the fact that there were publicly-traded cannabis companies, and I found them to be riddled with corporate governance issues and incredibly expensive. I realized that no one was really focused on the sector from a financial perspective and began to write about it at Seeking Alpha, where I had a large following, and I quickly developed a reputation for watching out for the public. When Sanjay Gupta reversed his long-held negative views about medical cannabis, and the Cole Memo was issued in August, I realized that this was a long-term play and launched my subscription-based service with a goal of being a trusted source of information and guidance.
Adelia: Now what about New Cannabis Ventures, what led you to launch that platform?
Alan Brochstein: NCV is an extension of what has made 420 Investor so successful: It serves as a filter of business news and financial information, but for the entire industry and not just public companies. I had long believed that through high-quality content, New Cannabis Ventures could bridge the gulf between investors and operators in the industry, and it has been doing so for over two years now since our launch in late 2015.
Adelia: You have been researching and analyzing the cannabis industry for years when you first started researching the industry what surprised you the most?
Alan Brochstein: My first area of focus was the publicly-traded sector, and the low quality of the few companies at that time amazed me. I couldn’t believe how bad these companies were and how much penny stock traders loved them nonetheless.
Adelia: Please share your insight into the current state of the cannabis industry?
Alan Brochstein: Fortunately, things have improved dramatically, especially over the past two years or so. I believe the most important driver has been Canada, which has become the global leader in cannabis. In 2015, it had a small and slowly growing federally legal medical cannabis program, but the election of PM Justin Trudeau totally changed the landscape with the promise of full legalization, which is on track to take place in mid-2018.The amount of capital raised and deployed by the licensed producers there has been amazing, and these companies are pursuing global opportunities in Europe, Latin America, and Australia. Further, the development of capital markets there has resulted in substantial capital raised and deployed into the United States.
The U.S. cannabis industry remains very challenging, as we were reminded with the rescission of the Cole Memo earlier this year. Still, we are seeing several multi-state operators emerge as well as the proliferation of a vibrant ancillary industry that provides goods and services to the direct cannabis industry. Further, the publicly-traded markets have improved significantly, with many companies now generating more than $10 million in revenue per year.
Adelia: How do you see the new memo affecting entrepreneurs raising capital in 2018?
Alan Brochstein: This is a setback that wasn’t entirely unexpected but is disappointing nonetheless. I had hoped that the DOJ would refine the prior guidance, making it perhaps stricter, but the rescission of the Cole Memo leaves entrepreneurs and operators in a precarious position of not knowing the rules and, instead, being subject to enforcement based on perhaps arbitrary rules, like the whims of a particular U.S. Attorney. I am hopeful that the insanity of the current situation will yield a legislative solution, one which clarifies in law how the U.S. will deal with state-legal cannabis. This, by the way, doesn’t require legalization!
Adelia: Any insight or advice to potential investors who are looking to invest in the cannabis industry?
Alan Brochstein: I always tell my new subscribers to treat investing like they might edibles: Start low and go slow. Whether investing in publicly-traded companies or private ones, there are so many nuances that new investors must learn to appreciate.
We are just now beginning to see the emergence of pooled funds available to the public, and I am hopeful that we will see more options for investors so that they can participate in a diversified way. I also would suggest that investors be very cynical in both the public and private markets. While I think things have significantly improved over the past five years, there are still a lot of charlatans.
Adelia: If you were to invest in a company, would it be in the public market or the private market and why?
Alan Brochstein: Your readers may not realize, but, unfortunately, most investors can’t participate in the private market, as to do so typically requires $1 million in net worth or annual income in excess of $200,000. Public stocks have the benefit of liquidity, meaning you can cash out with a profit or a small loss at your own discretion. Private investing is more like marriage! It requires more diligence and your entire investment can be at risk of a complete loss because you have no way to exit. With that said, the best opportunities are likely in the private space. To answer your question, if I were to invest in a company, it would be in a private company (about to go public!).
Adelia: What do you think is the single best evaluation metric for analyzing a company’s stock?
Alan Brochstein: That’s a tough one! I have been very focused on revenue lately, but ultimately what will matter down the road is profits. For now, I suggest paying attention to the balance sheet, as I see lots of companies long on talk and short on cash!
Adelia: Regarding investing categories, what do you believe would be 2018’s top category (or categories)?
Alan Brochstein: I think there are a lot of ways to break down the market in terms of categories, but I caution against doing so to finely. Big picture, I think public company investors in the U.S. can choose between domestic or international options (primarily Canadian, but increasingly others) and then ancillary or direct. I came into the year seeing a lot of opportunity in the direct cannabis opportunity in the U.S., but how this category fares seems pretty dependent upon resolution of the federal regulatory issues. If Congress moves to extend Rohrabacher-Blumenauer and make it applicable to all cannabis and not just “medical”, then this is the area I think will perform the best.
Adelia: During previous interviews, you have stated that technology is an untapped market and that you are always looking for companies who are lowering the cost of production and improving compliance. What have been your findings?
Alan Brochstein: The public market doesn’t really have too many options, but the strong performance of Kush Bottles in terms of its revenue growth and stock price performance bears out my thesis. I think the companies that help with compliance and lower the cost of production are definitely the place to be, but I also believe brands are another area. The point I try to make is that investing in cultivation, which will commoditize, may not be the smartest way to ride the growth of the industry.
Adelia: What are five cannabis stocks, you think our readers should keep an eye on?
Alan Brochstein: For a lot of reasons, I don’t like to answer this question. Let me instead point your readers to the New Cannabis Ventures Revenue Tracker, which lists 14 or so companies that are generating substantial revenue. I will also say that anyone following the space should definitely pay attention to the large licensed producers in Canada, which include Aphria, Aurora Cannabis, CannTrust, Canopy Growth and MedReleaf.
Adelia: What advice would you like to share with new investors looking to invest specifically in cannabis stocks?
Alan Brochstein: I would say don’t fall for the hype, of which there is a lot. Specifically, ignore companies that don’t file with the SEC, and make sure to read the filings of the ones that do. Research not only the people running these companies but also the financiers.
Adelia: Looking back in 2017, what does the cannabis industry need to work on to help propel the industry to move forward?
Alan Brochstein: I think our industry needs to do a better job of supporting the institutions that help pave the way for legalization. At New Cannabis Ventures, we donate 2% of our revenue to these organizations, and I would like to see others in the industry make a commitment as well, as we need to educate voters and lawmakers and combat the influence of the alcohol and pharmaceutical industries.
Adelia: What achievements should we recognize as an industry in 2017?
Alan Brochstein: There is more work to be done, but I believe our industry continues to be one that offers a tremendous opportunity to members of minority groups as well as females. I was proud of the stand Minority Cannabis Business Association took against a conference that selected Roger Stone as a keynote speaker, as it raised awareness of important issues we face.
Adelia: What is the best piece of advice you can share with entrepreneurs and investors in the cannabis industry?
Alan Brochstein: Be somewhat flexible, as things seem to change or be delayed all the time. This can mean raising and retaining more cash than one might have in other industries in order to weather the inevitable storms.
Adelia: Anything else you would like to share that our readers may not be aware of?
The business model of New Cannabis Ventures is very transparent but perhaps misunderstood. We work with both public and private companies, but we don’t solicit investment nor weigh in on the investment merits of these companies. The service we provide to our clients is creating customized landing pages that allow interested readers to connect directly with the companies.
For public companies, we share a great deal of objective information through what we call an “investor dashboard.” My subscribers are well aware of the potential conflict of interest New Cannabis Ventures creates, but I disclose very clearly who my clients are. I was very gratified to learn during a periodic survey of my 420 Investor community recently that less than 2% felt that my involvement with NCV resulted in bias.
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