- Many Investors Placed Their Bets on the Illinois Cannabis Market, But Michigan is Now Surging, and When All is Said and Done, the Great Lakes State Could Be the Come Behind Winner
- An Effective Combo of Being in the Right Place, at the Right Time, With the Right People Has Red White & Bloom Set to Change the Cannabis Game in the United States
In the American cannabis market, Illinois made the most sense for investors due to its upside potential and large user base. While not discounting this incredible opportunity, serious cannabis investors should also be looking at Michigan, which is an underdog with a potentially massive pathway to profitability.
One lesser-known entity is about to conceivably bust open the vast riches of Michigan’s cannabis market, an arena that Michigan State University predicts will mature into a $3 billion industry over the next few years. This is an organization that understands the importance of walking the less-beaten path to maximize growth and stakeholder returns.
Among the available prospects in the financial markets today, very few have the allure and tantalizing potential of the legal marijuana industry. When all is said and done, we’re talking about a once illegal enterprise becoming a fully legal (and therefore taxable) industry. With fiscal budgets now a huge, perhaps crippling concern across international governing bodies, legalizing cannabis has economic appeal.
At the same time, several cannabis stocks have been among the most disappointing for embattled stakeholders. Frankly, many hard-hit organizations simply grew too fast and irresponsibly. As well, unforeseen administrative issues, particularly in the Canadian cannabis space, have resulted in a sharp crash back toward reality.
In 2020, U.S. Pot Stocks are finally being rewarded for their much stronger fundamentals compared to their Canadian counterparts, and as a result, have rebounded sharply and appear to be in the very early stages of a brand new cannabis bull market run.
To summarize the key headwinds impacting the early volley of the cannabis investment market (i.e. initial legalization and “Cannabis 2.0”), sector players have been hurt by these three obstacles:
- Less-than-favourable geographic markets
- Poor corporate planning/execution
- Unfortunate geopolitical timing
Let’s tackle these three issues one-by-one, juxtaposing earlier setbacks against the potential profitability of Michigan’s legal marijuana market and a rapidly rising upstart in the cannabis space.
Opportunity Calling in the Great Lakes State
As you know, Canada generated much fanfare when it became the first G7 member nation to legalize recreational marijuana. Immediately, investor dollars poured – almost indiscriminately – into any and all “weedpreneurs.” Unfortunately, the Canadian government could not handle the deluge of applications for dispensaries and other cannabis-related enterprises.
Invariably, one of the consequences of this dynamic was that applications were granted haphazardly without consideration to maximum efficiency – we are talking about the government, after all. Thus, many high-profile Canadian markets often received low cannabis retailer density on a per-capita basis.
Simultaneously, several cannabis firms poured resources into production facilities whose end goods would have difficulty finding a home. Despite the obstacles, though, industry analysts project Canada’s 2020 medical marijuana sales to hit $1.513 billion (2.03 billion CAD). And by 2022, the country may experience a peak in medical marijuana sales of $1.774 billion (2.38 billion CAD).
Now, let’s take a look at Michigan. Though overshadowed in the media by other marijuana-friendly regions like California, the Great Lakes State is quite a green powerhouse. As a report from 24/7 Wall Street and published by Huff Post reveals, Michigan had over 1.3 million marijuana users in 2016. Because of its smaller nominal population size, however, it has a higher per-capita density of weed users (15.6%), than stalwart California at 14.9%.
But even on a nominal basis, Michigan is home to the sixth-largest cannabis consumer market. According to the state’s Marijuana Regulatory Agency, by September of this year, Michigan’s cannabis industry will generate $390 million in recreational sales. By the end of 2021, the recreational market will explode to nearly $1.5 billion.
Such projections are begging a well-run organization to establish dominance in this ripe-for-the-picking and undervalued market. And that company could very well be Red White & Bloom (CSE: RWB) (OTCQX: RWBYF).
Source: Shutterstock
RWB is a Firecracker of an Upstart
Unlike other cannabis firms that have been plagued by poor planning and myopic leadership, Red White & Bloom focuses on prudent, responsible growth. Primarily, RWB accomplishes this by exclusively targeting large, viable markets. RWB CEO Brad Rogers has on many occasions referred to the company not as a multi-state operator (MSO), but a “Super State Operator.”
“We’re very disciplined in what we’re doing. We call ourselves Super State Operators. We’re not a multi-state operator. We’re super state, meaning that we go in [states] with a big footprint, and we dominate wherever we go,” explained Rogers in an interview with TraderTV Live.
Just as importantly, Red White & Bloom enter qualified regions with the appropriate scale, thereby integrating strategy with execution.
And the proof, as they say, is in the pudding. By securing the first-mover advantage, RWB now controls a dominant 22% share of the Michigan cannabis market. Breaking it down, the company has 41 cannabis licenses, which cover the full spectrum of the value chain: cultivation, retail, delivery and consumption events. As well, the company has 10 dispensaries, eight of which are ready to open.
Further, Red White & Bloom levers 23 individual facilities, which are spaced out to serve the majority of Michigan’s 10 million residents. Also, its five cultivation facilities translate to over one million square feet of indoor and outdoor growing space.
Better yet, Red White & Bloom is a burgeoning multi-state operator (MSO), and the only one of its kind in Michigan. For the most part, MSOs can be difficult to operate because each state has different nuanced laws and regulations. As well, the consumer base varies in taste and preferences. A marketing campaign that works in one state may not work in another. However, RWB is so far the sole MSO that has unlocked the code to the vast riches of Michigan’s cannabis market.
Additionally, RWB has licenses in Illinois and Massachusetts and is targeting expansion in Florida and California. For Illinois, RWB offers a uniquely attractive portfolio featuring a 3.6 million sq ft indoor hemp/CBD cultivation and processing facility. RWB’s Illinois facility is said to be the largest in the world and is capable of producing 600,000 pounds of biomass per year.
The end goal here is the incredible profit potential of the global cannabidiol (CBD) market. To quickly recap, CBD is cannabis without the psychoactive compound THC. Because of this pivotal distinction and the passage of the 2018 Farm Bill, CBD is no longer considered “marijuana” under federal law. And it’s possible that other countries will eventually follow suit, making Illinois a potential goldmine in the making.
For Massachusetts, this is one of the latest states to legalize cannabis. Here, experts predict that its market will exceed $1 billion. RWB has three licenses in the state, two for cultivation and one for processing. What stands out is that Massachusetts is a limited license state, translating to approximately 0.3 square feet of cultivation per resident. Thus, with Red White and Bloom’s presence, it will be tremendously difficult for competitors to unseat this MSO.
And competitors will come. According to a study by Michigan State University on behalf of the Marijuana Regulatory Agency, Michigan marijuana sales will eventually hit approximately $3 billion per year. However, the tenacious management team at Red White & Bloom have already grown revenues to $100 million during the most challenging period in the marijuana industry. Plus, by cementing a foothold in Michigan’s broader retail machinery, RWB is well prepared to address any competitive concerns.
Massive Cannabis Catalyst on the Horizon
Undeniably, 2020 will forever be marked by the COVID-19 pandemic. On scales both large and small, the disease caused by the novel coronavirus may permanently change how business is conducted. Yet even within this health catastrophe, certain political elements see opportunity.
Principally, the outbreak may give the Trump administration its final lifeline to save what was an otherwise feasible campaign for the 2020 presidential election. Pre-pandemic, public opinion polls favoured Trump, mostly because he ran on a strong economy. At the time, the headline numbers, such as Wall Street valuations and multi-year low unemployment, supported this narrative.
However, the coronavirus ruined everything. And as the pandemic crushed several states, the probability of success for a second term diminished substantially. But as the Wall Street Journal points out, President Trump could corral this crisis into a political catalyst. The WSJ notes that Trump supporters “are more enthusiastic than Biden’s, and may be less fearful of going to the polls.”
Still, mere pandering alone may not be enough. Frankly, the economy is at an inflection point. Strong leadership and a chips-on-the-table approach to saving the country may prevent an apocalyptic disaster. Additionally, astute political strategists will observe that marijuana is also at an inflection point. All it takes is one major piece of legislation to move the momentum forward.
Clearly, this is a win-win partnership. Although speculative, the COVID-19 pandemic may be the pivotal tailwind for which cannabis investors have been seeking.
As Michigan State reported, it’s not just the $3 billion annual revenue stream that should interest prospective investors of RWB stock. Instead, it’s the 13,500 jobs that the green industry will create. Plus, the tax revenue from the projected sales should amount to nearly half-a-billion dollars annually for the state government.
In a single strike, both state and federal authorities could open an unnecessarily capped economic engine. And that’s precisely what the U.S. needs – jobs and robust tax revenue streams.
To that end, investors should consider the broader bullish case for RWB stock. In addition to the incredible production footprint that Red White & Bloom leverages, RWB is set to acquire 100% of the incredibly successful American cannabis company, Platinum Vape. A specialist in vaping and cannabis-infused products such as edibles, Platinum Vape products are sold at over 700 retail locations throughout the U.S.
In particular, this acquisition will bring revenue streams from California and Oklahoma under the Red White & Bloom umbrella. The former has always been a vaping stronghold, and the practice has exploded in popularity in the latter.
In addition to the Platinum Vape deal, just last week, Red White & Bloom announced that the company exercised its call option to acquire 100% of the Michigan-based cannabis company PharmaCo.
“PharmaCo has established significant market share within the state of Michigan. Now that we have completed our go public transaction, we felt that the time was right for us to take the next step of rolling our critical mass asset base together in what we believe is one of the top 3 most important cannabis states by market size and potential,” said RWB CEO Brad Rogers.
Best of all, in mid-June, RWB closed a game-changing exclusive licensing agreement with High Times. Inarguably the vanguard of cannabis pop culture, High Times enjoys millions of monthly page views, as well as 8.9 million social media followers. The deal cements the RWB brand to the single-largest consumer portal possible, facilitating a daunting firewall against would-be competitors.
Source: RWB Investor Presentation
Putting It All Together
Notwithstanding the incredible potential of RWB stock, perhaps the most remarkable aspect of Red White & Bloom is how deeply undervalued it is. In a way, this shouldn’t be too surprising. As we discussed at the top, many investors were burnt when the Canadian cannabis bubble burst in late 2018. It’s understandable that some investors may be a little gun shy when it comes to cannabis stocks for this reason, but the massive American market, which is yet to fully open up and is full of huge potential catalysts, is a whole new ball game.
As mentioned, U.S. pot stocks have begun to take off and many experts are calling this move the beginning of a new bull market in marijuana or simply, the Cannabis Boom 2.0. Top U.S. MSOs such as Curaleaf (CSE: CURA) (OTCQX: CURLF), Trulieve (CSE: TRUL) (OTCQX: TCNNF) and Green Thumb (CSE: GTII) (OTCQX: GTBIF) (FRA: R9U2) are finally getting the love they deserve as a result of strong earnings and it won’t be long until RWB is right up there with them.
The Red White & Bloom story is very compelling and it becomes clearer when you stack the underlying company up against leading Canadian cannabis firms. With an assumed share price of $1.25, Red White & Bloom has an enterprise value of $375 million.
From an EV/EBITDA calculation, RWB has a ratio of 6.5. That is half the valuation of many leading Canadian cannabis firms’ valuation. However, if we ramp up the EV/EBITDA ratio to 19.2 – the median ratio of select Canadian competitors – the implied enterprise value will hit slightly over $1.1 billion. And this will translate to a stock price of $4.58.
Even more enticing, it’s possible RWB’s valuation could exceed projections. While cannabis is capturing new adherents, the vanguards of the adult liberties markets – alcohol, tobacco and big pharmaceuticals – are losing market share. To stay relevant in this new age, the top players may end up opening their wallets and partnering with strong, sustainable cannabis firms.
Indeed, we’ve already seen this happen with Canopy Growth (TSX: WEED) (NYSE: CGC) (FRA: 11L1) and Cronos Group (TSX: CRON) (NASDAQ: CRON) (FRA: 7CI), which secured partnerships with alcoholic beverage maker Constellation Brands (NYSE: STZ) (FRA: CB1A) and tobacco giant Altria Group (NYSE: MO) (FRA: PHM7), respectively. Though nothing is set in stone, there’s no reason to believe such major deals won’t happen again, but this time, with top U.S. cannabis names.
When you factor in Red White & Bloom’s dominance in Michigan’s burgeoning cannabis market, along with expanding its MSO footprint in key regions, RWB is well-positioned for any breakthroughs in the legal environment. But the most potent opportunity could be now when the crowd has yet to sniff out this budding firecracker.
Source: Barchart
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Red White & Bloom is a paid client of The Cannabis Investor. The Cannabis Investor holds a position in RWB.
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