Ask me to analyze an insurance company and I can, to borrow a phrase from the sports world, generally write the story on the way to the ballpark.
In that business, one hardly needs an MBA from Wharton to get a sense of the company’s position, performance and potential. Other companies can be a lot more difficult to shoehorn into one opening sentence.
I guess that’s a pretty good problem to have, and it is the problem I ran into with the nifty little company I came across in the fascinating area of pot stocks.
Now, before I go any further, you should know that I’m only going to give you the highlights on this opportunity in this issue.
Like I said, there’s just so much to tell here that I simply don’t have the time or space to reveal everything. But I will be discussing it more in-depth at the Fast-Track Millionaire Summit, airing live today at 1:00 p.m. EST. Be sure and check it out to get the full skinny.
I do have a confession to make here. I ran across this company looking for a genius I met in Denver a number of years ago. M.T. is one of those guys who, even in a casual conversation at a barbecue restaurant, which is where we met, makes me wish I had paid more attention in high school biology.
His mind processes at the molecular level, and his insight into these processes is keen. He created a fantastic technology that I think has the potential to become a much–needed industry standard in the cannabis space. The only trouble is that no one has seen him or knows where he is. I narrowed the search to Florida, but that is as close as I came.
In 999 out of 1,000 cases, that’s where the Case of the Missing Genius would end. But in my investigation into his whereabouts, I ran across a couple of guys who knew him. These were Pretty Damn Smart dudes in their own right, so much so that they saw the potential of M.T.’s idea. Within minutes of talking to one of the principals of the company — something I do routinely that few other analysts would ever even attempt — I knew I was onto something, and something big.
His company started out with a revolutionary way to grow lettuce and strawberries. If you want to grow a plant, you have some options. Most of us are familiar with the notion of geoponics — planting a seed or immature plant into dirt or another growth medium, giving it a good drink and letting nature take its course. Perhaps you’ve also heard of hydroponics or aquaponics, in which the plants are grown without soil with their roots directly in water. Another option is known as aeroponics — a method that involves putting the roots into the air and very precisely adding water and nutrients at the critical intervals the plant requires not just to grow but to thrive.
Okay, so, well, “neat.” That sounds like fodder for an interesting show on the Discovery Channel. For our purposes, though, the economics didn’t turn out to be something that would pique much interest from CNBC.
Then the company switched crops. Things changed, and not by a little. It started growing cannabis.
This is great — investors love cannabis. But investing in this pioneer market has its difficulties, and I want to be very clear about what those are.
Really, all of these roadblocks stem from one key issue — cannabis sativa’s very existence is illegal under federal law. While states are legalizing, the federal government — proud motto, “Always here to help” — still classifies cannabis as a Schedule 1 controlled substance along with heroin, LSD and mescaline. (Cocaine, for its part, is a Schedule 2 drug. Go figure.)
Because weed is federally illegal, banks are forbidden to touch the deposits as proceeds from an illegal enterprise. FINRA, a key Wall Street watchdog, has quietly said no company that touches the plant will be allowed to hit Wall Street through an IPO. And moving weed through the traditional distribution channel, from FedEx shipping to delivery by over-the-road trucks, is completely unlawful.
The bottom line about weed for U.S. investors is this: You’re out in the cold. You can’t click your mouse and enter the cannabis space from your Ameritrade account. And given the tone from the current administration, especially the attorney general, I don’t expect that to change.
I say great. Keep the mainstream investors away as long as possible. Because that gives us time to load up on the companies in the industry that, in my view, have a far greater long-term potential.
Here’s the thing about cannabis. It’s a good business, but not a great one. At its core, growing weed is just basic agriculture. The inputs and process and scale are a little different, but from a sheer business perspective, it’s really no different than growing corn.
I don’t know if you’ve ever tried to grow corn. I have. It’s not difficult, it’s just God-awful expensive. We’re talking about razor-thin margins.
The numbers in the cannabis space aren’t a great deal better from a production standpoint. Yes, cannabis is valuable, but it costs a fortune to grow. For the kind of a return that growing a crop can offer, you’d be a fool not to park your money in the S&P 500 instead.
In the cannabis space, the trick is not to grow the commodity. The trick is to find a critical value-add. It boils down to this question: Would you rather take the risk of tying up $25 million in cash (or borrowing it) so you can grow corn to earn a 5% margin or do you want to sell popcorn in boxes at the picture show at a 1,000% markup?
My rule: Always go for the value-add.
That’s where my favorite cannabis company comes in. With revolutionary growing and lighting systems, it has cracked the aeroponics code for cannabis. Its system consumes less power, less water, wastes no nutrients, and requires less grow space. Computer controls cut down on inefficiencies and labor costs. Even better, the company extracts hemp oil from the leftovers — basically earning free money.
All that means significantly lower costs — and much better margins. And even though you can’t buy stock in this fledgling company on any exchange, it is accepting new investment. And even a small stake could be worth untold amounts of money in the years to come.
— Andy Obermueller
Sponsored Link: I’ll be sharing more of my findings, including how to exploit this opportunity, in the Fast-Track Millionaire Summit today at 1:00 p.m. EST.
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