Cannasouth IPO — A Post-Mortem

On Wednesday, 19 June, the very first public cannabis company listed on the New Zealand Stock Exchange.

Within 60 minutes of going live, the stock tanked…

From an IPO price of 50 cents per share straight down to 36 cents.

That’s 28% down in an hour.

How did it go so wrong?

Well, as you know if you’ve been a long-time reader of Money Morning NZ, we fully believe that we’re on the cusp of something truly explosive with the looming legalisation of cannabis.

It’s a reality that any investor should understand…regardless of what their personal thoughts are on the topic. It’s coming…and it could very well make investors very wealthy. It’s a matter of having a seat on the train before it leaves the station.

But in recent months, our tune has changed slightly.

We were concerned that there was too much build-up in the mainstream press…too much attention…especially since the Cannasouth IPO was the first new blood on the exchange in around two years.

Everyone had their eye on this company.

And I believe the extraordinary attention gave way to the extraordinary valuation that Cannasouth sought in their IPO — $50 million.

That’s a big number for a company that doesn’t have any revenue…

…nor the possibility of revenue unless the referendum passes next year.

You’d be hard-pressed as an investor to make a good argument to buy that company at that price. There’s simply too little evidence to back up your position.

It’s all speculation.

Which I have no problem with…my own research service is called Small-Cap Speculator, after all…

But there’s a big difference with picking out the ignored and obscure businesses that have a unique offering…and Cannasouth.

Cannasouth is big. It’s mainstream. It’s also a big question mark. [openx slug=inpost]

In their prospectus, you’ll find little that sets them apart from their competition. They don’t necessarily have anything unique. No special products. No ultra-qualified management team. No market advantage.

In fact, you won’t find much about their products at all…

The main nuggets you’ll glean are that the company has a cultivation licence and facility in East Hamilton. That they hold a couple of import licences. And they signed a memorandum of understanding with a Dutch supplier called Bedrocan.

They’re also doing some research with the University of Waikato and Callaghan Innovation.

But here’s the problem: just about any cannabis company in New Zealand will also have facilities, licences, supplier relationships, and research projects. That’s going to be par for the course if you want to get involved at the medicinal or potentially the recreational level.

It’s like a bakery saying that they are special because they have ovens and dough.

Well, of course you do!

What else do you have? What’s your ‘special sauce’?

And what’s your plan to do it better than every other contender piling into the ring?

That’s what keeps investors on board for the long run…

Why I could be wrong…

OK, now that we’ve established that Cannasouth isn’t a smart investment, let’s talk about why it might be a half-decent punt.

The industry as a whole has shown incredible potential…and profitability…if you look at American and Canadian companies similar to Cannasouth. Early investors in these companies have been rewarded for their support.

The Financial Times looked at a Canadian cannabis ETF, Horizons Marijuana Life Sciences Index Fund, and discovered that ‘a $10,000 investment made at its launch in May 2017 was worth $25,750 at the end of last September… The fund has since returned 52 per cent.’

That’s no small number…and from an index fund too.

And as I reported back in August, individual stocks like Aurora Cannabis and MedReleaf both generated triple-digit returns as Canada legalised cannabis.

Based on these overseas experiences, it could certainly be worth putting in a tiny bet here in NZ and seeing where it might take you…

Another point is that we’ll likely see cannabis stocks become more expensive as we get closer to the referendum. Poll results nearer to the vote will give investors more confidence (if it’s supportive, as I expect) and you’ll see a growing number of buyers entering the field.

From a big-picture perspective, it would make sense to try to get in as early as possible…

And as Simon pointed out a month ago, Cannasouth is one of the leading medicinal cannabis researchers here in NZ…with existing ties to the Crown through Callaghan. That bodes well for their research projects…and if they manage to develop one or two proprietary products, you could see their value explode overnight.

Pharmaceutical-type businesses like these often plateau for years until they have a new medicine approved or test results come in. That means that you often see lumpy valuation trajectories…which can sometimes pay off nicely for investors.

Might be worth buying in with fingers crossed…

But keep in mind that it would be a speculative gamble…without much financial substance to back up your bet.

With Cannasouth currently trading below the IPO listing price, this may be the time to put your chips in thepot.

Best,

Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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