AXELROD INVESTMENT NEWSLETTER
-- PRESS RELEASE - -
Contact:
Robert Axelrod, CFA
Phone: 209-874-6121
Email: raxelrod@axelrodnews.com
FOR IMMEDIATE RELEASE
November 8, 2016
AXELROD GOES LONG MYDX, GWPH, AND KSHB;
Neutral to Short on Most Other Over-Inflated Cannabis Sector
LOS ANGELES, CA – November 8, 2016 / Axelrodnews.com, a leading investment newsletter that covers stocks for both long and short opportunities, today announced newly initiated cannabis sector long positions in MYDX, GWPH and KSHB, three well managed companies, leaders in their respective space, that do not “touch the leaf.” It is Alexrod’s opinion that all but the most nimble traders can take profits or step to the sidelines in most of the Cannabis sector.
Voters in nine states go to the polls this week to decide whether to legalize cannabis in medicinal or recreational form, with California and its 39 million residents the industry’s big prize (polling positively). However, the entire sector -- the good, the bad and the ugly -- is up an average 100% to 200% in the past three months based on blind, broad sector speculation and short covering. Most of those stocks will fall back hard, faster than you can spell “four-twenty” when investors realize poorly managed companies burning expensive cash will only burn it faster if they try to address a larger marketplace. Many of these stocks will retest their lows by year end. Companies with earnings, positive cash flow or trending to breakeven will outperform. Near the end of this report, we provide a representative list of cannabis stocks to avoid near or after Election Day.
AXELRODNEWS.COM INVESTMENT NEWSLETTER OPINIONS
AXELRODNEWS.COM FEATURE STOCK OPINION: LONG MYDX
MyDx (OTC: MYDX) $0.037
We’ve listed MyDx on our radar screens before, but recent factors have converged to drive the stock low and its earnings potential higher thus suitable for short term traders and long term investors. While not a pure cannabis play, MyDx produces a next-generation handheld chemical analyzer that, for the first time ever, puts the power of commercial chemical (cannabis) analysis labs in the hands of consumers affordably, delivering test results in minutes for a dollar vs. days and hundreds of dollars at a commercial lab.
The Analyzer offers a CannaDx Sensor that tests cannabis to produce a detailed profile of its composition of THC, CBD, terpenes and other components that give each cannabis plant a unique chemical profile, and give its user a unique experience. All of which can be uploaded to the cloud where the big data is crunched, catalogued and available to all MyDx Analyzer owners.
We like that the MyDx Analyzer has no competition. It garners much favorable media coverage that builds brand awareness and PR more valuable than any paid advertising.
MyDx Catalyst
Just last week, the Company introduced its OrganaDx Sensor for its multi-purpose Analyzer that tests cannabis and cannabis-derived vape oil, fruits and vegetables for toxic chemicals or heavy metals from pesticides, fertilizers, polluted ground water, soil and other environmental contaminants.
While the legal cannabis industry is heavily regulated, remarkably cannabis quality is not. The media does credible reporting on the prevalent danger of toxins in cannabis. At just a few hundred dollars, and given the not uncommon presence of carcinogenic toxins found in cannabis and especially the popular vape oil, we expect consumers, growers and dispensary/sellers, (legal or otherwise), simply cannot afford not to own one of these devices to test cannabis for potency and safety.
The Company also sells an AquaDx Sensor (Flint, MI) and will introduce its AeroDx in H1-17 to test air for VOCs. It has a solid IP portfolio. Its Founder and CEO, Daniel Yazbeck, was a scientist at Pfizer Pharmaceuticals where he specialized in Chemical R&D technologies. Earlier, he was an Engineer and Strategic Market Developer for Panasonic, creating new products and partnerships in the consumer electronics healthcare industry. Each Analyzer test requires a disposable chip that sells for about $1 providing a recurring revenue stream.
Down from its $0.65 high at the start of 2016, the stock was hit hard in October as most of its convertible debenture holders sold pushing the stock from $0.18 to $0.01. We believe the preponderance of that conversion is over, and its market today is liquid enough to absorb any remaining sales. Whatever the outcome of next week’s ballot initiatives, we believe MyDx’s distribution channels and authorized retailers will grow rapidly driving sales to meet increasing demand. Our financial analysis indicates the company will turn EBITDA positive in Q4-16 or Q1-17 reducing risk substantially.
AXELRODNEWS.COM OPINION: LONG GWPH
GW Pharma PLC (Nasdaq: GWPH) $116.60
Axelrod subscribers have traded this cannabis-derived biopharmaceutical company successfully, long and short, a couple times in 2016. At $117, it is consolidating from its 52-week high of $137.88 made in a major September upleg fueled in part by positive results of the second Phase 3 clinical trial of its investigational medicine Epidiolex(R) (CBD) for the treatment of seizures associated with Lennox-Gastaut syndrome (LGS), a rare and severe form of childhood-onset epilepsy.
With a growing pipeline of cannabis-derivative drugs, the Company reported cash and cash equivalents as of June 30 of $254.3 million and subsequently, in July, completed a cap raise for total net proceeds of $273.1 million. With its well-funded long runway, we expect GWPH will soar to new highs in Q1-17 and more risk adverse, mid to long-term investors will be rewarded. Investors should buy dips as the stock rose with the sector last month.
AXELRODNEWS.COM OPINION: ACCUMULATE KSHB
Kush Bottles (OTC: KSHB) $4.20
We are initiating coverage on Kush Bottles with an “Accumulate” rating. This leading producer of regulatory compliant bottles and packaging for the cannabis industry is growing rapidly. It is responsive to its customer experience and offers a fast growing line of products that can be easily ordered and customized online, with a dispensary’s name, logo and address for cost effective branding and low-cost point of sale items. The customer can have the product shipped or pick them up at a regional Kush Bottles center which accommodates cash.
The Company in July opened its third regional sales and distribution center near Seattle with 13,000 square feet, in addition to California (headquarters) and Colorado (along with Washington, currently the two largest US recreational markets). Gross margins are healthy for a product producer in a competitive market averaging around 30%. Top line growth is strong with annualized revenue growth near 100% over the past two years. Its May 31, 2016 balance sheet is solid with $354,000 in cash, a current ratio of 2.4:1 and only $45,000 in long term debt. We expect to see Kush trading in the double digits in 2017, however only because the stock has had a boost with the sector last month, it is our opinion to buy the dips and plan to hold for six to 12 months.
AXELRODNEWS.COM OPINION: AVOID MOST OF THE CANNABIS SECTOR
In an overheated market sector, some of the over-promoted, under-performing cannabis stocks are badly overvalued and, while some will rise further on momentum and ill-placed optimism, most will end badly. Not unlike the dot.com era and its bust of 2000 to 2001.
While still an emerging industry, it is a $6 billion marketplace and if companies do not have meaningful revenue and a clear path to profitability yet there is likely a good reason. Such companies will face a high, dilutive cost of capital and eventually be left in the dust of those with the acumen to capture market share and lower their cost of capital. We expect the winners will consolidate the marginal players starting in 2018. Until then, it is buyer beware. Of cannabis industry companies with market caps of $100 million to $500 million, some of the cannabis stocks we are avoiding include:
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Contact:
Robert Axelrod, CFA
Phone: 209-874-6121
Email: raxelrod@axelrodnews.com
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