As most market watchers would know, cannabis stocks globally are in the early stages of recovery from the 2019 bear market.
But for Mike Curtis, non-executive director at MMJ Group Holdings (ASX:MMJ), the sector is also filled with opportunity for experienced investors who know where to look.
Curtis is managing partner at Toronto-based Embark Ventures, an advisory group that joined forces with MMJ last year via an investment management agreement.
And speaking with Stockhead, Curtis says he’s been busy taking advantage of muted market conditions to position the company to benefit from an incoming rebound in the North American market.
MMJ’s work with Embark Ventures gives it unique exposure to development in North America, which Curtis said is “five or six years ahead” of Australia in terms of both regulation and capital flows.
As an experienced investor in the space, Curtis tracked the market last northern summer when the first retail numbers of Canada’s newly legal pot industry failed to match expectations.
That was followed by the withdrawal of institutional capital, which wanted to see more proof of established business models.
But following a capitulation heading into the year-end, Curtis pointed to the sector’s recent performance amid the coronavirus correction.
“Over the last seven-10 days the broader market has traded down dramatically, but cannabis stocks haven’t touched November lows. So we feel we’ve probably seen the bottom,” Curtis noted.
And after such a rocky period, the focus is on leveraging the fund’s industry experience to target areas that are best poised for growth.
For Curtis, the trend that stands out in the huge North American market is the focus on successful extraction models.
“It’s not really about supply, it’s the extraction process; developing a suite of products such as edibles and vapes that consumers are moving towards,” he explained.
“From product perspective, I use Colorado as a good example because it’s the most mature market.”
“So in that state, 30-35 per cent of the actual demand is for dried cannabis, the rest comes from products that are derived from an extraction process.
“It’s already a regulated space and it requires intellectual property. You can’t just buy a machine and set up an extraction facility. It really takes a lot of expertise.
“And that’s the key area we’ve found where we want to allocate capital, to address that bottleneck.”
The fund’s investments in the space span public and private markets and include Bespoke Capital, in which it participated in a pre-IPO round before the company listed on the Toronto Stock Exchange.
Another is Sequoya Cannabis, a Poland-based cannabis extraction company that’s compliant with Europe’s GMP certifications.
As at January 31, 2020, MMJ had a net tangible asset backing of 23.57c per share (pre-tax), with a book value of assets of $58.8m.
However, the stock is currently trading at just 10.5c per share, with a market cap of $23m – a discount of over 50 per cent.
And importantly, Curtis said the fund was looking to take advantage of key opportunities presented by last year’s market selloff.
“We’ve seen deals out there where you’ve got a great company structure with a skilled CEO, and we just don’t think you could get the same transaction in the event of a sustained recovery,” he said.
Looking ahead, Curtis said MMJ had laid the groundwork for strong returns in the years ahead as the market consolidated.
“We’re holding companies with good extraction operations and good brands. And if you look at our portfolio there’s a lot of business models that make for compelling takeover opportunities or consolidation opportunities,” he said.
“So we’re set for that over the medium term. We expect 2021 will be a big year, when markets have consolidated and the winners have been decided.
“At the same time, demand within the industry will remain robust. So it’s all about getting ready for that next stage.”