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johnboothus · 4 years ago

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Is the Summer of Hard Tea Brewing?

What will be the next hard seltzer? That is the multi-billion-dollar question for alcohol producers.

It’s hard to imagine now, but if you’d posed that question this time last year, many in the alcohol industry might have assumed you were asking for the next flash-in-the-pan “innovation.” Now, with sales still surging, it’s overwhelmingly clear hard seltzer is no fad. As the wave of its enormous success crescendos, multiple producers are betting on the next competitor: hard tea, a ready-to-drink spiked beverage flavored in still and sparkling form.

Hard tea is not a nascent subcategory by any means. According to Nielsen data, hard tea sales reached $436 million in 2019, and they’re continuing to grow this year. In the 18 weeks leading up to July 4, hard tea sales surpassed $200 million — almost half of 2019’s total.

This remarkable growth has almost entirely come from two market leaders, Boston Beer’s Twisted Tea (launched in 2001) and Molson Coors’ Arnold Palmer Spiked (launched in 2018), but neither of these brands align with the formula that’s seen so many flock to hard seltzer. Each contains more than 200 calories and over 20 grams of sugar per 12-ounce serving; that’s double the amount of calories of the average hard seltzer, and between 10 to 20 times more sugar.

Many alcohol brands see this as an opportunity — a “better-for-you” beverage in the already-established hard tea subcategory that mimics hard seltzer’s low-calorie, low-sugar formula. With multiple such products already released this year, could this signal that the summer of hard tea is brewing?

Hard Tea: A Hard Seltzer Alternative?

Producers wishing to appeal to health-conscious drinkers currently have two options: compete in the now-saturated hard seltzer space or differentiate. With well-established brands like White Claw and Truly already dominating hard seltzer sales, many producers may feel that offering a hard seltzer alternative is the easier route to success.

“When seltzer became this big story and everybody said ‘the future of alcohol is seltzer,’ we felt as though we were seeing something different,” says Daniel Goodfellow, chief marketing officer at Crook & Marker. “We thought that seltzer was just getting the party started, demonstrating there is such a thing as an alcoholic beverage that consumers can drink and not feel guilty about. But as in every other beverage category, flavor is what’s going to pull them through.”

Goodfellow makes an important point: For regular drinkers of products like LaCroix, hard seltzer’s flavor profile is a familiar one. But for others seeking low-calorie booze, subtle hints of fruit may not be sufficient on the flavor front. If hard seltzer is the alternative to beer, then hard tea is an alternative to hard seltzer.

Crook & Marker currently offers five lines of low-calorie alcoholic beverages brewed from ancient grains, such as quinoa and amaranth. One of its lines, Spiked & Sparkling, closely resembles a hard seltzer (and bears striking resemblance to Truly’s original brand name). The other four — Spiked Tea, Spiked Lemonade, Spiked Coconut, and Spiked Soda — have bolder flavor profiles. The brand’s teas, lemonades, and coconut beverages have been the main drivers of the company’s 300-percent retail sales growth over the past year, Goodfellow says.

Other brands are betting on bolder flavor profiles as a hard seltzer alternative as well. In February, AB-InBev’s craft beer unit, Brewers Collective, launched a new line of products called LQD. Described as Brewers Collective’s “first craft beyond beer platform,” LQD debuted with four spiked products: two flavored green teas, a hibiscus lemonade, and an agave limeade.

Brewers Collective devised these products after in-house market research showed consumers were seeking hard seltzer alternatives at its on-premise locations. “Across the country, consumers were coming into our craft breweries and brewpubs and asking for seltzers, but also asking for different types of beverages,” says Lindsey Willey, director of beyond beer for Brewers Collective. LQD’s teas, lemonade, and limeade have low-calorie, low-alcohol qualities akin to hard seltzers, but offer “a more flavorful or fruit-forward option,” she says.

In June, Rhode Island’s Narragansett Beer launched its own hard tea in collaboration with local lemonade brand Del’s. Narragansett’s CEO, Mark Hellendrung, says the decision to launch a hard tea rather than a hard seltzer came from not wanting to become another “me too” offering in the seltzer space. Hellendrung describes the initial consumer response to Del’s Rhode Island Hard Tea as exceeding the company’s “wildest expectations.” (Narragansett’s Del’s Shandy, a half-lemonade, half-beer is also made with the local brand.)

“Right now, because it’s doing so well, we’ve had to really restrict where we’ve shipped it,” Hellendrung says. (Del’s Rhode Island Hard Tea is currently distributed in nine states, with more markets soon to follow.) “We’re producing a lot more in August and September and we’ll be able to release it full-throttle in September,” Hellendrung adds.

Learning from Non-Alcoholic Beverage Preferences

Tea is not the only non-alcoholic beverage to receive the spiked treatment in the wake of hard seltzer’s success. Many producers have also turned to lemonade and limeade (such as Crook & Marker and LQD), while others are instead adding ABV to coffee and kombucha.

A skeptical take on this trend could be that these brands are hoping for success by virtue of the now- recognizable “hard” moniker. But many producers say there’s strong evidence in the non-alcoholic RTD space to suggest that tea is a particularly potent candidate for spiking.

In July, Pabst Blue Ribbon (PBR) introduced a 100-calorie, peach-flavored hard tea following in-depth consumer research and over a year of development. “The non-alcoholic iced tea category gives us some clues about consumer preferences,” says John Newhouse, PBR’s brand manager. “In our research, we learned that over one-third of millennial and Gen Z consumers would be interested in trying a sparkling tea drink, especially if it contained a lot less sugar than the best-selling teas on the market.”

Newhouse continues: “The hard seltzer segment is obviously booming and here to stay, so better-for-you alcoholic drinks are proving to have a lasting place in the market. Compiling all of these data points gave us confidence that our lower-calorie, bubbly hard tea could gain traction.”

New York-based entrepreneur Kyle Cooke was also inspired by the popularity of non-alcoholic iced teas when starting his hard tea and spritz cocktail brand Loverboy in 2018. “For me, there’s a huge opportunity for hard tea because if you go into a supermarket or a grocery store, there’s an entire cooler dedicated to ready-to-drink, non-alcoholic tea products,” Cooke says. In contrast, when you browse the alcohol section, there’s “basically one [tea] option,” he adds.

“Twisted Tea has 93 percent of the hard tea market share and it’s gone uncontested for 20 years,” Cooke says. Not only does this prove that tea can succeed as an alcoholic beverage, it also offers a previously untapped opportunity.

Given Twisted Tea’s high-calorie and high-sugar formula, it’s safe to assume that it’s not traditional hard seltzer drinkers who have driven hard tea’s growth in recent years. But with an increasing number of low-calorie options in the segment, such as Loverboy, LQD, and PBR, hard seltzer drinkers could be tempted to switch to hard tea. And with consumers’ healthy perception of tea, a spiked version could perhaps be even better placed than hard seltzer to succeed as a “better-for-you” alcoholic beverage. “That was really the genesis of Loverboy,” Cooke says.

The Future of the “Beyond Beer” Space

The combination of hard tea’s stronger flavors, the popularity of non-alcoholic iced teas, and our perception of tea as “healthy,” make it a compelling contender to compete with hard seltzer. But with the former’s head start in the market, can hard tea ever approach the status of spiked sparkling water, or incite the cultural phenomenon that spawned viral memes and YouTube videos? Some producers say, yes.

“Sparkling water is a $22 billion category right now. Iced tea is a $24.5 billion category,” says Jennie Rips, co-founder of Owl’s Brew, a New York-based company partially funded by AB InBev’s venture capital arm, ZX Ventures. Owl’s Brew offers low-calorie canned “boozy teas,” as well as tea-based, non-alcoholic cocktail mixers. “If you look at that, and look at where spiked seltzer is now, I believe [hard tea] will be a major, major category,” she says.

Owl’s Brew co-founder Maria Littlefield adds, “Over the years, we’ve seen a lot of trends that started non-alc transfer over to alcohol four or five years later.”

For Crook & Marker’s Goodfellow, the question is not whether hard tea can compete with hard seltzer, but whether a range of “better-for-you” spiked drinks — seltzer, tea, lemonade, and low-alcohol canned cocktails — can one day compete as a combined category.

“I truly believe that when the history books are written, 2019 will be the year that everybody woke up to the emerging ‘better-for-you’ alcohol category,” he says. “But 2020 [will be] the beginning of its true maturation into a multifaceted category. Just like any mature category, such as beer, there’s room for everyone in that scenario.”

The article Is the Summer of Hard Tea Brewing? appeared first on VinePair.

Via https://vinepair.com/articles/hard-tea-trend-summer-2020/

source https://vinology1.weebly.com/blog/is-the-summer-of-hard-tea-brewing

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isaiahrippinus · 4 years ago

Text

Is the Summer of Hard Tea Brewing?

What will be the next hard seltzer? That is the multi-billion-dollar question for alcohol producers.

Hard Tea: A Hard Seltzer Alternative?

Learning from Non-Alcoholic Beverage Preferences

The Future of the “Beyond Beer” Space

Owl’s Brew co-founder Maria Littlefield adds, “Over the years, we’ve seen a lot of trends that started non-alc transfer over to alcohol four or five years later.”

The article Is the Summer of Hard Tea Brewing? appeared first on VinePair.

source https://vinepair.com/articles/hard-tea-trend-summer-2020/ source https://vinology1.tumblr.com/post/624179164374794240

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delfinamaggiousa · 4 years ago

Text

Is the Summer of Hard Tea Brewing?

What will be the next hard seltzer? That is the multi-billion-dollar question for alcohol producers.

Hard Tea: A Hard Seltzer Alternative?

Learning from Non-Alcoholic Beverage Preferences

The Future of the “Beyond Beer” Space

Owl’s Brew co-founder Maria Littlefield adds, “Over the years, we’ve seen a lot of trends that started non-alc transfer over to alcohol four or five years later.”

The article Is the Summer of Hard Tea Brewing? appeared first on VinePair.

source https://vinepair.com/articles/hard-tea-trend-summer-2020/

source https://vinology1.wordpress.com/2020/07/20/is-the-summer-of-hard-tea-brewing/

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wineanddinosaur · 4 years ago

Text

Is the Summer of Hard Tea Brewing?

What will be the next hard seltzer? That is the multi-billion-dollar question for alcohol producers.

Hard Tea: A Hard Seltzer Alternative?

Learning from Non-Alcoholic Beverage Preferences

The Future of the “Beyond Beer” Space

Owl’s Brew co-founder Maria Littlefield adds, “Over the years, we’ve seen a lot of trends that started non-alc transfer over to alcohol four or five years later.”

The article Is the Summer of Hard Tea Brewing? appeared first on VinePair.

source https://vinepair.com/articles/hard-tea-trend-summer-2020/

0 notes

marketinghero · 5 years ago

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Hovis is bringing its iconic 1973 advert ‘The Bike Ride’ back to TV screens as the British breadmaker looks to stir up brand love among a new generation. The original collaboration between Hovis, creative agency Collett Dickenson Pearce (CDP) and director Sir Ridley Scott depicts an old man recalling his days as a baker’s boy struggling to push his bike up a cobbled hill. By mining the brand’s rich heritage CDP came up with the classic tagline: ‘Hovis: As good for you today as it has always been’. Now, 40 years since the ad first aired, ‘The Bike Ride’ (otherwise known as The Boy on the Bike) is returning to TV screens tonight (3 June). It uses footage remastered by the British Film Institute and a re-recording of the soundtrack – Antonín Dvorak’s New World Symphony – performed by descendants of the original Ashington Colliery brass band from 1973. Despite being four decades old, affection remains strong for ‘The Bike Ride’. Last year, it was crowned the nation’s favourite advert from the 1970s in an exclusive Marketing Week and YouGov Omnibus poll. Then, in May, the advert was named the most iconic of the past 60 years, according to research released by Kantar. Some 22% of the 1,200 UK consumers questioned said The Bike Ride was the most seminal ad of the past six decades, while a further 15% described it as the most emotional. “It puts into question, what’s been going on in the advertising industry for the last 40- plus years,” jokes current Hovis marketing director, Jeremy Gibson. Gibson believes a mix of nostalgia, a great creative concept and dedication to the craft have driven enduring affection for The Bike Ride over the past 40 years. Compared to the way ads are shot today, with multiple scenes and often aggressive price messaging, Gibson believes the advert stands out as something different. “Watching the original 45 seconds of that ad it’s almost a moment of pause and that’s why it has cut through as advertising has evolved and changed… because it becomes almost timeless and it’s a heart-warming thing to watch,” Gibson tells Marketing Week. “It celebrates a time in the advertising world when emotion and feel were much more important than ‘our phone is faster’ or ‘our product is cheaper’.” While the research highlighted an enduring love for the ad, Gibson explains it also felt like the right time to bring back The Bike Ride as it conveys a sense of there having been a healthier time as today’s society feels increasingly divided. READ MORE: How Hovis’s 1973 ad ‘The Bike Ride’ kickstarted its route to household name Going back in time Gibson is keen to show that Hovis is not just as a company with a nice ad but a brand with real depth and genuine history. To help tell this story, the re-release of The Bike Ride will be supported on social media with additional footage, including interviews with Hovis’s marketing director in the 1970s, Alan Hepburn, and director Sir Ridley Scott. Hepburn’s brief back in 1973 was to create an ad that would allow Hovis to tug at the audience’s heartstrings, rather than simply being obsessed by taking sales volumes from X to Y. “I asked Alan about how they wrote the brief back then compared to how we write it now and it was less around taking numbers, it was more about ‘we just want more consumers to love Hovis’. That’s a really simple brief but really hard to execute,” Gibson explains. “They absolutely hit the nail on the head with not just a great execution, but also a hell of a director who, from talking to Alan, took control on the day and told the client to just sit over there, which was fascinating to hear.” The filming of ‘The Bike Ride’ in 1973.Scott recalled the very end of the third day on location at Gold Hill in Shaftesbury, Dorset, when the clouds were coming in and all the equipment went back in the van. Then suddenly the sun came out and he told everyone to unpack for a re-shoot. Hepburn remembers that moment vividly as he was about to set off home in his car and suddenly there was a “palaver” as the team reset the entire shoot in order to capture the sunlight. Gibson marvels at the “level of love, care, passion” displayed by the brand, agency and director, which he believes comes through in the quality of the advert. This is the first time Hovis has revisited its Bike Ride roots since the 2008 campaign ‘Go on Lad’. The two-minute film follows a young boy running with a loaf of Hovis through history, from the sinking of the Titanic and World War I, to VE Day street parties, miners strikes and the Millennium celebrations. The advert ends with the classic line ‘As good today as it has always been’. Since then, Hovis has cut its range of pancakes, crumpets and muffins to focus on the quality of its core bread products. There is still growth to be had in the UK bread market, which in 2018 rose in value by 0.7% year on year to £3.5bn, according to Mintel figures. Pre-packaged bread represented 70% of the total volume sold. In September Hovis launched a new seeded batch, tapping into what Mintel describes as the trend for “bread with bits”, a category that contributed more than £30m to the sales of bread in 2017-2018. To support this clear focus on the core product, last year Hovis released ‘It’s Just Bread’, a campaign focused on bread as an everyday product. While the campaign did raise brand awareness, Gibson feels that, on reflection, the message was not as “pinpointed” as they would have liked. “We’re moving now into celebrating our product and our category, as opposed to making it a bit more every day. That’s what we’ll continue to do and using this Boy on the Bike relaunch as a bit of a springboard to do that,” he adds. Why an iconic ad can be a double-edged sword The advert itself, combined with the subsequent place it created for Hovis in the fabric of British culture, was the main reason Gibson wanted to join the bakery business as marketing director in December 2018. Excited about taking a brand with 130 years of heritage through its next stage, Gibson came on board at Hovis following two years as group head of marketing for Innocent Drinks. Prior to that he worked for three years as marketing director at PepsiCo, leading the juice and cereals teams, following five years at Molson Coors, which included a stint as global brand director. Having worked outside the Hovis business, he appreciates that an advert like The Bike Ride is a powerful asset for any brand and something other marketers would “break their arm for”. Speaking to Marketing Week last year, Alan Hepburn credited the The Bike Ride with kickstarting the baker’s transition into a household name. READ MORE: Sir Ridley Scott on why the 1970s was the ‘golden age’ of advertising Gibson accepts that working for a brand which such an iconic advert in its cannon can be a bit of a “double-edged sword”. “If you didn’t have it you’d wish you did and if you do have it you go, ‘how do you beat that?’. I’m sure the Cadbury ‘Gorilla’ team thought the same thing and the guys who came in after Guinness did their ‘Surfers’ ad thought, ‘right what do we do next?’. It’s really tricky one,” Gibson reflects. “My perspective is it’s about being true to the positioning of the brand and almost dissecting what The Boy on the Bike did and thinking, how do you take those elements and bring them to life?” Looking at the competitive set in a “dynamic” bread category characterised by own brands and big names vying for shelf space, Gibson hopes the re-release of The Bike Ride will appeal to loyal fans, as well as winning over new customers attracted to the brand’s identity as an authentic British baker. The post Hovis brings its iconic ‘The Bike Ride’ ad back to TV appeared first on Marketing Week.

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quitblow5-blog · 6 years ago

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A Warning On Canadian Pot Stocks

Stocks of Canadian cannabis producers and sellers are on a wild run in 2018. A selection of talked about names have doubled or tripled in value the past few months, with others not far behind. Price action like that is bound to pique the interest of investors and traders who may be wondering what has caused the surge in prices, something that is looked at in the first part of this article. Other investors and traders already familiar with the space may be questioning the valuation of major names, which is a second major focus of this article. The final focus of this article is to provide a precautionary tale and some tips for anyone looking to get exposure, long or short.

TLRY data by YCharts

Figure 1: Performance of four Canadian cannabis producers since mid-July (IPO of TLRY): Cronos Group, Inc. (CRON), Aphria Inc (OTCQB:APHQF), Canopy Growth Corporation (CGC) and Tilray, Inc. (TLRY).

Key developments that started the hype

The recent run-up in Canadian pot stocks comes off the back of announcements that major beverage makers had either made or were looking to make investments in Canadian pot stocks. However, such investments would likely not materialize were it not for legislative developments, and so we might argue that the passing of new laws is what is truly responsible for the run-up.

A landmark event for the space occurred on June 19, 2018, when the Canadian Senate voted to approve bill C-45 (The Cannabis Act), which received Royal Assent on June 21, effectively legalizing recreational use of marijuana from October 17, 2018. Those over 18 will be able to purchase cannabis products from a provincially/territorially regulated retailer (or from a federally licensed producer), carry and share (with other adults) up to 30 grams, and cultivate up to four plants in their homes. Royal Assent for the bill was actually met with a sell-the-news reaction by some Canadian pot stocks, which was likely due to the fact that approval of bill C-45 was largely expected and some names had already begun to run up approaching the news. The approval however, did clear the way for a number of deals.

A recent major deal was announced on August 1, when Molson Coors Canada, the Canadian arm of Molson Coors Brewing Company (TAP) notified investors it had entered into an agreement with The Hydropothecary Corporation (OTCPK:HYYDF, TSX: HEXO) to form a joint venture which would develop cannabis-infused beverages. The initial reaction from HYYDF was pretty modest, perhaps because the press release noting the deal didn't provide a lot of detail on the potential financial benefit to HYYDF. Supposedly some warrants would be issued and purchased, but how much would this bring in for HYYDF was not clear.

In connection with the closing of the transaction, subject to the final approval of the Toronto Stock Exchange, HEXO will issue to Molson Coors Canada warrants to purchase shares of HEXO. - Comments from August 1, 2018, press release from TAP and HYYDF.

The next deal announcement in the Canadian Cannabis space had a much higher impact, perhaps due to clarity on the financial benefit to the cannabis producer involved. On August 15, Constellation Brands (STZ), a Fortune 500 alcohol beverage company, announced it would increase its stake in CGC by acquiring 104.5 million shares at $48.60 CAD (a 51% premium to the close the day prior to the press release). The deal will increase STZ's holdings in CGC to approximately 38 percent of shares outstanding (assuming certain existing warrants are exercised, the PR suggests this is the case). As part of the deal, STZ will also receive additional warrants which, if exercised, would give STZ greater than 50 percent ownership of CGC.

Figure 2: STZ lays out the addressable market in Canada, 15 years from now. Source: STZ investor overview presentation.

The STZ-CGC deal fueled additional speculation: Which beverage giant would strike a deal with which cannabis company next? August 24 saw a report from BNN Bloomberg noting Diageo plc (DEO) was holding discussions with three or more Canadian cannabis producers. The speculation continued when on August 28, The Globe and Mail published an article noting multiple beverage makers including Anheuser-Busch InBev SA/NV (BUD), Pernod Ricard SA (OTCPK:PDRDF) (OTCPK:PDRDY), Heineken N.V. (OTCQX:HEINY), The Coca-Cola Company (KO) and DEO were making the rounds with cannabis producers. Investors and traders might believe now is the time to go long one or more Canadian pot stocks before one of these beverage makers decides to make a move, but with such a run-up already, it makes sense to consider the valuation of some of the key names in the space.

The problem: The valuation

Let us look at the market cap of just the four names shown in Figure 1 and Aurora Cannabis Inc. (OTCQX:ACBFF). We will start with CGC. Seeking Alpha's Julian Lin notes due to shares being issued for STZ to buy from CGC, the number of shares outstanding has increased substantially, something some do not appear to be taking into account, and other analysts are trying to get clarification on.

And then, one more housekeeping and I'm sorry to because it wasn't clear in the release. So I'm trying to calculate the fully diluted number of shares now... - Andrea Teixeira, JP Morgan.

So let me while Tim digs up the share count. - Bruce Linton, Co-Founder, Chairman & CEO of CGC, August 15, 2018, earnings call.

You know it's bad when someone has to "dig up" the share count (maybe go easy on issuing so many shares?). Tim [Saunders, the EVP and CFO of CGC] did come up with a number of 268M fully diluted shares outstanding prior to the STZ deal. Still we can go ahead and add 104.5M shares to that for STZ and the additional warrants that were granted (139.7M) to come up with a fully diluted count of 512.2M shares. Now how many of those are outstanding now? Well, I don't think the 139.7M which could come from the exercise of those warrants are in play just now given their conditions (88.5M are exercisable at $50.40 CAD and 51.3M are exercisable at the volume-weighted average price at the time of exercise). However, the warrants and options which led to the 268M count have more favorable terms and so one can't pretend they represent potential dilution that probably won't happen; they are in the money (heavily) and need to be included in any market cap calculation. For example, as of June 30, 2018, there were 18,969,495 options outstanding as part of an employee stock option plan exercisable at prices between $0.56 and $40.51. Similarly as of June 30 there were 18,876,901 warrants outstanding with exercise of $12.97 (these are the original STZ-held warrants which were to be exercised to get STZ to 38 percent stake in CGC). Those options and warrants account for most of the 268M fully diluted number noted on the August 15 earnings call and so I'm adding 268M to 104.5M (total 372.5M) for my market cap calculation. At the close of $51.53 on Friday, September 7, that yields a market cap for CGC of $19.19B.

TLRY's 10-Q notes 93,144,042 shares outstanding as of August 29.

As of August 29, 2018, the registrant had 16,666,667 shares of Class 1 Common Stock... and 76,477,375 shares of Class 2 Common Stock... - Comments from TLRY 10-Q.

Class 1 and Class 2 shares have different voting rights. At Friday's close of $77.89, TLRY's market cap was $7.25B.

APHQF notes 232,372,569 shares outstanding in a recent investor presentation, that yields a market cap of $3.6B based on Friday's close of $15.49.

Table 1: Shares, options and warrants outstanding for APHQF. Source: Recent investor presentation.

Isn't it great when the number of options grows overnight? Below is the same table based on July 31, rather than August 1. If one wanted it would be possible to use the 238M number which adds in the exercisable and in the money options and warrants to get a partially diluted market cap like I did for CGC (funny that APHQF refers to this as fully diluted).

Table 2: Shares, options and warrants outstanding for APHQF on July 31. Source: 2018 annual report.

CRON had 177,147,970 shares outstanding on August 14, corresponding to a market cap of $2.12B based on Friday's close of $11.99.

Table 3: Shares, options and warrants outstanding for CRON. Source: Exhibit 99.2 from August 14, 2018, 6-K filing.

ACBFF noted 564,783,420 shares outstanding on May 7, 2018.

Table 4: Shares, options and warrants outstanding for ACBFF. Source: Q3 FY '18 results.

However, ACBFF acquired MedReleaf Corp shortly following Q3 FY '18 earnings in an all-share deal worth $3.2B. MedReleaf shareholders were to receive 3.575 shares of ACBFF per share of MedReleaf. The exchange ratio implied a price of $29.44 CAD per share of MedReleaf, suggesting ~109M shares were being acquired. That calculation agrees with the number of outstanding shares, warrants and options of MedReleaf around the time of the acquisition (Table 5) and suggests ~390M shares of ACBFF were used to make the acquisition.

Table 5: Shares options and warrants outstanding for MedReleaf. Source: MD&A dated June 18, 2018.

So go ahead and add that ~390M used to acquire MedReleaf to the 564.8M shares outstanding on May 8 that gets us to ~955M shares outstanding, which agrees with Bloomberg's 951.41 M (I'd say the 109M is a little high and because of the 3.575-to-1, being off by 1M on MedReleaf means being off by 3.575M on ACBFF). I'll use the Bloomberg number to be conservative, but know that many of the options and warrants listed in table 4 may have been exercised by the time we get the next update from ACBFF (likely next month) and so a shares outstanding count of over 960M should not be a surprise. Thus, at Friday's close of $6.17, ACBFF had a market cap of $5.87B.

Now, if we add up the market cap of just these five names, we get to $38B. Above in Figure 2, STZ notes Canadian sales estimates of $11B. So these five pot stocks together trade at 3.5 x Canadian sales estimates (sounds good)... sales estimates for around 2032 that is (oh)... based on sales at the retail level (not good). The actual Canadian supplier revenue pool is estimated at $7B and that yields a multiple of 5.4 (again, 15 years from now in 2032). We can also look at sales estimates of $4.9B in 2022 for Canada from another source and that would have these five companies together trading at a multiple of 7.8 x 2022 sales. That may sound a little more encouraging but there are not just five Canadian pot stocks and the share count of these companies seems to grow overnight (meaning the market cap will grow unless the price comes down).

Investors may have read that Canada has restrictive conditions with regards to obtaining a licence to produce and supply cannabis products. There are, however, already 116 licensed producers of cannabis for medical purposes in Canada, up from just six at the end of 2013. For more color, Nova Scotia Liquor Corporation placed purchase orders with 14 cannabis vendors in August, so there is already plenty of competition. If we were to add up the market cap of those 14 companies, the valuation would look even more stretched.

Justifying current valuations: Wishful thinking required

To justify current valuations, Canadian cannabis producers would need to tap into the worldwide market to quite an extent. However, wherever cannabis is legalized, an industry seems to pop up around it; we saw this already in state after state in the USA. On the other hand, in Uruguay, there are actually only two licensed producers. Prime opportunity for Canadian cannabis producers to capture, you suggest? Not really, the government has set the price at $2.50 a gram (and the population of Uruguay is about 3.5M, making it a much smaller market). Compare that to estimated Canadian sale prices of closer to $10 CAD and the profit margins in Uruguay seem barely worth it (you'd have to ship the product a bit further too).

When you can produce something domestically, do you really need to import it? Is Canada really the cheapest, most-efficient place in the world to grow cannabis? Or does growing cannabis require a whole lot of lighting, heating (especially in colder climates), pumps and fans? Consider the cost of electricity in Canada compared to elsewhere in the world. Does Canada pay workers the lowest wages in the world, making it a cheaper place to produce cannabis? Or is the rising minimum wage in Canada actually threatening job numbers there?

Canadian cannabis producers do have or are setting up warehouses elsewhere, but as countries legalize cannabis, legislation to make sure the industry creates money for the country/state concerned and not some other nation (Canada) doesn't seem unlikely. I just don't see why a lot of the world's cannabis won't end up being grown domestically or produced in the developing world at lower costs.

The pot stock bubble has happened before

In late 2012, 2013 and 2014 pot stocks, mostly US-based saw similarly remarkable price action to what is being seen now with Canadian pot stocks. Washington state legalized possession of up to one ounce of marijuana in late 2012 for those 21 or older, Colorado soon followed suit. Some of the pot stocks caught up in the hype were legitimate names (that doesn't mean their ridiculous valuations persisted) and others were a little more scandalous.

Figure 3: Screen capture of 2014 warning about pot stocks. Highlights by Biotech Beast. Source: SEC website.

So what happened to those names? Well, Fusion Pharm, Inc. (OTC:FSPM) is down from highs over $9 in 2014 to $0.02. Cannabusiness Group, Inc. (OTC:CBGI) is down over 90 percent from 2014 highs as is Growlife Inc. (OTCQB:PHOT). Advanced Cannabis Solutions became General Cannabis Corp. (OTCQX:CANN) but the name change hasn't stopped it trading down 90 percent from 2014-highs. Petrotech Oil & Gas, Inc. (PTOG, which at the height of the US pot stock bubble decided to enter the Marijuana space) is down over 99 percent. Another name being pumped at the time was Medbox Inc. (formerly MDBX); in January 2016, Medbox Inc. changed its name to Notis Global, Inc. (OTCPK:NGBL), shares are currently trading at about $0.0001, down from highs around $100 in January 2013. Solid performance then. MDBX appears to have been an outright fraud for those interested, of course the SEC settled.

Now if the valuation of Canadian pot stocks doesn't deter you, nor the fact that many US pot stocks blew up, I have a few tips which will mostly be useful for newer traders and investors.

1. These are likely not buy and forget stocks

Don't put pot stocks in your retirement account. These are not blue chip names with reliable dividends. Be particularly wary of some of the small names in the space, the penny pot stocks and even those in the $100M-1B range. These smaller players may fail to compete with the larger players in the space which have better economies of scale and greater access to funding (they can issue stock a little easier and are more likely to trick a beverage company into investing in them).

If you are thinking about buying and holding a selection of speculative names, consider first how things went for those who bought and held the US pot stocks in 2013/2014. An investor who bought $10,000 of MDBX (now NGBL) at $50 would have... 2 cents left (based on the close of $0.0001 recently). Yep, $0.02. You can't even get a packet of ramen for $0.02. Good luck putting food on the table if you buy and hold penny pot stocks. The SEC is also seeking to warn investors again about the risk of pot stocks, like it did in 2014.

Figure 4: Screen capture of 2018 warning about pot stocks. Source: SEC website.

2. Technicals may help you exploit momentum

While I don't view most pot stocks as the most obvious buy and hold opportunity, they do represent a compelling short-term trade. I notice with some pot stocks the formation of a potential high and tight flag (HTF).

Figure 5: High and tight flag representation. There are minor differences in the definition of this pattern from one source to the next. Source: Breakoutwatch.com.

Renowned chart expert Thomas Bulkowski notes that HTF is the best performing chart pattern in bear and bull markets.

Table 6: Bulkowski's notes on high and tight flags. Source: Thepatternsite.

I note an HTF formed in Canntrust Holding Inc. (OTC:CNTTF) shortly following commencement of trading and an HTF could be setting up again. Others have noted HTFs seen in TLRY and also CGC.

3. Don't hold any unhedged short overnight

Pot stocks can gap up between sessions leading to large losses for those short. Any trader looking to short these stocks outside of intraday trading should seriously consider hedging their position with options. Not all of these stocks are optionable, so that may not be possible in some cases. In the absence of using options, position size has to be considered even more carefully than one normally would. A double overnight is not out of the question and so 1000 shares held short of a $20 stock which pops to $40 would result in a $20,000 loss overnight. In my opinion, consideration of position size alone isn't enough when dealing with pot stocks, and so without options I wouldn't be shorting them outside of intraday trading. You don't want to end up asking for cash via a gofundme campaign because your short blew up your account.

Figure 6: In late 2015, a trader shorted KaloBios Pharmaceuticals and blew up his account due to an unexpected piece of positive news. Martin Shkreli acquired shares and saved the company which was running out of cash. Source: MarketWatch article.

Summary

You need to assume Canada will become a major player in cannabis production for the whole world to justify current valuations, but does that really make sense?

You don't want to buy and hold pot stocks long term. Take any money you make and get out.

Look for a long or a short with help from technical analysis.

Don't short overnight without some sort of insurance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: https://seekingalpha.com/article/4205562-warning-canadian-pot-stocks?source=feed_tag_editors_picks

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