On Oct. 17, Canada lifts the bar on adult marijuana sales, unleashing a potential $5.7 billion legal weed market next year. Investors anticipating the event have thrown so much money at Canadian MJ producers their stocks are now selling at 120X sales or higher and in the case of one profitable company 1,900X earnings. Finding good companies is easier than finding good values, but there are some bright spots in the market.
By most estimates, Canada’s new recreational market will be 8X bigger than its thriving medical market. But most Canadian pot stocks are selling at valuations likely to thud loudly when they fall back to earth. Canopy Growth and Aphria, for instance, both carry market caps that are bigger than the entire marijuana industry—including adult tokers.
There are still a few deals left, though. These are the handful of stocks that investors have not followed closely enough. VIVO Cannabis Inc.TM (TSXV: VIVO) (formerly ABcann Global) has a collection of premium brands across medical and recreational, with large production capabilities. Supreme Cannabis (V: FIRE) is another. It is selling at a steep discount to its peers despite a lucrative contract to sell a product to Tilray (TLRY) the stock with the wildest gains so far this year.
Then, there’s Choom (CSE: CHOO; OTC: CHOOF), which just came to the market late last year and has remained outside the frenzy. It is an undervalued jewel with upside growth potential that rivals the best in the business.
In fact, Choom already has the confidence of Canada’s best MJ companies. Aurora Cannabis has invested $7 million recently, and VIVA BCann has inked a supply agreement earlier this year.
So where are the regular investors?
Cracking Retail Wide Open
Every market has its oddities, and in this one, Choom stands out. It is “only” up 496% in the past year compared to 1,009% for HEXO Corp; 1,193% for Namaste, and 4,152% for Tilray.
The other big gainers worked the PR machines to make much more noise… and sometimes they were a lot more explicit about their plans. Tilray secured a well-publicized Nasdaq listing then got much-touted FDA approval to export cannabis to the US for research. The market reacted to repeated news releases as if the company had personally cured the world’s diseases. Namaste’s e-commerce model put it into the ultra-rich accessories market with worldwide sales of vapes, pens and other tools.
Knowing what each company “does” has been the key to big gains in pot stocks.
Choom has had a strategy from the beginning that was a little harder for investors to warm to—“acquire and develop growing and retail assets.” Well, who in the Canadian MJ universe wasn’t? Even Choom’s admirers have to admit that doesn’t sound very sexy, and until recently, it wasn’t very clear what it would mean.
But now, Choom is on the verge of establishing a huge footprint in the retail market. It can point to four growing sites so far and a fifth location in the future that will be even larger. There’s a lot of good news in the pipeline for investors to discover.
Choom Focused on Fun Before Investors Were Ready
Another subtle point that shouldn’t be overlooked in Choom’s quiet beginning may be subtle, but it probably counts for something. That is Choom’s name and “good times” message, which spoke to its adult-market intent.
The Canadian marijuana stocks started out completely differently from US companies—they were all legal entities, approved and licensed by Health Canada. They appealed to investors who didn’t need to worry the companies they were backing could be raided and seized at any moment, a fate that is still technically possible for US MJ companies. As if it to underscore this respectability, Canadian company names are very restrained: Emerald Health, Maricann, Organigram, Emblem, CannTrust….
Then there was Choom—named after the “Choom Gang” of friends who smoked pot, surfed and lived for the good times, Choom was not a medical stalwart. It was always looking forward to the adult market.
At last, with Canada officially opening adult-use marijuana on Oct. 17, investors are ready for Choom.
Choom Has Coast to Coast Coverage In Sight
So far, Choom has three growing facilities all in late-stage licensing approval and a fourth site under offer. The lack of licensed growing space meant that Choom wasn’t making news when the likes of Canopy Growth and Aphria were on everyone’s radar. But now, Choom’s approvals are in very late stage. Approvals should come within weeks.
Phase 1 of its building plans entails developing 37,300 sq. ft. of indoor growing space in British Columbia capable of producing 3,700 kg dried cannabis per year. In Phase 2, when it will add facilities on Vancouver Island to the BC operation, Choom expects to expand to 68,200 sq. ft. that can produce 6,500 kg of dried cannabis a year.
At a wholesale price of $2,000 per kilo that means $13 million in revenues with all four farms running. That’s a low projection. Supreme Cannabis Co. prices its product at $6-$7 per gram, three times as high[i]. Canopy Growth, selling at $8 a gram is four times as high. So $2,000 per kilo ($2 per gram) is an exceedingly safe benchmark[ii].
Farther out, Choom intends to add 700,000 sq. ft. of indoor and greenhouse space in British Columbia and it has another 120 acres in Saskatchewan lined up.
But it is the retail plan that makes Choom particularly attractive. Not just for investors…. That is also the reason that Canada’s second largest MJ company, Aurora Cannabis, just took a big stake in Choom.
Choom has established 52 retail locations in Saskatchewan, Alberta, and British Columbia so far. Quebec, Manitoba, and Ontario are in its sights next. It recently applied to Manitoba for a license that it expects to have in hand when adult marijuana sales begin on Oct. 17.
The Aurora Big Deal
Investors may have overlooked Choom, but the industry and accredited investors who have been active in the background are well aware of its potential. In February, its $2.7 million private placement was oversubscribed. Then in June, its $10 million raise included a hefty $7 million investment by Aurora Cannabis. Aurora now holds about 6% of Choom stock.
Aurora has a history of buying out good prospects. So, a future buyout is definitely a potential with Choom but it’s not the most important point here.
Choom’s deal with Aurora is probably exactly what Aurora says it is—a strategic position. Choom has planted its flag firmly in the western provinces and is almost a sure-shot to acquire rights in the much more populous provinces of Manitoba, Ontario, and Quebec very soon. The company intends to have a coast-to-coast presence and is well on the way to achieving it. Aurora would like a piece of that.
Investors should consider Aurora’s move a high compliment from an industry leader. The two companies first connected through Aurora’s Aurora Pro platform, which provides services to the industry[iii] and allows Aurora to support craft growers and help them enter the market. Aurora invested in Choom with an insider’s eye.
Choom has high upside potential, solid contracts, an ambitious and growing retail footprint and big votes of confidence by industry insiders. For the moment, it also has a bargain price.