Most of the investments discussed on this board are in the SaaS arena. The remainder are pretty much all tech related.
The “old” business of providing a product, like a pair of sneakers (e.g., Skechers) which is sold one at a time to customers has fallen out of favor. There was a repeat business component, but it was not assured as the customer could easily abandon one company in favor of another. While a company can, and sometimes does swap out one software component for another, if the software has a large segment of embedded users, it’s far more difficult; and there’s a considerable cost involved with respect to training, lost productivity while users climb the learning curve of a new product, internal support, etc.
With these companies we find ourselves not only investing in high growth companies, but we are investing in what for all intents and purposes are new businesses that didn’t exist before.
There’s another “new” business before us. It follows the old model of providing a product that must be sold repeatedly in order for the company to survive, but the product is already known to be in high demand (it has long supported a vibrant black market), but with legalization in Canada and several US states, the marijuana business holds a great deal of promise. But, picking winners at this stage seems like an impossible task. There are already dozens, maybe hundreds of stock positions one could take and precious little performance history for any of them. In the US, in that the federal prohibition still stands, usually lending activity is greatly curtailed for almost every aspect of the business. In Canada, the picture is different.
So far, I’ve held two tiny, speculative positions in marijuana related companies. Innovative Industrial Properties (IIPR) is a REIT. They provide grow infrastructure for medical marijuana growers in the US. No matter which growers succeed, which get bought out and which fail, the specialized facilities required to grow the plants will be needed. Those that specialize in medical marijuana are seen to be less risky than those that grow recreational product. Financing is still a problem, but via equity and other non-bank sources of capital, IIPR is able to meet their capital requirements - so far.
I first purchased IIPR in January of 2017. The stock is up 123% since that initial purchase. They have beat earning estimates in all but one of the last four quarters. They have a yield of a little over 2% (I don’t know if this is good or bad for a REIT as I don’t follow the industry). It comprises about 1% of my total investments. Despite its performance, I have not purchase any additional shares.
Vitality Biopharma (VBIO) is a company that specializes in producing prodrugs from marijuana. They have a process which I do not understand that somehow mitigates against the psychotropic qualities of THC (the primary active ingredient in marijuana), yet delivers the potential medical benefits. They are developing medication for PTSD, Crohn’s disease (and other intestinal disorders), and possible other indications. They do not have any drugs on the market at this time, as such, they have no earnings derived from business operations. I first bought VBIO also in January of 2017. It is off 25% since that purchase. VBIO comprises less than 0.5% of my portfolio.
Today, I made yet a third tiny investment in a Canadian marijuana company. Canopy Growth Company (CGC). After I just got done saying the shakeout in the growers is coming and it’s impossible to know who the winners are, why would I buy into CGC? Simple, Constellation Brands (Corona, Pacifico, Modelo, Robert Mondavi, Clos du Bois, Black Box, etc.) just invested $4B in CGC. In the nascent marijuana business, $4B is an enormous amount of capital. I trust (possibly unfounded) that Constellation performed due diligence and has a high degree of confidence in CGC management’s ability to productively allocate this principal sum. Again, my position is tiny, about 0.66% of my total holdings. But enough in order for me to continue to pay attention.
I am not recommending any of these companies as “investments.” Clearly, these are speculative positions (that’s why I have kept my positions tiny and why I labeled this post as “Somewhat OT”). I hope Saul will cut me some slack for posting here. But it can not be denied that the marijuana business in the US and Canada (and I’m sure elsewhere to soon follow) will be a huge business. There are some ground floor companies that I feel are worth taking a small stake in just to keep a finger on the pulse as this fledgeling industries expands.
Future growth like a weed is probably an appropriate analogy.