Plus 2 New Benefits to Your Real Wealth Strategist ...

MATT BADIALI'S

Real Wealth Strategist

This Junior Pot Stock Is the Next Canopy Growth Corp.

Plus 2 New Benefits to Your Real Wealth Strategist Subscription

Special Introduction by Anthony Planas

W ITH a marijuana leaf embroidered on his baseball hat, "Rich" bobbed his head to the rap music. That's all he did for five minutes, occasionally muttering the name of the pot company he was going to review.

Five minutes... I almost turned the video off a dozen times. But this is a popular "expert" on pot stocks. I needed to see what passed for sage advice in this sector. The marijuana industry is booming right now. Colorado has taken in over $1 billion in taxes since 2014. Investors are flocking to these stocks like miners to the Klondike during the gold rush. They are greedy for gains and information. The problem is, most of the so-called experts ... aren't. This month, we're taking aim at that problem with several new features. We launched a free weekly POTcast on youtube. com. We designed a brand-new metric to evaluate the marijuana sector. It shows us which stocks we should buy and which we should avoid. Finally, we will detail our brand-new investment idea. The young company we're buying today is doing everything right. Its stock is moving steadily higher. It's exactly the kind of company we think has the potential to be a giant in the industry. We used our traditional analysis on this new pick -- something we don't see anywhere else right now.

Let's use Rich as our example. He has a popular channel on YouTube -- the most popular video-sharing website -- where he discusses cannabis investing. I like to stay on top of the market, so I decided to check it out.

When the analysis (finally) began, he scrolled through the investor presentation. Circling the headshots of management with his computer mouse, he said: "These are real people. This is a real company."

About 10 minutes into the "analysis," viewers began to write comments below the video. They pointed out that he was repeating the wrong stock ticker symbol.

At that point, I had seen enough. At best, it was amateurish. At worst, it was deceptive.

YouTube is a great resource for free advice and tutorials. You can find lessons on topics from playing guitar to weight loss to cheating at video games.

One channel, CustomGrow420, is all about consuming marijuana products. It has over 1.2 million subscribers. The demand is there...

The problem is that anyone can upload a video and claim to be an "expert." And if they're like Rich, they'll get plenty of followers. More than 20,000 in his case ... even if they don't know what they're talking about.

I emailed the video link to Matt with the subject line: "We can do better..."

The same day, we laid out a plan to do just that. The truth was, we'd been preparing for well over a year.

In February of 2018, Matt and I decided that we wanted

2 | Pot Looks Like Other Manias

Inside This Issue 4 | Measuring Marijuana Companies

7 | Portfolio Update

July 2019



to start covering the marijuana market. We spent months combing through companies and analysis. The sector was brand-new, only grabbing mainstream attention the previous December when the market skyrocketed ... and then crashed.

We sorted through dozens of companies. It took several days of combing through bad data to find a handful of qualified companies. These were the stocks we believed had a chance to execute their plan and succeed.

That's a big leap for startup companies, which every marijuana stock was at the time.

After six months of intense research, we started our coverage of the marijuana sector. It's been an exciting -- and lucrative -- journey!

Emotion and perception drive these stocks. That means shares can rally 25%, 50%, even 100% -- or lose that much -- in the span of a couple of days.

Understanding company fundamentals and what's important to succeed in this market is invaluable for navigating knee-jerk market reactions.

We need to understand this because we are convinced this sector will offer up the next Starbucks or Monster Energy. Those stocks went up thousands of percent. It's what we want to find.

Now there are hundreds of companies to choose from. Most will fail.

Our job is to identify the best ones with the most potential to make money: stocks such as Canopy Growth Corp. (NYSE: CGC), on which we made 64% and 40% gains in the past year.

Finding the relevant information is the hardest. News is scattered. Worse, there is little context for what any of it means to investors. Blogs and websites dedicated to "informing" marijuana investors often have an agenda. They either own shares or take money to promote stocks. Many sites accept "sponsorships" from companies. In return, these sites spin news to put their sponsors in the best light. This creates paid stock promotions. That leaves investors in this sector in a difficult situation. Reliable information is hard to come by. There isn't a quick and easy option to stay up to speed on the booming marijuana sector. Rather, there wasn't. Until now. Matt and I discuss the latest cannabis news regularly throughout the workweek. But we saw an opportunity to bring you in. That's why we started the Marijuana Markets POTcast on YouTube.

The idea is simple: We put together a two- to fiveminute video every Thursday recapping the most important news in the industry. We highlight earnings reports, major deals and changes in state and federal laws. We also answer your questions.

Our goal is to elevate the discussion of marijuana stocks as investments. We want to make sure you're better informed, so you can make good investment decisions.

MMA aParOriTkjuceaatstns:a

Don't forget to check out our free POTcast playlist on YouTube. We post a new video every Thursday!

We'll help you along the way. But we know that informed investors make better partners.

I'm going to hand it off to Matt now. He'll explain how the pot-stock mania looks like others he's seen.

These manias didn't end well for some companies, but investors who bought the right ones made a bundle.

Pot Looks Like Other Manias

By Matt Badiali

IT'S tough for regular investors to pick the right stocks in the cannabis space. There isn't much good information. Many of the "experts" in this field are simply consumers. They consume cannabis, but they know nothing about the stock market.

So, the stocks climb and fall for no apparent reason. Even experienced investors can make mistakes. It's a rough place to invest your hard-earned money. It reminds me of the mining booms I've watched over the years. Many of these were narrative-driven. In other words, they had a great story ... but not much else. The problem with that is investors bought individual stocks because of the story about the resource ... and most of the companies ended up going broke. Sadly, it's common. We saw it at the end of the dot-com boom in the 2000s.

July 2019

2



Investors believed in the internet so much that they

bought any stock related to it. That's similar to what's

happening now with marijuana.

The worst case in natural resources started about 10

years ago -- with the rare earth boom and bust.

You might have heard about rare earth metals lately.

The little-known "rare earth" metals are crucial

components of electric car batteries, wind turbines and

advanced electronics -- such as the kind in your cellphone.

This group of 16 exotic metals is typically found in

oddball deposits -- ones that include radioactive elements

as well.

Freeing the rare earth metals from the rock requires

special techniques. Purifying the metals for use in

electronics requires even more.

These techniques were so specialized that China spent

the last 30 years perfecting

the supply chain. Today,

Follow us on social media:

the country holds a virtual monopoly on these metals. It

@MattBadialiGuru

produces around 95% of the world's supply.

@MattBadialiGuru

That made a great story. After all, it was easy to paint

Matt Badiali

the situation as "us against them."

Anthony Planas

As the narrative went:

Any good, red-blooded American has to buy these stocks

because the commie Chinese are blocking our access to it.

The future supply of iPhones depends on it!

China fed the story. It reduced rare earth exports to

conserve its supply and squeeze other countries.

That caused a global scramble to build non-China

reserves. Prices of rare earth metals spiked enormously from

2010 to 2011.

Take a look at the rare earth metal neodymium's 1,100% price spike:

Neodymium Price Skyrocketed

1/2010

5/2010

9/2010

1/2011

5/2011

$140 $120 $100 $80 $60 $40 $20 $0 9/2011

SOURCE: Bloomberg

A full-blown mania erupted. There were only a handful of publicly traded rare earth companies. But suddenly, every failed mining stock had a rare earth project.

Some people made enormous amounts of money. Many others got crushed. See, most of these new rare earth projects had the life cycle of a Fourth of July firework: soaring hot and fast, only to fizzle and crash back to earth. Molycorp Inc. was the most egregious. In July 2010, Molycorp came on the rare earth scene. It owned the only rare earth metal mine in the U.S. And it promised massive production in just a few years of development. Called Mountain Pass, it was a government cleanup site before it reopened. The company had tons of red flags, not the least of which was trying to reopen the mine on a shoestring budget. There was also the fact that the company

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Editor: Matt Badiali

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Managing Editor: Kristen Barrett

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3

July 2019

rode a wave of hype that it couldn't possibly sustain. But investors ignored them. Even folks who should

know better... The price of rare earths rose, the narrative got louder

and Molycorp shares soared. In less than a year, shares flew from around $11 to nearly $80 each. That's almost 700% in nine months.

But the company couldn't live up to the expectations. At its peak in 2011, Molycorp made $170 million mining and selling rare earth metals. That was the top of the rare earth price spike. The problem was, that was the company's only profitable year. The slowing global economy pulled the teeth out of China's threats on rare earth metals. It turns out that the world doesn't need all that much. In 2011, the world used about 100,000 tons ... $15 billion at the time. At its peak, Molycorp's market value was nearly half of the value of the entire rare earth metal market. That meant Molycorp's shares were overvalued. And it made a spectacular collapse. Management borrowed over $1 billion to renovate the mine, only to see the price of the metals fall 80% over the next couple of years. Molycorp's shares fell from $80 to $0.36 in four years.

Molycorp's Quick Rise -- And Long Fall

$80

$70

$60

$50

$40

$30

$20

$10

$0 2010 2011 2012 2013 2014 2015 2016

SOURCE: Bloomberg

Many investors piled in just because the company was the only U.S. rare earth stock. The story about rare earths was so compelling, they felt like they had to own it. It didn't matter that this former waste cleanup site was stupidly overvalued.

That's the problem: The red flags should have kept investors from piling in. I wrote about Molycorp's issues. I warned folks at conferences to stay out of the stock.

Don't get me wrong: Not all the rare earth companies ended up like Molycorp. Lynas Corp., an Australian rare earth miner, is still around.

I see a lot of similarities to the rare earth mania in cannabis. We can't just invest in every marijuana stock because of the narrative...

You know the story: "Marijuana is going to be legalized in the U.S., so you'd better buy now!"

While that's true, it's not enough. We need a plan. We need to be critical. And if the stock isn't right ... we need to say no. That's our hard-earned money that we are investing. We must be selective. That's why we created the POTcast. And it's why we created a new "measuring stick" for marijuana producers.

How We Rank Pot Stocks

Value is one of the most important metrics in investing. To quote Warren Buffett: "Price is what you pay; value is what you get." Value captures both utility and price. We are interested in finding value in pot stocks the Warren Buffett way. Buffett often sees value in small stocks set to take off. See's Candies is a great example. Buffett bought the company in 1972 for $17 million. Back then, it generated profits of $5 million. Buffett saw room for that to grow. With a little help from him, See's Candies exploded. In 2017, See's Candies generated $2 billion in profit. And it continued to do well as it grew. Buffett's total investment in See's Candies was about $57 million. It's worth at least $10 billion today. That's a 17,400% gain over 45 years. That kind of investment made Warren Buffett famous. Buffett used some simple metrics to determine that See's Candies was inexpensive and could grow. We see opportunities like that in the marijuana market. But first, we need a way to evaluate the companies.

Measuring Marijuana Companies

Buffett uses simple metrics to evaluate companies. Classic stock valuation metrics such as the price-toearnings ratio fail to capture the cannabis industry's nuances. In the gold mining sector, we use the price-to-goldproduction ratio. It tells us how many shares of a company it takes to buy an ounce of gold produced by the miner.

July 2019

4



When compared against other gold miners, it's a quick

way to sort out the cheap and expensive stocks.

The young cannabis sector needs a metric -- one that

we can use to quickly sort companies for further research.

For expensive companies, we ask why they are expensive.

We dig in to see if the metric missed something.

The same goes for the cheapest companies. We review

the cheap companies for problems. We want to know if

the ratio is showing us a material defect in the company.

After all, cheap doesn't always mean valuable.

Our team used our combined experience to create the

new measuring tool. After bouncing ideas around, we

created the enterprise-value-to-production ratio.

The enterprise value (EV) is the market cap of the

stock, plus its debt, minus its cash. Our ratio compares

the EV of a company against the value of its current

products to consumers. Our measure of production is

price per gram of marijuana. We take the average price

per gram each company earned in the last quarter and

Company

Current EV-to-Production

Ratio

use it to estimate the OrganiGram Holdings

19.6

future value.

CannTrust Holdings

20.8

The table at right

Aphria Inc. HEXO Corp.

33.2 38.7

shows the current

Aurora Cannabis

41.8

values in order from Canopy Growth Corp.

46.8

cheapest to most

Tilray

51.0

expensive. The average value

for these stocks is

Flowr Corp. Cronos Group

110.0 200.0

SOURCE: Refinitiv Eikon

about 62.5. That's skewed because of Cronos' and Flowr

Corp.'s high values.

The median (which looks for a more group-central

point) is 41.8. That tells us that many of these companies

are expensive today.

Cronos Group looks ridiculously expensive at 200

times, and OrganiGram looks cheap at 19.6 times.

To make this information more comprehensive, we

compared the EV to future production -- in this case,

forecasted production at the end of 2020.

In this forward-looking group, we see an average of

3.5 times. That shows how much growth should happen

between now and the end of 2020 -- roughly 18 months.

Once again, Cronos is the most expensive.

There's a reason for that. Cronos is one of the most

visible cannabis companies. Back in December 2018, the

giant tobacco company Altria Group acquired 45% of

Cronos for $1.8 billion. That valued the stock at $4 billion.

Its current EV is $4.7 billion. So, Altria set the market

Company

Future EV-to-Production

Ratio

for Cronos' shares. Aphria Inc.

1.4

The company's bid CannTrust Holdings

1.7

accounts for the wild Flowr Corp.

2.5

divergence between

Canopy Growth Corp. Aurora Cannabis

3.0 3.1

Cronos' valuation

OrganiGram Holdings

3.5

and the rest of its

HEXO Corp.

3.9

peer group. We also see that

OrganiGram isn't as

Tilray Cronos Group

4.9 7.6

SOURCE: Refinitiv Eikon

cheap as we thought. The market is pricing it based on

forward production, in line with the other companies.

But this isn't the final metric for valuing a pot stock.

There's one more step to take here that gives us everything

we need to know.

For that step, we created a metric that accounts for

current value and future value.

With that in mind, here's our final word on marijuana

company valuation. We call it the Green Flag Index.

The companies are listed from least expensive to most

expensive. We're going to update this list as companies update their production information.

This month, we're going to tell you all about

Company

Green Flag Index

CannTrust Holdings

9.3

OrganiGram Holdings 9.9

Aphria Inc.

14.1

HEXO Corp.

17.8

a cannabis company that isn't on this list. That's because it doesn't actually grow marijuana.

It's a graduate of our

Aurora Cannabis

18.6

Canopy Growth Corp. 20.5

Tilray

23.3

Flowr Corp.

45.5

Cronos Group

84.6

SOURCE: Refinitiv Eikon

premium Front Line

Profits service. We bought it early in its development,

when the risk was much higher than it is today.

This company evolved from a speculative play to an

established business in less than six months. Revenue is

growing quickly, and it even has positive earnings.

We bought this company when its market cap was

just C$328 million. Today, it's C$700 million -- and we

expect it to keep growing.

We still hold it in the Front Line Profits model

portfolio. And today, we are adding it to the Real Wealth

Strategist portfolio. Now, Anthony is going to explain why

this stock is primed to be the next Canopy Growth Corp.



5

July 2019

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