Why Alan Brochstein is My New Best Friend

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April 1, 2016
Scott Lowry
Photo: iStockPhoto.com
Alan Brochstein
Photo: ©GCShutter

Alan Brochstein, CFA, is a marijuana industry expert based in Houston, Texas. He runs 420 Investor an online community and newsletter, and has his ear to the ground when it comes to our rapidly evolving industry and the big players who have emerged on the stage. 420 Investor (420Investor.com) is the first and largest due-diligence platform focused on publicly traded stocks in the cannabis industry. Brochstein also provides profiles of investors and promising companies at New Cannabis Ventures — his latest project.

Prior to focusing on his own ventures, he spent nearly 20 years working as a portfolio manager for investment firms on Wall Street, and was a writer for Seeking Alpha — covering stock market insights and financial analysis — to which he contributed more than 600 articles since 2007.

To put it simply, Brochstein is a bit of a financial genius, and he knows everyone who is anyone in the cannabis industry. So when he talks, I listen. And just last week, I was lucky enough to land an interview with the fundamental analysis guru himself. Here’s what he had to say:

"I am very positive on Canada, and nobody’s really tracking it, so I wanted to create an index and a model portfolio for the Canadian stocks." — Alan Brochstein

Scott Lowry: What were the key factors that led you to develop 420 Investor?

Alan Brochstein: I wasn’t just writing for Seeking Alpha. I was an independent analyst … working with several different investment firms, and I was also working with an investment/research company. So Seeking Alpha was just a small part of what I was doing, just to be clear. But, I was getting a pretty big following because nobody, at the time, was really focused on the cannabis space.

SL: Yeah, I noticed.

AB: I actually came into the whole cannabis thing a little canna-ignorant. I started to get up to speed on two different fronts. One, probably most important to my followers, was, understanding that these penny stocks were total scams for the most part, and, two, really learning from the ground up about the medicinal power of cannabis.

I was already on board from a personal freedom standpoint, but it got me really charged up over the implications of the future for this industry. I would also like to add that the social justice issue also really concerned me.

So, really, over the last three years since I jumped into this, I have learned a lot. I’m not an activist, per se, but I am a huge advocate, and before I was just a pacifist. Now I am an advocate for both social justice and the medicinal reasons [for marijuana reform], as well as personal liberty. Basically, I have a lot of reasons to support cannabis. And then, on top of that, I’ve really gained a huge appreciation for the economic power of not only cannabis, but hemp as well.

SL: Alan, you are my new best friend. So, in an earlier interview for CASHINBIS.COM, you stated, “The green rush is a triple win, with benefits for society, entrepreneurs and consumers.” So that goes right in line with your previous comments today, actually. Care to expand?

AB: Yeah, I use that line for a lot of things in life. You always want multiple parties to benefit from change.

… Between medical patients and recreational consumers, there’s this whole argument about the recreational thing. I personally don’t use the word “recreational” that much because to me, quite frankly, it seems that a lot of people are self-medicating, and you can label it whatever, but it’s still self-medicating.

SL: The industry has had some unscrupulous characters on the stage. There was a lot of press about a year and a half ago on GrowLife — which was the industry darling two years ago and poised for astronomical growth — and then the SEC ended up suspending them after their stock was, again, dumped on the market at its peak. (I had my you-know-what handed to me.) Do you think GrowLife will ever recover now that they have Marco Hegyi (ex senior director of global product management for Yahoo) on board as president?

AB: No, unfortunately, I don’t. They have terrible financial problems, and, yeah, it’s a regret to me. I’m sad at what happened to them, but I kind of gave up on them a year ago due to insurmountable challenges they face. It’s hard enough being a penny stock. It’s worse being one that’s on the Grey Sheets market. I still don’t really understand why they were suspended.

SL: So while we are on the subject of pump and dumps, what can an investor, especially one of your followers, look for as key signals or indicators that a company might be unscrupulous or be heading for a pump-and-dump scenario?

AB: The very first thing is: Did they file with the SEC (Securities and Exchange Commission)? Unfortunately, filing with the SEC doesn’t say that they’re not a pump-and-dump; but if they don’t [file with the SEC], I can almost assure you that they have a license to outright lie, so that’s the first thing they should look for.

The second thing is how they promote their messaging. There are a lot of people out there who are very loud, and [yet] they say nothing. That’s a big red flag. Always out talking, and there’s really nothing substantial to what they’re saying. I could go on for hours on this subject. I could write a book on it. But, for the purpose of this interview, I think those two things are really key.

You want to see that they’re actually doing something. There are so many people out there just trying to take advantage of the interest in the area. …

SL: Playing on the social megatrends and the hype, huh? That is great advice.

AB: Let me give you a third one. Always do three’s.

The third one would be to look into the background of the person. Do they have cannabis industry experience? [They] don’t have to, but do they? Have they done anything successful in their life? Is this just a person out of the blue? A lot of times with these penny stocks, these people are losers, and they are just trying to do something because they’ve never done anything. Do you really want to bet on someone who has never really done anything? The other thing is to go to their website. Call their office. If nobody picks up the phone or if it’s not easy to communicate with them, or if their website doesn’t have detailed information about them, it’s most likely not legitimate.

SL: Tell me about some of the other projects you are involved in, namely the 420 Investor Canadian Cannabis Index.

AB: As far as the Index, one of the big positives in the cannabis sector has been what’s going on in Canada. The public markets in Canada ended up having a good year last year because of the fourth quarter of the elections. [Justin Trudeau, who ran his campaign mainly on the legalization of recreational marijuana, was elected.] So there’s a lot of optimism about legalization there.

My interest there and my positive view doesn’t even really require legalization for rec. I think that the new government, especially now, is going to be strengthened. Health Canada was against [medical marijuana], so it’s kind of an awkward situation. And you know how difficult it is to navigate the rules. The goal posts get moved. The rules aren’t clear. It’s hard for those that have licenses.

So I am very positive on Canada, and nobody’s really tracking it, so I wanted to create an index and a model portfolio for the Canadian stocks. So that’s really what it’s all about.

SL: On that note, in your most recent Seeking Alpha article, you stated that you believe Canada would be a global leader in the industry, especially considering it is going to be the first G7 country to legalize recreational cannabis — some of your reasoning being that Canada has full access to banking and upcoming insurance coverage, which I think are two huge drivers of growth in the industry. What are your thoughts on that?

AB: When you look at the United States, … almost every challenge comes down to the fact that it’s not federally legal. So having it federally legal in Canada really makes things easier. It’s not perfect, because there are still provincial issues, and there still are some banking issues, but nothing like what’s going on in the U.S.

A lot of pharmaceuticals are covered at least in part by insurance — which is obviously not the case for medical cannabis — so the playing field needs to be leveled. And in Canada, it’s coming, but it hasn’t happened yet. One place where it is happening is with Veterans and the first responders. Some of them get free cannabis basically up to a certain limit, but for now it’s a big limit at a big price.

But I think there was a young guy who was able to get insurance to cover [medical marijuana].

SL: Yes, Johnathan Zaid. A University of Waterloo student. I just did a story partially on him in CBT’s January/February issue. He has an illness called constant headache syndrome, and he was able to convince Sun Life (his health insurance company) to cover the price of his cannabis, as well as a vaporizer.

AB: So the point is that Canada has a better chance of moving in that direction. While it’s federally illegal in the U.S., it ain’t happenin’.

SL: What are some of the drivers, and/or signals/indicators that are the deciding factor for your entry and exit points of a particular stock?

AB: That’s a hard one. I mean, look, most of these stocks are scams. There’s only a few I really like, and it’s really tough, honestly. It’s not really investable in the public markets, so I think people really need to focus on when the company can generate positive cash flow. I think that’s an essential element that’s lacking.

Unfortunately, that’s the biggest problem, because these companies talk about this and ... talk about that. But as they burn money, they have to raise capital.

And the big takeaway here is that they’re spending less time running and growing their business than they are fundraising — talking to investors, begging people for money, which is not a good use of time.

So that’s one of the reasons why my focus has really shifted to Canada. I see the light. It’s not at the end of the tunnel. It’s really close in terms of some of these companies being able to move toward cash flow profitability, and that’s what’s going to make the investment work, in my opinion.

About the Author: Scott Lowry resides in Oakland, Mich., with his wife, five children and their dog, Nora. He is a licensed medical grower and caregiver, and has focused on organic cannabis cultivation for the last 8 years. He also is founder and COO of a large-scale Canadian cannabis production company out of Tecumseh, Ontario, called Global Organiks, which is currently in the application process for becoming a Licensed Producer under Canada’s Medical Marijuana Program. In addition, Lowry is the founder and CEO of GO Engineering, an agribusiness technology engineering company, which creates products for the indoor cannabis cultivation industry. It is safe to say he has a healthy obsession for science, business and all things agriculture.