5 Overvalued Cannabis Stocks - Part 3: People Price Marijuana Stocks Like Lottery Tickets

Benzinga recently had a chat with Alan Brochstein, founding partner at New Cannabis Ventures and founder at 420 Investor. In the first part of this article, we took a look at overvaluation and hype in the general marijuana market, as well as at General Cannabis Corp CANN, a stock with roughly 70 percent potential downside. In Part 2, we went into CANNAGROW HLDGS IN COM USD0.001 CGRW and Helix TCS Inc HLIX.

Below, we’ll share a look at two more stocks that seem overvalued at current prices.

Vitality Biopharma Inc VBIO

First off, there’s Vitality Biopharma, a ~$35 million market cap company focused on the development of cannabinoid prodrug pharmaceuticals, which has been unjustifiably compared to GW Pharmaceuticals PLC- ADR GWPH and Zynerba Pharmaceuticals Inc ZYNE.

A third party recently paid $100,000 in cash to MAPH Enterprises, creators of MarijuanaStocks.com, for promotion — or, as they call it, “publicly disseminate information about (VBIO) including on the Website and other media including Facebook [Facebook Inc FB] and Twitter [Twitter Inc TWTR].”

“That’s being paid for by the company’s warrant holders, I believe— There’s almost 8 million warrants at a very low price [$0.17],” Brochstein revealed.

Brochstein: Is it overvalued? It’s hard to say. I think that there’s a lot of companies out there that claim to be the next GW Pharmaceuticals; it’s so easy to say that, but so hard to do. It took GW Pharma like 15 years to get to where they are, so now everybody thinks they are going to be that, very quickly.

If you look at the history of Vitality Biopharma, it’s a failed company. They’ve been around for a while, they were Stevia First Corp., they then changed their name and decided to do this; that’s the way I read it.

Moreover, they have like $33,000 [no typo here] in the bank— How can you be a biotech that gets anything done with $33,000 in the bank.

The company has almost $1 million in liabilities, but have derivative liability related to those warrants— If you strip that out, their liabilities are about $327,000. So, it’ll be good if they get their $1 million from the exercise of their warrants. But, still, it takes years to advance these clinical trials; I think they are years away.

When you count the 14 million shares and 6.7 million warrants that were not exercised yet [...] You get a market cap of roughly $66 million [and] I don’t understand that valuation. There are other companies out there like Nemus Bioscience Inc NMUS, INMED PHARMACEUTIC COM NPV IMLFF, and a few others, with lower valuations.

What I’m concerned with is, when I see this heavy promotion, like we’ve been seeing on Vitality Biopharma, and I add the warrants— I think people are going to get crushed with the stock [...] In May of 2016, they raised capital, they sold 2.65 million shares at $0.10 each, and these warrants, 7.95 million, at $0.17. So, what has changed in the last eight months that would justify this type of valuation? I don’t see anything.

Maybe it works out in the long run. There’s a lot of things that have to happen for this to work out, in my opinion.

I know people got excited about the DEA [approval to scale-up facilities], but they already had DEA approval; they just approved them to do some more.

Axim Biotechnologies Inc AXIM

Finally, Brochstein went into Axim Biotechnologies, which is 45 percent owned by Medical Marijuana Inc MJNA.

They are doing some clinical trials; they’ve had this chewing gum, CanChew, which has been a commercial flop. To their defense, there weren’t any FDA labels— So, if they are actually able to get this to the FDA, it would probably be more commercially successful."

This one has been a short squeeze, I think— The market cap here is over $500 million— So this one really seems overvalued, although they are further along than Vitality. But, my point on this one is that they have never been able to raise money [and] one of the ways to know if a biotech is worth something is to see if they are able to raise capital.


To round it all up, Benzinga asked if overvaluation was something specific to the stocks discussed above, or if it was a trend seen across the industry.

“In general, people price penny stocks — and certainly these cannabis stocks, kind of like lottery tickets,” Brochstein explicated. “If you do the math, it’s a lousy bet.”

“When it comes to cannabis stocks in particular, there’s this greater fool theory, so you’re not buying based on the fundamentals, you’re buying them based on other buyers coming in. So, that’s one of the reasons why these names with canna- or marijuana in their names do well,” he added. “So, when they have a good chart, they have a good name, and they have good liquidity, it doesn’t matter what the valuation is on any given day [although, in reality, it really maters].”

Posted In: Long IdeasNewsShort IdeasEmerging MarketsSmall Cap AnalysisTechnicalsTopicsMarketsMoversTrading IdeasInterviewGeneral420 investorAlan BrochsteinCannabisDelmar JanovecJeff SessionsmarijuanaNew Cannabis Ventures