Sunday, 23 July 2017

Isodiol: 10x Undervalued Cannabis Stock Inks Deals With Canopy

Before we get into our next pick, we need to briefly speak about Applied Optoelectronics (AAOI). On May 6th we initiated a strong buy call on AAOI with our article "AAOI: Eight Reasons To Expect This Tech Unicorn To Double By The End Of 2017" and the stock has been on fire, up over 60% to $90 since then. It hit as high as $95 last week before dropping after another short attack from BWS Financial.



BWS has already done this song and dance once before as our article on June 20th "AAOI: Strong Buy Price Target $250; Short Squeeze Imminent" will show. BWS called for a $25 price target while we called for a $250 price target. Since then AAOI has risen from the low $60's to $90 so that goes to show you how much of an expert Hamed Khorsand, head analyst at BWS, really is. Khorsand's rating on TipRanks has deteriorated in the month since the first time he pulled this scheme, with his success rate down to 45%:



How this analyst continues to get mainstream coverage while we have a much better track record is a mystery. We are up to 266 followers and we don't think that is by accident. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel.

Now onto our next pick. The marijuana industry has been lightning hot upon expectations of favorable government rulings for recreational use and increased open-mindedness over cannabis-based medicinal uses. The issue with a lightning hot industry is that the major players in that industry tend to trade at quite aggressive valuations. There may be one exception to that.

Laguna Blends (LAGBF) has recently gone on an acquisition spree. It has changed its name to Isodiol International to reflect its largest acquisition. This stock is listed on the OTC and we rarely pick OTC stocks. But you really don't have much of a choice when it comes to weed companies. Isodiol trades frequently on the Canadian Stock Exchange under the symbol ISOL. So it's not quite like the typical OTC stock. LAGBF closed at 18.74 US cents on July 21 and ISOL at 23 CAD cents. With 173 million shares outstanding, Isodiol has a US market cap of $32 million and $40 million Canadian.

What makes ISOL/LAGBF stand out as an OTC company other than the fact that it is dual-listed is that it can claim that is is EBITDA positive:

While these numbers are unaudited, $12 million in revenue and $1.6 million in Adjusted EBITDA makes it sound like ISOL is a steal compared to its peers with a trailing revenue multiple of 2.7x.

Furthermore, the consolidated company "recorded sales of $1,843,173 CAD for the thirty-day period ended June 30, 2017. Total quarterly sales were $4,919,693 CAD for the period April 1st to June 30th, 2017" according to a press release on July 11. If sales are $5 million CAD per quarter, ISOL is trading at a 2x revenue multiple.

Contrast this to Canopy Growth Corporation (TWMJF) (WEED.to) which has a market cap of $1.37 CAD billion. Revenue was $14.7 million in its last reported quarter and $40 million for the year. Canopy's trailing revenue multiple is 34x while Q4 equates to a $60 million annualized run-rate or a revenue multiple of over 22x. Canopy is growing very quickly, but so ISOL so it's difficult to imagine that ISOL is over ten times undervalued compared to Canopy. Especially in light that the two companies have recently announced a distribution deal:

"VANCOUVER, BC / ACCESSWIRE / July 20, 2017 / Isodiol International Inc. (CNSX: ISOL) (OTC PINK: LAGBF) (FSE: LB6A) (the "Company" or "Isodiol") a global cannabis innovator specializing in the development of pharmaceutical and consumer products is pleased to announce it has signed a licensing agreement with Canopy Growth Corporation ("Canopy") (WEED) (https://www.canopygrowth.com).

Canopy Growth is the world's premier cannabis company that operates a collection of diverse brands and curated strain varieties, supported by over half a million square feet of indoor and greenhouse production capacity. Under this licensing agreement, Canopy Growth will have the right to manufacture and distribute the Company's "Pot-O-Coffee" and "Pot-O-Tea" branded marijuana infused single serve K-Cup products in Canada and certain other markets internationally as federal regulations allow. Licensed products include caffeinated and de-caffinated product lines as well as Isodiol's single serve "Pot-O-Coco". In addition to the Canadian rights, Canopy Growth shall have the right of first refusal to sell the "Pot-O" brand products in any territory outside of the US, Mexico and Puerto Rico.

"This distribution agreement has us positioned to increase our global footprint with the largest cannabis company in the world. We will continue to develop our Pot-O-Coffee product lines with ready to drink and cold brew products while working with Canopy Growth for international distribution channels. The Pot-O-Coffee brand is well recognized, and adding additional products to this line will continue to strengthen its market presence," stated Isodiol's CEO Marcos Agramont.

The availability of the various licensed products in Canada and elsewhere will differ depending on applicable laws and regulation. While Canadian law does not yet permit the manufacture and sale of marijuana infused products, the Company anticipates that such products will be permitted in the near future. Furthermore, currently proposed regulations which would permit the sale of infused products, would not allow such products to contain both marijuana and caffeine. As such, the specific product offerings in Canada and elsewhere may be limited. The Company will provide additional updates as regulations are adopted and as product roll-out plans are developed."



ISOL's stock has been diluted over the past several months as the company has gone on its acquisition spree. Any investor can see that this is money well spent but it has also led to a buying opportunity as some may fear that the 12 cent shares will flood the market in a couple of months when the lock-up period expires. With a revenue multiple of 2x on an EBITDA positive business in a lightning-hot industry, a strong growth profile of cannabis-infused products and pure, natural CBD and a distribution deal with Canopy, ISOL looks like a slam dunk 10-bagger as long as the cannabis industry continues to get positive regulatory events. We think that ISOL can hit $2.00 in due time to properly reflect its value, but for now $1.00 should be a reasonable target before 2017 is up.

Disclosure: We are long ISOL on the Canadian Stock Exchange

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