One of the most interesting things that I think Warren Buffett (Trades, Portfolio) has said (and he has said a lot of interesting things) is what he could do if he was managing a tiny portfolio.
He said it to Businessweek back in June 1999:
“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money.I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
Since I’m just a simple retail investor not burdened (I’m so lucky) by having to manage a $100 million plus portfolio I’ve been trying to turn over a lot of rocks looking for interesting companies in the micro-cap area.
I’ve also been sniffing around what is going to be a very rapidly growing sector in the coming years….legalized marijuana.
When Bill Clinton was president the idea that he had even tried marijuana was shocking to a big percentage of the population. Today, President Obama is on record saying that he doesn’t think that marijuana is any more harmful than alcohol.
We have come a long way in the last twenty years.
The medical marijuana market is already huge and continues to grow rapidly.
According to a report (second edition of the State of Legal Marijuana Markets) there will be $1.43 billion worth of legal marijuana sold in the United States in 2013. In 2014 the report believes that total sales will increase by 64% to $2.34 billion.
This is a high rate of growth that won’t be slowing down any time soon.
As of March 17, 2014 there are 15 more States with pending legislation to legalize medical marijuana. Currently there are 20 States where medical marijuana is legal (only 2 have legalized recreational use).
Now, I enter the world of marijuana stocks with my eyes wide open. This is a high risk area to be sure and I’m not sure I’m going to ever buy any stocks.
But the growth possibilities combined with being able to search amongst some micro-caps intrigues me.
What is going on with marijuana today reminds me of the Dot.com days of the late 90’s when every stock with dot.com in its name went ballistic. Loads of bulletin board listed companies have changed their names to include marijuana and have stock prices that are flying for no reason other than that.
Sure there are some real companies that will survive and thrive, but just like the Dot.Com days there will be lots of duds.
Turning Over Rocks
After turning over a few rocks looking at micro-caps involved in the marijuana industry I found a very young company that is doing something interesting.
The company is called Rostock Ventures and it is a very young operation.
Rostock operates a website called iWeedz.com through which it operates a technology platform it acquired from Windward International in March of this year.
The purchase price for Rostock was 4 million shares of common stock and a 2% royalty on all net sales derived from the use of the patents, technical information and trademark.
What iWeedz does is help consumers locate the right cannabis products to meet their needs. In order to use iWeedz a consumer must first create an account (which is free). Once an account is created the member can use iWeedz to locate local cannabis products and communicate with dispensaries.
It is like Google maps, but it directs you only to where you can find marijuana.
As the member uses the iWeedz website and application, the iWeedz technology gathers specific information about the member by tracking accessed content, 'liked' items, purchased items and the member’s profile. iWeedz then uses this information to match the member with the right cannabis vendor or to find deals that may be of interest to the member.
Members who are smart phone users can take advantage of iWeedz’s mobile application which automatically register a member’s geographic location and utilize proximity advertising to notify a member of real-time offers, coupons and discounts from vendors within the member’s vicinity.
Members can easily redeem offers that they receive from local vendors by displaying mobile coupons from the iWeedz application at the point of purchase. Unlike other popular internet advertising sites such as Groupon or Living Social, iWeedz customers can redeem coupons without having to pay for them before making a purchase.
For cannabis vendors iWeedz provides a cloud based solution to manage their inventory, post daily deals, attract new customers with proximity marketing via mobile phones, and engage with customers via e-mail and text messaging.
IWeedz helps vendors to do a targeted marketing campaign at iWeedz members which helps build their customer base.
An example would be a vendor offering a real-time discount on a product to iWeedz members in exchange for the member providing an e-mail address or phone number.
The consumer is going to be attracted to iWeedz so that he can get access to discounts. The vendor will find it useful because it will help allow for targeting of known marijuana consumers.
Membership for a vendor is free if the vendor only wishes to be listed as a dispensary on the website and application. However, if the member wants to be able to offer promotions and discounts or to interact with member consumers, they are required to pay a monthly service fee.
In addition to these membership fees iWeedz second revenue source is selling advertising on its website.
Rostock’s primary competitors are WeedMaps and Leafly, which also compete with each other for consumers seeking medical and recreational marijuana.
WeedMaps is an online website and mobile application where marijuana consumers connect with other marijuana consumers in their geographic region to locate, review and discuss local marijuana vendors.
Leafly is an online website and mobile application resource that allows users to rate and review different strains of cannabis and cannabis dispensaries. Leafly helps patients determine which cannabis strain is appropriate for their particular symptoms and then directs the patients to dispensaries.
Both companies generate revenue by charging dispensaries to upload information about their shops and strain offerings.
Rostock also faces competition from Groupon, Yelp, Google and others which offer daily deals from local retailers for various industries including the marijuana industry. Although these alternatives don’t offer the targeted marketing that iWeedz can offer.
Valuation
To value a business you really need to be able to within reason estimate the present value of future cash flows.
I can’t do that for Rostock Ventures.
In fact I have no idea what the future will entail for this company. I don’t even know if this company will ever generate any cash flows.
This is a start-up venture in an industry with a terrific growth potential. I like to get familiar with little companies like this in case they do start to have some success.
By getting myself signed up for news flow from the company I can monitor Rostock’s progress and get ahead of the rest of the market if there is a reason to want to own shares.
When hunting in the micro-cap sector it is all about turning over lots of rocks and building up a database of companies that you are familiar with. The more you look at and the more you know the better the odds of finding something special.
Rostock recently announced a $2 million equity financing commitment. As it starts drawing down on that we can get a look at where this company is going.
