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The Marijuana Manifesto’s Jimmy Mengel on his Investing Strategy in the Cannabis Space

January 8, 2018

Gerardo Del Real: This is Gerardo Del Real with Small Cap Stock Digest. Joining me today is the Managing Editor for Outsider Club, Investment Director of the personal finance advisory, The Crow's Nest, and cannabis stocks advisory, The Marijuana Manifesto, Mr. Jimmy Mengel. Jimmy, how are you today?

Jimmy Mengel: I'm great, Gerardo. Happy new year. It's a pleasure to talk to you.

Gerardo Del Real: Happy new year to you as well. I was joking a bit off the air. The last time we spoke yesterday, your portfolio in The Marijuana Manifesto was up over 175%, and then a close friend of ours, Mr. Jeff Sessions, came in and you're now only up, I believe, what is it as of today? 135%? 145%?

Jimmy Mengel: Yeah, I think it's hovering between 120 and 130. Yeah, these stocks move all over the place, but I'll take 175. I'll take 130. It's a good place to be.

Gerardo Del Real: Well, listen, you're obviously ahead of a megatrend. We've talked before in the past. I've always said the trend is your friend. This is very early stages, in my opinion. You're the expert, however, and the last time that we spoke you were on your way to the Cannabis Cup and I was on my way back from Argentina. With all the developments in the cannabis space, I'd love to start with the Jeff Sessions policy pivot, if you want to call it that, or policy pronouncement. I think it's been the intent of Mr. Sessions the entire time, but I'd love to get your take on how you feel that affects the investment thesis, and if this is really an opportunity where investors and speculators, and people that may be new to this space, should be taking advantage of and loading up.

Jimmy Mengel: Yeah, it's extremely interesting and it's quite a wild way to start the new year. Just backing up a second, when the new year started, California legalized recreational marijuana. My portfolio went crazy. Every pot stock that you could think of went up double digits. I had a couple that were triple digits within the month leading up to that. That was huge news, and we were all celebrating. The day after that happens, Mr. Sessions came out and said essentially he was going to repeal the Cole Memo, which was basically the only thing standing in the way of the federal government from cracking down on legal cannabis companies state by state, which was a nice buffer for a while. You could start companies without the fear of the government coming in and cracking down.

I do have some thoughts about that. I don't think it's going anywhere. As soon as he released that statement, there was a bipartisan backlash across the country, especially from states that have already legalized marijuana, coming out and saying, "No, we will not let this stand." There's been officials in Colorado specifically that have said, "If you continue with this, we are going to hold up everything that you want to do from your position, whether it be political ..."

Gerardo Del Real: Nominees. I believe I read somewhere that any political nominees that he was supporting or backing. Again, you made a very important point. It was bipartisan backlash. They said, "We will become a roadblock for you if you don't honor the commitment that you've made to states' rights." Is that accurate, Jimmy?

Jimmy Mengel: Yeah, that's accurate. Yeah. They're going to withhold political appointees. Hickenlooper from Colorado, he was one of these guys who was against some of these provisions to make medical marijuana and recreational marijuana legal. But once it passed, the will of the people passed it. They passed it on ballot measures. After it did pass, despite his reticence to it, he came back and said, "Wow. This has been a boon for our economy. We've created thousands and thousands of American jobs. We're bringing in tons of tax revenue. We can divvy it out to education." He became a convert immediately, and every single person, Republican or Democrat, in those states is saying the same thing. "We're going to fight this tooth and nail, so come at us if you like, but we're not going to let this happen." That's one point.

The other point is a lot of the things in the Cole Memo, which is what he repealed, were things like keeping cannabis out of the hands of children, keeping it out of gangs, keeping from having people driving while impaired. Each one of these states has shown that not only have they done those things, but a lot of those problems have gone down since legalization. Especially driving under the influence, that sort of thing, and gang and cartel involvement, all going down. If Sessions is going to try to crack down on that sort of thing, they've already done it legally and safely, so I don't know that he has any room to stand.

Gerardo Del Real: With that being said, Jimmy, let's talk portfolio allocation and let's talk strategy. The Marijuana Manifesto, the service that you are the head of and that you edit and write, has done extremely well. You mentioned the performance this year, but the performance ending the year last year was incredible as well. Talk to me a bit about what speculators that are new to the cannabis space should be aware of. What are they looking out for?

Jimmy Mengel: The beginning of this year is a perfect example. Last year, I was heavily invested in Canadian marijuana companies based on Canada's legalization. While we were legalizing recreational marijuana state by state, they're doing it across the entire country starting, they say, around July this year.

Gerardo Del Real: Right.

Jimmy Mengel: That announcement was a big alert to me, saying, "Okay, well, these companies have already been doing wonderfully. When it is wide scale and they're allowed to really open up all of the shops and sell recreationally, it's a market that's going to go up and up into the five, six billion dollars over the next year or two," which is actually bigger than beer in Canada.

Gerardo Del Real: Right.

Jimmy Mengel: Which, I'm sure you've been to Canada plenty of times, these guys drink a lot of beer.

Gerardo Del Real: Canadians like their beer. Absolutely. I can attest to that.

Jimmy Mengel: That's a shocking new market that is coming out of the shadows. Once that happens, all the companies that are properly positioned, they really can't lose. The demand is there. They just need to get the supply there, carve out some niche markets in their individual companies, and you can pick a few winners rather easily.

Gerardo Del Real: Excellent. Excellent. That's really good, insightful macro commentary, Jimmy, and again, I think that you've been able to get ahead of powerful trends. Obviously, you have your finger on the pulse. When we talk about company-specific metrics, things that you look for, boxes that need to be checked before you recommend a company or invest in a company, what should people be looking for there?

Jimmy Mengel: Well, it's what you look for in most companies. When I started in the sector, you had a lot of marijuana companies that evolved out of shell corporations that basically had no experience in the industry. One I point to sometimes, I think it was called Integrated Parking Solutions, and then overnight they became Integrated Cannabis Solutions, and the stock went up like 100%.

Gerardo Del Real: Right.

Jimmy Mengel: But really, they had no warehouses. They didn't grow anything. What does a parking meter company know about marijuana sales? You need to really make sure that the team involved has not only the expertise and the know-how to run a marijuana operation, but you also need to know that they've done it before or they can raise capital to keep something going, because it's not cheap to just open up a marijuana factory. It's a huge infrastructure project. You really need to have people who know the product. Look at the investor relations page on any marijuana stock you're looking for and see what these guys have done before. The other thing is to make sure they do have some cash set around, because you can burn it pretty quick without the right approach. If you don't have enough money, you're not going anywhere.

Gerardo Del Real: Excellent, so you look for experience in the space. You look for technical expertise. Obviously, you want a familiarity with the capital markets. Would that be accurate, Jimmy?

Jimmy Mengel: That would. What I would add to that is, I think as everything opens up, marijuana as a crop, the margins are going to be tough just to sell straight-up marijuana flower. There's going to be a ton of people that are able to do it. In Canada, it's been nice because there's only a certain amount of licensed producers they allow, but as they expand that, everyone is going to be growing a lot of marijuana. I don't look for companies that are simply growing marijuana. They need to have a solid brand. They need to have a unique product or something to differentiate themselves from your local dispensaries just selling marijuana. Like any other business, you need a unique selling proposition, and there are a lot of companies coming out like that.

Gerardo Del Real: Excellent. Excellent. Well, again, Jimmy, you obviously are ahead of a megatrend. I don't think it's a megatrend that's going away any time soon. Using a baseball analogy, in what part of the game do you think we're in when it comes to making money in the cannabis space? Is it the first inning? Is it the ninth inning? Is it somewhere in between? What's your take there?

Jimmy Mengel: Oh baseball, nice. I think it's tough to say. If I were looking at it like a baseball game, I'd say you may have been looking at one or two innings of shutout baseball, like when things first started and a lot of companies were going under because they didn't understand these things. They didn't have the money to maintain. You may have been looking at a pitchers' duel for a few innings. I'd say maybe the third, fourth inning, it broke out into a slugfest. Then where we are right now, things are riding high. A lot of runs have been scored, a lot of different companies, but I think as we go into the relief innings when you really need ... I'm trying to make this as baseball-friendly as possible.

Gerardo Del Real: No, you're doing a great job.

Jimmy Mengel: You need endurance. You need some on-base hitters. You don't need to just continue to hit home runs. What you need is people who would be hitting doubles and driving in runs, and really bringing up their batting average. I think maybe we're in the fifth inning or so.

Gerardo Del Real: Excellent.

Jimmy Mengel: It'll be a slower burn as all of these other things come online, but I think we're going to see a really, really big slugfest to end it out. I don't think the ninth inning is coming for another five to six years. Who knows, it may go into extra innings, but right now is a good time to be positioning because this is not going anywhere.

Gerardo Del Real: Wow, so assuming we don't go into extra innings, these next four innings are where you believe that the companies that know what they're doing, and that have access to the capital markets and an understanding, would differentiate themselves as opposed to this first initial couple of innings where anything with the name marijuana went up. Is that correct?

Jimmy Mengel: Yeah, definitely. I think we'll start to see some consolidation, too. Even some of the smaller companies that are maybe treading water right now, in terms of their finances, I think we're going to see more consolidation, more of the larger companies buying up smaller companies. As they say, a rising tide lifts all boats. Even some of the smaller guys are going to be absorbed by the larger guys, and then you have a few companies that will just ride this into the sunset and be a solid investment for many years to come.

Gerardo Del Real: Perfect. Perfect. Well, Jimmy, tell us a bit about what The Marijuana Manifesto is. That's the name of your service. Tell us a bit of your background as well. I mentioned earlier that the last time we spoke in depth, you were on your way to the Cannabis Cup. Let's start with what exactly The Marijuana Manifesto is, and then tell us a bit about your background if you don't mind.

Jimmy Mengel: Well, yeah, I'll start with my background. I still run a newsletter called The Crow's Nest, which is kind of a long-term, dividend-focused letter, set it and forget it stocks. It's pirate-based, so we did have a plundering section where once a month I would throw the readers something that wasn't conservative, wasn't long-term necessarily, kind of when you go back to baseball, the swing for the fences type of play.

Gerardo Del Real: Got it.

Jimmy Mengel: One of the first ones I did was Canopy Growth Corp, so I flew out to their manufacturing facility in Smith Falls, Ontario. They were one of the first big movers in the marijuana industry, which at the time was very, very volatile. I was like, "Okay, I got to go check this out and make sure it's legit." I arrived, and they had transformed an old Hershey chocolate factory into a medical marijuana plant, which in and of itself was worthy of a business trip. I was like, "All right, cool. I should go check this out."

But after touring the facility, I realized how serious they were about the marijuana industry going forward. I saw how legitimate of a manufacturing plant they had, and then what they were already buying to expand. They were already in expansion mode from the get-go. After my trip there, I was extremely impressed. I came back, and I was like, "Hey, readers, I know marijuana's kind of crazy. A lot of you may have ethical boundaries to it or may be risk-averse." But I recommended Canopy around $1.80 as one of these plundering plays, be like, "Hey, give it a shot. Throw some money into it. See what happens."

Gerardo Del Real: How did that do?

Jimmy Mengel: Well, today they're up. I think they're around $35.

Gerardo Del Real: Not bad.

Jimmy Mengel: In a couple of years, you get a 1,500% return. I think that's pretty good.

Gerardo Del Real: That's incredible. That's incredible.

Jimmy Mengel: After I saw what happened with them, it was obvious to me that there are so many of these companies that will do just as well. I've decided to launch my own newsletter just dedicated to this, because it is a niche subject. It's not for everybody. As we saw at the beginning of the year, these can fluctuate wildly. The Marijuana Manifesto pretty much gives you week by week updates on cannabis positions and what to look for, what to buy, what to sell, when not to chase it, when not to catch a falling knife. So far it's been extremely successful. It's been the craziest investment sector I've seen since I've been investing, and that's been quite a while since I was a young child.

Gerardo Del Real Wonderful. Well, it's definitely a powerful trend. The guidance, I got to imagine for people that are subscribed, has to be invaluable, because as you mentioned, this is a volatile sector. You really do need to be able to dedicate the time to stay on top of this. It's obviously what you do. How can people get a hold of you, Jimmy? How can they find you?

Jimmy Mengel: Yeah, you can go to outsiderclub.com, and you can sign up to our free e-letter. We write about cannabis stocks pretty frequently. From that page, you can contact myself personally through our email system. If you have any questions, I'm willing to answer them, I read all my emails. If you want to sign up, there are places to do that there. So far everyone has been extremely pleased. I really think we're only getting started. You may not see the 1,500% gains from companies like Canopy, but there are so many new upstarts coming up with the US legalization. Then while we haven't really talked about it, globally it's blowing up, too. Germany's opened up its medical market. Australia, South America is coming out with it too. Some of these companies have exposure into all of those areas, and if everything keeps expanding, the sky is the limit. I'm extremely excited and privileged to be in the sector right now.

Gerardo Del Real: You made a really good point about the medical applications and the overseas market. I'd love to have you back on, Jimmy, if it's okay with you and maybe dedicate a segment just to that aspect of it.

Jimmy Mengel: Oh, I think that would be great. It's one of the kind of unsung heroes of this whole story. People talk about Canada and the US, but this thing is catching on massive globally. I think there are huge opportunities there, and yeah, I would love to sit down and discuss them with you.

Gerardo Del Real: Excellent. Well, thank you very much for your time, Jimmy. Are you on Twitter? Can people follow you on Twitter?

Jimmy Mengel: I am. I'm on Twitter, @mengeled. It's M-E-N-G-E-L-E-D. I have some insights there, though I try to only tweet when necessary. It gets a little interesting in there.

Gerardo Del Real: It can get dicey, I can tell you from personal experience, but it definitely is interesting.

Jimmy Mengel: Yeah, I'll have some professional insights in there. Yeah, I would love for anyone to contact me if they wish through the other avenues.

Gerardo Del Real: Wonderful. Jimmy, thank you again for your time. I look forward to having you back on.

Jimmy Mengel: Thanks, Gerardo. Much appreciated.

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