July 2015

TheCROW’SNEST

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A“The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore.”

— Vincent Van Gogh

hoy Crow’s Nesters,

I trust you are all having a splendid summer — and doing your best to enjoy yourselves in spite of the current turmoil gripping the global markets.

Now, I don’t think any of us can say we’re surprised that we’re finally seeing some cracks in the hull. But it has been unsettling to watch as no less than three major disasters in the global market have unfolded since the last issue.

The most startling was China’s complete collapse, which sent the Shanghai Composite Index tumbling almost 30% in less than a month, making investors a horrifying $3 trillion dollars poorer. The collapse was so jarring that the Chinese government stepped in and halted trading for over half of the listed companies on the exchange.

If you compared China’s drop to the U.S. market, it would be like the Dow Jones dropping 5,100 points.

Yikes...

The drop followed a run-up of 150% in the 12 months leading up to last month. This is exactly what happens when investors start believing that stocks can only go up. Sounds awfully familiar, doesn’t it?

Then you have the Greek tragedy, one of such magnitude that it would make Sophocles blush.

Despite the fact that Greece only makes up a minuscule 0.3% of the global economy, U.S. stocks got hammered for their worst day of the year at the end of June. With fear building over a Greek default, the Dow dropped a whopping 350 points — or 2%. The S&P shed 2% and the NASDAQ fell 2.4%.

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The scary part is, all of these events are largely divorced from the U.S. stock market at large. We’ve just seen the panic selling from shores away. I fear that these are just tremors that may grow into a huge tsunami by the time it reaches our shores.

But if we can already feel the tremors from these distant events, what happens when the Fed raises rates this year — which is looking more and more likely every day. Despite the disasters in China and Greece, Fed Chair Janet Yellen reiterated her desire to raise interest rates this year...

“I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen said in her first public remarks since the June meeting of the Federal Open Market Committee

This would have far greater implications for the U.S. stock market than either Greece or China. As I told you last month, I think U.S. stocks are now at the point where they are simply overvalued to say the least, and downright scary to say the most.

But at times like these, I don’t get scared, I get prepared. Please refer to the last issue for a look at my strategy for market crashes. Essentially it boils down to taking some gains now, building up a war chest of capital, then buying up long-term dividend stocks at rock bottom prices.

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But until then, I’m going to focus the bulk of this issue on a sector that is really not tied at all to the broader U.S. stock market. Not only are these stocks not overvalued, but this sector is only just getting going and has serious blue sky potential.

I’m talking about the medical marijuana sector — specifically licensed Canadian growers and providers.

This issue will focus heavily on these companies. I have full updates on our current positions, as well as a lay of the land following the mega-merger.

I’ve been doing a lot of research leading up to my appearance on the Cannabis Investing Symposium panel on July 18th.

I’d like to invite you to join me in San Francisco on July 18th from 12:00 pm – 4:00 pm. I’m on a panel with some very big names in the cannabis investing industry.

• Michael Berger, President and Founder of Technical420, a sell-side research firm focused specifically on the cannabis sector.

• Scott Greiper, President and Founding Partner of Viridian Capital & Research — the first investment banking/strategic advisory firm dedicated to building and financing emerging growth companies in the legal cannabis industry.

• Matt McCall, Founder and President of Penn Financial Group, LLC, an investment advisory firm.

• Mathew Sherwood, Vice President, Product Development at CannaPharmaRx, a pharmaceutical company with a mission to advance cannabinoid discovery, science, research, and development.

• Staffan Hillberg, CEO of Heliospectra — a world leader in intelligent lighting technologies for plant research and greenhouse cultivation.

• Isaac Dietrich CEO of Marijuana Social Network MassRoots (MSRT)

• John Hollister CEO of Nemus Bioscience (NMUS)

• Michael Tew, Advisor, CannaSys

We’ll be separating the facts from the hype and bringing you an honest look at a sector full of smoke and mirrors.

You can join us for free, you just need to register here.

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I’ll also be meeting with a large contingent of industry players: CEOs, capital market experts, and analysts — all with some serious skin in the marijuana game. I’ll have a full report upon my return.

Until then, we have a lot to get to this month. I have two brand new recommendations: an under-the-radar company that actually pays you to invest in its dividend reinvestment plan and a new medical marijuana recommendation that I’m incredibly excited about.

So let’s dig in...

Charting the Course

Delta-9 Stocks

It’s been a couple months since I weighed in on the sector, so I figured it was high time I did so.

There has been some very notable news from the Canadian medical marijuana space in the past few weeks so, let’s take a quick lay of the land.

The medical marijuana business is still its infancy. In fact, it’s only about a year old...

We’ve seen the first class of Canadian companies try and stake their claim to what amounts to the gold rush in the old Wild West. And like gold miners, some have struck it rich while

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others have lived up to the Mark Twain adage: “A gold mine is a hole in the ground with a liar on top.”

You can see that in the boom and bust of some of the first crop of companies that IPO’d last year to mega-hype, only to crumble:

• MedBox (OTC: MDBX) dived from $98 all the way down to $0.16.

• CannaVest (OTC: CANV) slid from $147 to $1.20.

• Medical Marijuana Inc (OTC: MJNA) dropped from $0.58 down to $0.06.

Now, while you could have banked some serious gains if you timed these positions perfectly, in the end the performances of these stocks were nothing but smoke and mirrors. But it appears as if the time has finally come to weed out the champs from the burnouts.

For those legitimate companies that make it through these tough first years, there will be a massive payday. Medical marijuana will be a massive industry in Canada, with some projecting it to grow to well over $1 billion in the next decade.

But in order to make it that far, they’ll need to survive the next year or two first. We’re finally starting to see a couple of companies become cash-flow positive and break away from their competition.

Here are the top 10 medical marijuana companies by market cap:

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I’m going to discuss three of them in this issue, along with one small cap that may find itself on this list in the coming year or two.

Now, this does not include some big players like GW Pharma (NASDAQ: GWPH) and Insys Therapeutics (NASDAQ: INSY), of which marijuana based-pharmaceuticals only accounts for part of its larger business. We’re going to be sticking with 100% marijuana stocks here today.

Tweed Marijuana Inc. (TWD.V) and Bedrocan Cannabis Corp. (BED.V)

The big news I referred to above was the announcement of the first major merger and acquisition in the nascent market.

It was announced that two major players in the medical marijuana space have joined forces: Tweed Marijuana Inc. (TWD.V) and Bedrocan Cannabis Corp. (BED.V) have agreed to merge.

The market clearly liked it, as shares of Tweed were up 15% and Bedrocan jumped 27% after the merger was announced.

One analyst called it a “white whale deal.”

Tweed is a consumer-driven marijuana company that famously operates at the old Hershey Chocolate factory in Smith Falls, Ontario. It was the first publicly-traded cannabis company in Canada.

Bedrocan is focused more on the medical side of things. It has developed strains of medical marijuana for patients with chronic pain, fibromyalgia, multiple sclerosis, arthritis, epilepsy, anxiety and depression, Crohn’s disease, and multiple other medical conditions.

Bedrocan has over 15 years of research experience, starting in the Netherlands. They are considered to be the foremost experts when it comes to developing research-based marijuana strains.

It’s a perfect partnership in the sense that Bedrocan has a ton of experience growing medical-grade marijuana, while Tweed has a very slick set of consumer brands and more capital market experience. Together they present a very formidable company that has already set itself up to be the undisputed leader in the medical marijuana sector.

When the deal is official, the merged companies will sport a market cap three times the size of the next-largest competitors. They’ll also have a licensed sales capacity of 6,000

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kilograms of medical marijuana every year.

More importantly, they will represent about 25% of all registered patients in Canada — which is the key to making money in the space. You need regular customers, and this merger will pool the resources of both companies. Health Canada only allows patients to get a license for one provider at a time, so the merger will make the new company more attractive to customers who want more choice. A license for Tweed will essentially give you access to two robust product lines.

It will set the company apart when it comes to providing products to the growing number of patients in Canada. Health Canada has projected that the number of medical marijuana patients in Canada will more than quadruple by 2024 to around 450,000. If you go by the average revenue per patient of $3,750, that would make it a $1.7 billion industry.

But while Canada is a huge market on its own, Tweed is already looking to expand into others...

The newly formed company will be looking to expand into foreign export markets like Brazil and Chile, where medical marijuana is already legal at the federal level. That could certainly open up plenty of new revenue streams...

Here’s the announcement.

I spoke with Jordan Sinclair, Tweed’s communications director, and he shined some light about the merger, Tweed’s sales, and the future of the combined company. Here’s the rundown...

In less than fifteen months, Tweed is close to $2.5 million in sales. More importantly, its first sale wasn’t until May of last year, and it has been roaring since that. In fact, 50% of sales happened in the last quarter, which means it has the momentum at the back and this merger with Bedrocan will only escalate that.

Combined, they will have about 5,000 patients — far and away the most of any company in Canada, and 25% of the total patient count country-wide.

It is also working to onboard new patients.

Since medical marijuana is not a traditional market, you cannot just put out advertising campaigns.

Patients must have doctors prescribe the product. That is why Tweed is doing a ton of

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outreach to inform doctors about the industry.

It is very involved in the educational circuit where doctors learn about new products — kind of like trade shows for physicians. Tweed has done over 2,000 physician interactions this spring alone, and around 9,000 to date.

So it has been blanketing the space, and this will start paying off with more and more prescriptions for medical marijuana and an allegiance with Tweed to provide the products. Considering Bedrocan’s research and medical pedigree, the merger will only strengthen its appeal to physicians around Canada.

And support for medical marijuana from doctors has been on the rise for years. In a survey of 1,446 doctors from 72 different countries and 56 different states and provinces in North America, a whopping 76% supported medical marijuana. That number continues to grow as more studies come about regarding its effectiveness.

Bedrocan has been involved in the medical marijuana field for over 15 years on a commercial scale, starting in Holland — where marijuana laws have long been relaxed.

“When you’re a decade ahead of the rest of a brand new industry, that is a massive head start.” Jordan told me.

The marijuana “strain diversity” will lead to more customers — by offering Bedrocan and Tweed products, it gives customers more choice in their purchases. It also gives physicians a larger batch of products with unique therapeutic benefits.

Bedrocan, for instance, has five principal strain types, each delivering a unique combination of active ingredients (THC and CBD). Patients and health professionals can select the strain that best meets their medical needs, offering relief from the symptoms of their health conditions.

The Merger

Before the merger takes hold, a few things will need to happen:

• There will be a shareholder vote in August. They will need 2/3s of shareholders to approve the deal.

• They will also need approval from Health Canada regulators and securities regulators.

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I’ve been assured that all of these pieces are in place, and there will be no obstacles to the final merger.

Regulation-wise, since the company will be retaining all pertinent senior members, and both parties are already compliant with current standards, there shouldn’t be any qualms from Health Canada or Securities regulators.

The core of the company needs to remain intact to keep its licenses, and Health Canada doesn’t have issues as long as the application remains as presented initially.

Financials:

Tweed

Tweed is working with a 15-month fiscal year, which ended March 31st, 2015: Here are some financial highlights from that period:

• Sales for the three and fifteen month periods ending March 31st were $1,225,689 and $2,371,351 respectively.

• 52% of sales for the 15 month period occurred in the 5th quarter of the year.

• Sales and volume grew steadily over the 15-month period, with quarter-over-quarter growth including 91% growth in the fifth quarter over the fourth quarter

• The average price per gram sold was $7.25 and $7.17 for the three and fifteen-month periods ended March 31st.

Vitals:

Market Cap: 100.40 million

52 week range: 1.60 – 2.90

Avg. Volume: 91,342

EPS: -0.23

Bedrocan

Bedrocan announced its financial and operational results for the three-month period ended

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April 30, 2015. Here are some highlights:

• Revenues of medicinal cannabis to authorized patients in Canada were $439,759 for the three month period ended April 30, 2015 (“Q1/2016), compared to $94,812 for the three month period ended March 31, 2014.

• Gross profit was $170,858 for three months ended April 30, 2015 (Q1/2016) compared to $94,812 for the three month period ended March 31, 2014.

Bedrocan also completed construction on schedule of its 52,000 square foot domestic production facility in the Greater Toronto Area (GTA) and received its second license from Health Canada to allow for the production of medicinal cannabis in the first six grow rooms of its new production facility.

Vitals:

Market Cap: 58.99 million

52 week range: 0.50 – 1.45

Avg. Volume: 168,128

EPS: -0.09

We’re buying Tweed under $2.00 for now, and will reevaluate as the merger draws near.

If you have never bought a stock on the Toronto Stock Exchange (TSX), here is a handy guide.

You can learn more about Tweed here, and Bedrocan here.

Now on to a couple of our other medical marijuana positions.

T-Bird Pharma (TPI.V) is now Emerald Health Therapeutics, Inc. (EMH.V)

So, there was big news from T-Bird Pharmaceuticals this month...

It has completely changed the name of the company to Emerald Health Therapeutics. The new ticker will be EMH.V.

Now, sometimes this is seen as a sign of desperation. But Emerald Health has plenty going for it, and this may be a good move. First off, the name itself is way better: T-Bird Pharma doesn’t have the same gravitas as Emerald Health Therapeutics.

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You can also see the difference in the quality of the marketing materials and the website, which you can check out here.

The move comes after T-Bird sold off 45% of the company to Medna Biosciences. Here’s that press release:

T-Bird Pharma Inc. (TSX:V.TPI) has announced an agreement to sell 45% of stock in the company to US-based Medna Biosciences for $4 million.

Though the stock trades at $0.45 at the time of writing, the deal values the shares purchased at $0.21 per share, due to the fact they are escrowed founder shares that don’t free up until the company’s provision to sell is restored.

The ‘selling half the company for a quarter of the market cap’ theme spread quickly across social media after the announcement, but those with knowledge of the deal insist it’s not just a good deal, but potentially a great one.

“It’s a big compliment to T-Bird that our new partners are taking the sort of risk that comes with escrowed stock,” said Hamza Thindal Capital Corporation Managing Partner Kam Thindal on the phone Wednesday afternoon. “These are experienced operators with substantial capital markets success, and they’re getting involved to take the T-Bird operation to a much larger level.” To be sure, the primaries in this deal are very serious biotech players.

For the uninitiated, Medna is a life science company focused on the research, development and commercialization of medical marijuana. Medna will be developing its own strains of medical marijuana designed to treat specific diseases, carrying out clinical studies to determine the efficacy of these strains, and producing pharmaceutical grade medical marijuana in its production facility in Richmond, British Columbia.

Medna is privately held and run by founder, chairman, and primary shareholder Dr. Avtar Dhillon, who served as President and CEO of Inovio Pharmaceuticals (NASDAQ:INO).

From the company news release, “Dr. Dhillon led the successful turnaround of the company through a restructuring, acquisition of technology from several European and North American companies, and a merger with VGX Pharmaceuticals to develop a vertically integrated DNA vaccine development company. Dr. Dhillon led multiple successful financings for Inovio, raising over $200 million for the company, and concluded several licensing deals that included multinational companies, Merck and Wyeth (now Pfizer). Dr. Dhillon has served as Chairman of the Board of OncoSec since March 2011 and of Arch Therapeutics since April 2013.”

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Medna CEO Jim Heppell was a co-founder of BC Advantage Funds, where he managed a portfolio of life science companies.

From the NR, “In 2006, Advantage’s investment in Aspreva Pharmaceuticals, led by Jim, won Canadian Venture Capital Deal of the Year for having the highest realized return (23.4X) of any venture capital fund in Canada.”

Punit Dhillon, current CRO of OncoSec Medical (OTO:ONCS) will join Heppell and Dhillon on the board of T-Bird. Making way, but staying on, are CEO Dr. Bin Huang, Frank Barr and Dr. Essam Hamza will step down as Chairman but remain on the board.

The market liked that move as well, as shares jumped to $0.66 after the deal was announced. I spoke with Kam Thindal, who manages IR for T-Bird/ Emerald and he seems pleased with the way things are shaping up — especially with the new board.

It is an impressive group with a great deal of experience in the biomedical field:

Avtar Dhillon, BSc, MD Chairman

Avtar is a life sciences entrepreneur who has been instrumental in founding and developing numerous companies including Inovio Pharmaceuticals, Arch Therapeutics, Inc., OncoSec Biomedical and Stevia First. Avtar has more than 20 years of experience building public companies through mergers and acquisitions, leading innovation in scientific, engineering and farming enterprises, securing government grants and NGO funding (more than US$50 million to date), and building dominant IP portfolios through partnering and negotiating deals with small businesses as well as large multibillion dollar companies.

During his tenure as president and CEO at Inovio (NASDAQ:INO), Avtar led the turnaround of the company through restructuring and acquisitions. Under his leadership, Inovio completed financings totalling over $150 million and several licensing deals with global pharma leaders Merck, Wyeth (now Pfizer) and Roche. Before joining Inovio he was vice president of MDS Capital Corp. (now Lumira Capital Corp.), one of North America’s leading healthcare venture capital organizations.

Avtar practiced family medicine for over 12 years. He has a BSc (Honours) in Human Physiology, and an MD from the University of British Columbia.

David Raffa, BSc, LLB Director

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David has been working in the technology industry for more than thirty years in a variety of roles including scientist, corporate finance lawyer and venture capitalist. He currently provides corporate finance advisory services to a number of young technology companies, often in the capacity of executive board member. Prior to that David was a founding partner and fund manager with BC Advantage Funds, a BC-based venture capital fund.

David has led or been involved with numerous successful exits including Parasun Technologies (acquired by Uniserve), ActiveState (acquired by Sophos PLC), Wolf Medical (acquired by Telus), RFind (acquired by Constellation Software), TSC Software (acquired by Stardyne), In Motion Technologies (acquired by Sierra Systems) and Scorpion Software (acquired by Kaseya). Before retiring from the active practice of law in 2002, he served as legal counsel to Flickr (acquired by Yahoo), Layer 7 Technologies (acquired by CA) and Avigilon (TSX: AVO), companies who have achieved successful exits or gone public.

David has a BSc (Biology) from Simon Fraser University and a law degree from Osgoode Hall Law School. In 2004, he was named by BC Business Magazine as one of BC’s “Top 25 New Elite” in the technology sector.

Jim Heppell, BSc, LLB Director

Jim was co-founder, president and director of BC Advantage Funds (VCC) Ltd. BC Advantage is a venture fund that invests in and builds successful technology, life science, and clean technology companies. Jim’s first fund, the Advantage Life Sciences I Fund, won the Canadian Venture Capital Deal of the Year Award in 2006 for having the highest realized return (23.4x its investment in Aspreva Pharmaceuticals) of any venture capital fund in Canada.

Early in his career, Jim practiced corporate securities law with Fasken Martineau DuMoulin, one of Canada’s leading law firms. For part of that time he was seconded to the BC Securities Commission. Jim then became president and CEO of Catalyst Corporate Finance Lawyers, a boutique corporate finance law firm for life science and technology companies. He is a past member of the Securities Policy Advisory Committee to the BCSC and past-chairman of the Securities Section of the Canadian Bar Association (BC Branch). Jim has a BSc (microbiology) and a law degree from the University of British Columbia.

During his career, Jim has participated in building a number of successful life science companies, including Aspreva Pharmaceuticals (acquired by Galenica Ltd. SW: GALN), Immgenics (acquired by Amgen NASDAQ: AMGN), Inovio Pharmaceuticals (NASDAQ: INO), and Sophiris Bio Inc. (NASDAQ: SPHS). Jim is currently a director of a number of public and private life science companies.

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Punit Dhillon, BA Director

Punit is the co-founder and CEO of a leading biopharmaceutical company based in the U.S. that develops advanced-stage immunotherapy to treat solid tumours. Punit was formerly vice president of finance and operations at Inovio Pharmaceuticals, Inc. where he raised over $160 million through multiple financings and several licensing transactions, including early stage deals with Merck and Wyeth.

Punit’s management experience spans corporate finance, M&A, integration, successful in-licensing of key intellectual property, strategy implementation, corporate transactions and collaborations with leading universities and key global opinion leaders. He is also the founder of becancerpositive.org, an online community for cancer patients.

In 2013 he was recognized as one of the “Top 100 CEOs by PharmaVoice and “Most Admired CEO” by the San Diego Business Journal. In 2014, he was recognized as a finalist for Ernst & Young’s “Entrepreneur of the Year.” Punit holds a Bachelor of Arts with honours in Political Science and a minor in Business Administration from Simon Fraser University.

This team should put the company in a good position to focus on the medical side of the industry, which was the key to Bedrocan being bought out. It has built a couple half billion-dollar health companies.

It also has a lot more capital market experience, which should lead to more exposure and promotion of the company, which helps sell more shares. It has brought in north of $100 million this year in equity financing and $50-60 million in federal granting agencies for Inovio alone.

Emerald Health has received the first grant from the Canadian government for $50k to be used towards Research and Development. It expects to receive more of these grants.

It is a good partner and the remaining T-Bird group is very keen on the future with it.

A couple tidbits on the current operations:

• It has received a license to sell, which is crucial to long-term success.

• It is finally shipping product as Emerald Health. Which is far better than changing the name after shipping to customers.

• It has also provided a new method of onboarding patients (the most critical part of these companies) which just began as this goes to print, so I’ll have

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more information in the next issue.

The endgame here may be to get bought out, Bedrocan-style. After the mega-merger of Tweed and Bedrocan, we may see more acquisitions of firms like Emerald Health — which would be a boon for their stock price. According to Kam:

“Consolidation is the name of the game for sure. We get the phone calls too: are you ready to sell, are you ready to buy? There will be some more consolidation for sure and there will be 4 or 5 that probably survive.”

My feeling is this: the fundamentals of the company haven’t changed, its board is now filled with folks with better capital market savvy and it has secured licenses to grow and sell. I’m not the only one who feels this way. The company recently appeared on the Stockhouse “Medical Marijuana Rankings”, with this statement:

For a lot of months I told readers that there was something brewing at TPI, and for a lot of months they didn’t listen. Fair call, for a while anyway, but this company put the afterburners on in late February, jumping from $0.385 to $0.66 on news they were bringing in significant heavy hitters to develop the business. Has since fallen back to the $0.50 range where it appears to have firmed. Wouldn’t be shocked to see that license be the first one to be acquired by another LP.

Speaking of stock price, it really hasn’t moved much in the past few months, so it may be able to ride the M&A momentum of some of the larger companies.

We’re holding Emerald Health for now until it starts shipping more product. In the meantime, you can contact IR director Kam Thindal at kam@htcapitalcorp.com with any questions you may have.

InMed (CSE: IN) (OTC: IMLFF)

InMed Pharmaceuticals is a clinical-stage biopharmaceutical company that specializes in developing cannabis-based therapies through the Research and Development into the extensive pharmacology of cannabinoids coupled with innovative drug delivery systems.

This is a very, very interesting company. It is taking on the medical marijuana sector from a very unique angle: decoding Big Pharma drugs and replacing them with cannabis-based medicines. You see, InMed has a proprietary “Platform Technology” that can actually identify and uncover certain compounds from pharmaceuticals and cannabis plants and match them up to create new medications for specific diseases.

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Its platform is called the Intelligent Cannabinoid Drug Design Platform or IDP. InMed says it is a “bioinformatics tool/ algorithm that identifies individual chemical compounds from the cannabis and non-cannabis plants.” Essentially, it acts as a decoder of very complex compounds and allows the InMed scientists to create new therapies and medicines based on these identifications.

As I told you in May, InMed has hired a new strategic advisor who has had great success in the medical marijuana business: former GW Pharmaceuticals financier, investor, and Non-Executive Director, Peter Mountford. He will take on primary responsibility for the European markets where GW Pharmaceuticals has had a ton of success.

InMed Ranked #6 out of 20 in that same Stockhouse Power Rankings. Here is the blurb:

When I missed the $0.13-to-$0.37 ride, I vowed never again to let daily ups and downs influence my holdings in this biotech seedling. When it drops, I buy. When it jumps, I hold. Why? Two reasons. First, there’s increasing buzz that a deal with a larger biotech company is in the works. GW Pharma perhaps? Second, even if there’s no deal out there, the brainstrust driving this project are straight up beasts in the Canadian bio-science space, and Health Canada appears to agree. Negligible burn rate, growing collection of pharma IP, and one halfway decent deal away from never seeing sub-$1 prices again. The only way I get out of this stock is if I’m bought out, or I die.

I have conference calls scheduled with InMed in the coming weeks, so I’ll give you an update on it next month. I’d like to hold off on an official recommendation until I have time to speak in depth with management.

At the moment, it’s trading at $0.15 on the pink sheets (OTC: IMLFF), which is a nice entry position if you want to take a gamble for potentially massive gains.

You can watch its latest investor presentation here.

I have also had conversations with Organigram (OGI.V), and I’ll bring you a full update next month.

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Dividend Calendar and Rankings

For the sake of simplicity, I assign a rating number to each position, in terms of how attractive it is and how much you should buy at these prices for a long-term portfolio:

1 — No brainer

2 — Attractive

3 — Average

4 — Expensive

5 — Tread carefully

Aqua America (NYSE: WTR)

Ex-dividend date: May 13, 2015

Pay date: June 1th, 2015

Yield: 2.6%, 5% DRIP discount

Ranking: 3

Abbott Labs (NYSE: ABT)

Ex-dividend date: July 13, 2015

Pay date: August 15th, 2015

Yield: 2.0%

Ranking: 3

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AbbVie (NYSE: ABBV)

Ex-dividend date: April 13, 2015

Pay date: June 9th, 2015

Yield: 3.0%

Ranking: 2

Boeing Company (NYSE: BA)

Ex-dividend date: August 5th, 2015

Pay date: September 4th, 2015

Yield: 2.5%

Ranking: 1

Collector’s Universe (NASDAQ: CLCT)

Ex-dividend date: May 13th, 2015

Pay date: May 29th, 2015

Yield: 7%

Ranking: 3

Corning Inc (NYSE: GLW)

Ex-dividend date: May 27th, 2015

Pay date: June 30th, 2015

Yield: 2.5%

Ranking: 2

Cummings Inc (NYSE: CMI)

Ex-dividend date: May 19th, 2015

Pay date: June 1sh, 2015

Yield: 2.4%

Ranking: 1

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General Electric Company (NYSE: GE)

Ex-dividend date: June 18th, 2015

Pay date: July 27th, 2015

Yield: 3.5%

Ranking: 3

HCP (NYSE: HCP)

Ex-dividend date: May 7th, 2015

Pay date: May 26th, 2015

Yield: 6%, 1% DRIP discount

Ranking: 3

Johnson & Johnson (NYSE: JNJ)

Ex-dividend date: May 21st, 2015

Pay date: June 9th, 2015

Yield: 3%

Ranking: 3

Loews Corp. (NYSE: L)

Ex-dividend date: May 28th, 2015

Pay date: June 12th, 2015

Yield: 0.7%

Ranking: 3

Medtronic, Inc. (NYSE: MDT)

Ex-dividend date: June 25th, 2015

Pay date: July 17th, 2015

Yield: 2.1%

Ranking: 2

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Newtek Business Services (NASDAQ: NEWT)

Ex-dividend date: June 25th, 2015

Pay date: July 15th, 2015

Yield: 10.7%

Ranking: 1

Nucor Corporation (NYSE: NUE)

Ex-dividend date: June 26th, 2015

Pay date: August 11th, 2015

Yield: 3.50%

Ranking: 2

Piedmont Natural Gas (NYSE: PNY)

Ex-dividend date: June 22nd, 2015

Pay date: July 15th, 2015

Yield: 3.60%, 5% discount for dividend reinvestment program

Ranking: 4

US Bancorp (NYSE: USB)

Ex-dividend date: June 6th, 2015

Pay date: June 15th, 2015

Yield: 2.4%

Ranking: 3

Ventas Inc (NYSE: VTR)

Ex-dividend date: June 3rd, 2015

Pay date: June 30th, 2015

Yield: 4.9%

Ranking: 1

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Plundering

I have a new DRIP recommendation for you today. As you know, I think dividend reinvestment plans are the best and safest way to survive any market correction. You actually accumulate more shares when the market crashes, and over the long term you should be dollar-cost averaging these positions while reinvesting your dividends.

It’s really quite a simple strategy if you can keep your cool and ride out the storms. However, it does require a plan and the stomach to stick to it — especially if the markets continue to drop.

That’s because the plan involves buying a fixed dollar amount of a particular stock, fund, or index on a regular schedule regardless of its price. That is usually where most retail investors generally fail because to a large extent, they have it all backwards — they love buying the hype and selling the fear.

Even still, dollar-cost averaging does make sense even though it often involves overcoming those same fears as stocks “go on sale.”

I buy more when the prices are low, and less when they seem high.

Using dollar-cost averaging, more shares are purchased when prices are low, and fewer shares are bought when prices are high. The end result is that, over time, the average cost of your shares will become smaller and smaller.

Since dollar-cost averaging spreads out your stock purchases, it lessens the risk that you will buy them “at the wrong time.”

With that said, here is the latest DRIP play...

Sovran Self Storage, Inc. (NYSE:SSS)

You got your stuff with you?

Stuff is important. You gotta take care of your stuff. You gotta have a place for your

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stuff. Everybody’s got to have a place for their stuff. That’s what life is all about, tryin’ to find a place for your stuff! That’s all your house is: a place to keep your stuff. If you didn’t have so much stuff, you wouldn’t need a house. You could just walk around all the time!

So now you have a houseful of stuff. And, even though you may like your house, you gotta move. Gotta get a bigger house. Why? Too much stuff! And that means you gotta move all your stuff. Or maybe, put some of your stuff in storage. Storage! Imagine that. There’s a whole industry based on keepin’ an eye on other peoples stuff.

-George Carlin

Reading the Carlin bit on stuff really doesn’t do it justice, I’ll recommend watching him perform it here:

In any case, he is dead on: Americans love stuff.

They love building up such giant piles of stuff that they need to find even more places to stash their stuff.

In spite of how obvious these statements are, a good investor angle on unabashed consumerism flies under the radar for many.

Investing in companies that make the stuff people want is something everyone does. Just look at Apple.

However, consumers are fickle and what is flying off the shelves today may be rotting in warehouse storage next year.

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Why not invest in a company that gets paid when people have to rent extra space to jam all of it, regardless of what it is?

Self storage is hardly an exciting topic, in spite of the recent fad in reality television. Own some land, build a row of garages, put locks on them, and rent them out. That’s the whole plan.

However, this simple system is the bedrock for a strong dividend play available to us right now, and we can skip right past brokerage fees and get a discount on the shares we buy.

Good Ol’ Uncle Bob

Sovran Self Storage, Inc. (NYSE: SSS) operates as a real estate investment trust (REIT). It acquires, owns, and manages self-storage properties in the United States.

The company opened up its first facility back in 1985 in Buffalo, New York. Since then, it has expanded to own or operate over 500 self storage facilities encompassing over 30 million square feet, making it one of the largest self-storage companies in the United States.

In total, the company serves 250,000 storage customers in 25 states.

A vast majority of the locations are east of the Mississippi, though facilities are also in Missouri, Louisiana, Texas, Colorado, and Arizona.

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Sovran may not be a recognizable name because the company operates under the trade name Uncle Bob’s Storage.

The company has had success marketing itself with a well-integrated data center and booking system, along with value-added services like Dri-guard — a dehumidification system — rental trucks, and surveillance systems.

As a company that is essentially devoted to rental income from investments in property, Sovran is eligible to be treated as a REIT for federal income tax purposes.

In return for not paying income tax, the company must distribute at least 90% of taxable income to its stockholders.

In this sense, the entire point of the company is to continuously expand and return greater income to its investors. That would be us.

Strong Growth and Income

Sovran is the smallest of the four publicly-traded self storage REITS, yet has been posting strong growth numbers.

In the last three years alone, the company has added about 130 new properties, increasing its holdings by over 34%.

At the same time, the company has not dramatically increased debt, which is woefully common for expanding REITs.

Total debt to total capitalization in 2011 hit a ratio of 33.35. At the end of 2014, it had dropped down to under 23.

This is a healthier ratio than two of the three competitors — CubeSmart and Extra Space Storage.

However, the self storage companies have all been doing well in recent years, easily outperforming other types of REITs in total return through 2014:

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What sets Sovran apart from the others and warrants a recommendation over them are its occupancy levels and asking rates.

The company’s facilities hit an all-time high for occupancy and the asking rate for unit rent has climbed 25% over the last three years.

Overall occupancy rates averaged 89.3% in the first quarter of 2015, while rental rates averaged $12.12 per sq ft.

This is up from 88.7% and $11.75 per square foot in the first quarter of 2014.

This has led to very strong funds from operations growth, which hit $4.35 in 2014:

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In the first quarter of 2015, FFO came in at $1.07 per fully diluted common share, compared to $0.88 in the first quarter of 2014, an 11.2% increase.

Management expects FFO for all of 2015 to be somewhere between $4.79 and $4.85, representing a potential 10% to 11.5% increase year over year.

Revenue growth was near 8% last year, and total revenues increased 13.2% over last year’s first quarter. Same store net operating income rose 7.5%.

This has led to improvements across the board. Sovran has more cash, saw a credit rating increase with another hinted at by S&P if key metrics are maintained, and great dividend growth.

It has just lifted its quarterly dividend by 13% to $0.85 per share. It is now yielding a very nice 3.7%.

With FFO, revenue, NOI, and other key metrics improving at a strong rate, we can expect strong dividend growth to continue for the foreseeable future.

The DRIP Advantage

Sovran Storage has one more key aspect that warrants investor attention.

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It directly sells shares to investors at a discount through a system that can automatically reinvest all or part of dividend payments, as long as it is at least 10% of the dividend payment.

This is through the company’s dividend reinvestment program, or DRIP. After an investor makes an initial share purchase of any size, they simply need to fill out a form and mail it to an agent of the company.

After that is done, the company will issue shares or fractions of a share equivalent to the quarterly dividend payment amount with a 2% discount.

That may not seem like much, but it effectively drives down the cost of building up a position over time and effectively increases the dividend yield for participants.

After years, the compounding growth of that 2% can add up to a massive increase in the size of the position, along with total return for the investors.

If and when you purchase shares, you’ll want to check out all the details and terms. The prospectus for Sovran’s DRIP may be found by clicking here , and the authorization form for enrolling may be found by clicking here .

A Look In the Books

Sovran Self Storage, Inc. (NYSE: SSS) has just over a $3 billion market capitalization and a $3.93 billion enterprise value.

There are 25.56 million shares outstanding, and the float is 33.48 million. 2.42% of shares are held by insiders, and a whopping 92.1% are owned by institutions.

Management has been quite effective, posting a 4.35% trailing twelve month (ttm) return on assets and a 9.41% return (ttm) on equity.

Operating cash flow (ttm) is $158.41 million and levered free cash flow (ttm) is a healthy $122.35 million. In short, Sovran has no signs of any liquidity issues at all.

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Since REITs behave quite differently from “normal” stocks, a price-to-earnings ratio isn’t ideal.

Instead, a price to funds from operations is more useful.

As stated above, FFO rose 11.2% to $1.07 in Q1 2015, compared to $0.88 in Q1 2014.

Management expects FFO for all of 2015 to be somewhere between $4.79 and $4.85, representing a potential 10% to 11.5% increase year over year.

This puts the estimated 2015 price to FFO ratio between 18.09 and 17.87.

Though it is a bit of an apples-to-ranges comparison, this is cheaper than the S&P 500’s 20.54 price-to-earnings ratio.

As mentioned above, the dividend is yielding 3.7% — and with the 2% DRIP discount, that is a very attractive yield for a solid company like this.

With strong FFO and dividend growth, along with a slew of improving metrics, we’re adding Sovran Self Storage, Inc. (NYSE: SSS) as a DRIP to the Crow’s Nest portfolio at or below $95.00 per share.

That’s all for this month.

As always, please send along any questions you may have for next week’s “Message in a Bottle” at customerservice@angelpub.com.

Also, aside from the Cannabis Investing Symposium, I am also giving a solo presentation at the San Francisco Money Show. My talk is entitled:

Dividend Aristocrats: Or How I Learned to Stop Worrying and Let My Money Make Itself

Trying to time the market is a fool’s errand. The only way to compound your money

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safely, effectively and stress-free is to buy dividend aristocrats and plug them into a dividend reinvestment program…

You are all familiar with the material by now, but if you’d like to hear it straight from the horse’s mouth (and can’t make it to San Francisco this week), you can watch the presentation live via the web by registering here.

My talk is on Friday, July 17 at 8:00 am - 8:45 am, Pacific Standard Time. I hope you can tune in!

Godspeed,

Jimmy MengelInvestment Director, The Crow’s Nest

The Crow’s Nest, Outsider Club LLC Copyright © 2015, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. The Crow’s Nest or Outsider Club LLC does not provide

individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after

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