We will begin this article by asking a few key questions that every investor should be considering themselves before committing to any long-term investment in the shares of New Age Beverages Corp. (NBEV).
First, could it be possible that NBEV is showing all of the classic warning signs of a “blow-off top”?
Even a Maxim Group analyst (who, in the past, has been an NBEV Bull) has downgraded his rating on NBEV from “Buy” to “Hold” after seeing the recent euphoria surrounding the company’s share price. Back in August, after posting Q2 financial results, the Maxim analyst, Anthony Vendetti, lowered his price target on NBEV from $5.00 to $3.00. The stock has recently tripled form that level.
Secondly, will the apparent refusal to acknowledge that a very sudden, unusual and dramatic increase in valuation (over just a 5-day trading period), which is typically unsustainable, blind investors to taking an objective view of NBEV shares.
Third, is this just another example of investors suffering from “Ostrich Syndrome” by refusing to apply the long-standing principals of fundamental valuation, technical analysis and sound money management; rather choosing instead to follow the siren song of the Cassandras promoting the allure of a “new paradigm” for the growing (no pun intended) cannabis-infused beverage culture?
This past week saw an absolute headlong rush into stocks even remotely associated with the CBD/Cannabis story, after Coca-Cola indicated potential interest in developing drinks that would be infused with CBDs.
One micro-cap stock that literally went parabolic in price was New Age Beverages (NBEV), located here in the Metro-Denver area where we live. We have been followers of New Age Beverages for some time now and have successfully traded shares in the past as the stock price experienced ebbs and flows in the market.
The company recently did a financing deal back in August at a price of $1.28 a share. So why would a stock like (NBEV) suddenly rise to the $10.00 level; becoming worth an obscene amount in terms of a fundamental valuation in roughly a two-month period?
The answer is plain and simple: Naive investors are attempting to profit from the momentum created by the Coca-Cola news of interest in the CBD space.
Now don’t get us wrong, we believe that the cannabis industry will experience years of growth ahead, but to front-load all of those years of growth into a 5-day period, based solely on a rumor, is a recipe for financial disaster.
It seems that the prevailing opinion among many New Age Beverage (NBEV) investors is that on October 8th, when the company unveils its new line of CBD-infused beverages at the North American Convenience Store show (NACS) to be held at the Las Vegas Convention Center, it will be off to the races, in terms of the marketing these new products.
Before investors get too far ahead with their enthusiasm, we should point out that some very relevant steps that may need to be completed before a full-blown launch can take place.
This industry is in its infancy and there are many potentials issues that could arise, such as severe allergic reactions to CBDs, (just look at the lawsuits settled by Monster over the extreme amount of caffeine and sugar in their drinks).
Regulation could become another potential issue moving forward, with possible regulation by states, the federal government and agencies such as the FDA.
Just because something becomes legal, does not mean that it will be exempt from regulation and regulatory red tape.
The problem for investors is that if there are potential Federal and State legal requirements, they will likely need to be vetted and finalized before moving forward in any big way with the marketing and advertising of these new CBD-infused beverages.
The FDA (cannabis is a drug) may also want to have input in this area, and could possibly push for legislative powers which could force additional requirements be met pertaining safety and efficacy of these products.
If you have any doubts about the potential for delays based on these factors we would point you to a situation that arose some years ago with the marketing and advertising of calorie-burning beverages.
We know firsthand about this, from our experience as investors in Celsius Holdings, Inc., (CELH) a beverage maker that developed the first thermogenic, or calorie-burning beverage.
This episode showed just how important that being able to substantiate marketing and advertising claims with clinical results based on scientific proof can be.
The short version of the story is that Coca-Cola (KO) had developed a product in conjunction with Nestle, S.A. (OTCPK:NSRGY) which claimed to have similar calorie-burning properties. The problem was that those claims could not be verified or proven.
The result from these false claims in the marketing of Enviga was that KO and NSRGY they were sued by 27 State Attorney generals. In the end, the cases were settled and the Enviga product was pulled from retailer’s shelves.
The Center For Science In The Public Interest also decided to weigh in on the issue by filing a lawsuit against both Coke and Nestle.
In light of this past faux-pas by two corporate giants, we doubt that ant major beverage company will rush into the CBD market without having made sure that all their ‘T’s are crossed and their ‘I’s dotted.
If anything the bar has been raised for making advertising and marketing claims, not lowered. We believe this to be especially true for the marketing on CBD-based beverages.
Cannabis drinks will likely have to go through a rigorous testing process for safety, tolerability and efficacy before we see acceptance along with integration into the marketplace.
We offer the following quote from a recent press release:
…..”the U.S. Drug Enforcement Administration (DEA) has granted approval to import a cannabinoid study drug into the United States from Canada for a clinical trial at the University of California San Diego (UC San Diego) Center for Medicinal Cannabis Research (CMCR) examining its safety, tolerability and efficacy”…..
So what does all of this mean for CBD-based beverage investors? In short, it means the possibility exists for potential delays in the mass-marketing of these new beverage products.
We’re not sure exactly what these hurdles which may need to be overcome will be, but we would not be surprised to learn that there will be requirements to substantiate any marketing claims made by CBD beverage producers from organizations like CSPI and the National Advertising Division (NDA) of The Better Business Bureau (BBB).
If this is the case, the revenues, potential profits through the marketing of CBD-based beverages could be years out. Unfortunately, as we pointed out earlier, investors have crammed years of sales, revenues and profits into a week’s worth of valuation and stock prices for NBEV.
This looks like a bubble, and as with all past bubbles it will most likely pop and end very badly.
Investors who want to invest in NBEV shares for the long-haul should consider deferring purchases until the recent hype subsides and wait for the price to reach levels more in line with analyst expectations and the underlying fundamentals.
In breaking news just this morning, New Age Beverages has indicated its intention to sell additional shares through an At The Market Offering Agreement with Roth Capital Partners LLC., pursuant to which the Company may offer and sell from time to time up to an aggregate of $50M shares of the Company’s common stock.
The Company intends to use the net proceeds from this offering for investing in its portfolio of CBD-infused beverages and for general working capital purposes.
Just one more reason why investors may want to be patient when considering purchasing shares in New Age Beverage Corp.
Disclosure: I am/we are short $NBEV CALLS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We hold a long position in the shares of CELH. We may close out our position in CELH shares at any time without prior notice. We are not responsible to update either this article or our opinion on NBEV and CELH. We are not in the business of giving advice and ask that readers refrain from asking for it. Please do your own due diligence before investing. We are not responsible for any actions that you take based on the opinions that we express on SA.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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