Monday, 19 March 2018

Comparing Newstrike to Namaste Warrants

Since our article "Cannabis is on the Rise Again" and again with "Two Cheap Warrant Plays In Canada", we introduced our readers to Newstrike Resources Warrants (HIP.WT.CN) trading in Canada. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 499 followers despite not giving out a lot of alerts, a fact that we think is indicative of a diligent and prudent stock picking history. If you would like to share this blog, make sure to use the URL "" as certain spam filters on social media don't let you post addresses.

Newstrike is a popular and volatile weed play with a 52-week high of $3.30 and low $0.265 on the Toronto Venture Exchange. HIP.WT was part of a bought deal financing that the company completed a couple of weeks ago. The strike price is at $1.75 and the warrants expire on February 16, 2020. The warrants have an acceleration clause where the company has the option to move up the expiry to as soon as 15 days after notice if the stock price trades above $2.60 for ten consecutive days. This is not really much of a worry at this point, because if the stock does reach that high, the warrants will be intrinsically worth $0.85 and everyone buying now will be very happy.

The warrants finally moved up a bit today, closing at $0.165 even though the stock stayed flat at $1.27. We have explained the advantages of buying the warrants already, but we think the value proposition is most clearly laid out when comparing the Newstrike Resources Warrants to Namaste Technologies (N.CN) and its warrants (N.WT.CN). N.WT came out 11 days after HIP.WT and also have a two year expiry date. The Namaste warrants have an exercise price of $3.15 and an acceleration clause similar to the HIP warrants except at $6.00. Namaste has had a $4.40 52-week high and a $0.175 52-week low trading in Canada. It closed Monday at $2.31 with a $628 million market cap. At $1.27, HIP has a $613 million market cap.

So the HIP.WT and N.WT are very similar in terms of having out-of-the-money strike prices, acceleration clauses and they have expiry dates within two weeks of each other. Namaste and Newstrike are in similar industries with similar volatility on the stocks and are very close in market cap. That makes N.WT a near perfect comparable to HIP.WT. N.WT closed at $0.49 and HIP.WT closed at $0.165, so how does their relative values compare at these prices?

Here is an options calculator chart from CBOE, first with HIP.WT parameters and then N.WT parameters:

With the price of HIP at $1.27, strike price of the warrants at $1.75 and days to expiration of 698, HIP.WT's value is $0.5641 assuming a 100% volatility. With the price of N at $2.31, strike price of the warrants at $3.15 and days to expiration of 709, N.WT's value is $1.0413 assuming a 100% volatility. Now both warrants are undervalued assuming a 100% volatility and we have discussed in previous articles why we think 100% volatility is a reasonable assumption. But even if you don't think that, HIP.WT is undeniably undervalued when compared to N.WT. At $0.165, HIP.WT implies a volatility of 40.92% on HIP. At $0.49, N.WT implies a volatility of 54.84% on N. This is the valuation for HIP.WT when using the same volatility implied on Namaste based on the price of the warrants:

This CBOE chart shows that at a volatility of 54.84%, HIP.WT is worth $0.262, 59% higher than where the warrants trade today. Considering the hot weed industry, the terms of the warrants and how cheap they are compared to similar securities like N.WT and long-dated WEED call options, HIP.WT is a steal. If you are bullish on HIP specifically and the weed industry in general, these warrants are definitely something to take a look at.

Disclosure: We are long stocks listed in this report.

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