How can you not be bullish on a sector that’s experiencing:
ETF closings (THCX, POTX, LGLZ, FLWR, PSDN)
Investment banks stopping coverage (Jefferies)
Capital markets being tight
Buybacks (Green Thumb, Verano, Turning Point, TerrAscend)
Bankruptcies
Debt restructurings due to a prolonged downturn
Capacity being removed
Shuttering of operations, pulling out of markets
CEO replacements (Rubicon Organics, Decibel, Canopy, Vireo, Ascend Wellness, Ayr Wellness, Cannabist, Curaleaf etc)
Net nets (Cronos)
Commodity below marginal cost of production
The funny thing about cliches is that they’re concentrated truths that are so commonly repeated that they’re often ignored. Yes, you heard that right, the phrases that we use which depict the truth of reality the most are also the most ignored.
Everybody has seen this chart.
Yet, practically everybody ignores this chart. They take the insider view instead of the base rate view. They get caught up in their own feelings rather than recognizing the objectivity of matters.
Let me ask you this: If you were to buy, where would you buy in that chart? The answer is during Anger and Depression.
Ok, so how is this any different?
What happened to “Buy when there’s blood in the street's”? Oh, that’s right, people only adhere to such things in abstraction only.
I’ve shared the below chart before in Cannabis and Capital Returns.
Might people be undershooting? I’d say so. For instance, people are talking just as much trash on Canopy as they were a year ago, yet Canopy is improving, at least in some aspects. And that holds true for other Canadian names too. But if there’s one thing that's considered more down and out than the US cannabis industry it’s the Canadian industry. Why? People are nationalistic and ethnocentric i.e. foolish i.e. humans being humans.
A helpful analog and picture is the commodity mining clock.
I’d say we’re at 3 or 4 o’clock. We must remember that cannabis started with a Boom. Meaning, that we’re now slowly crawling our way out of the crash phase. Congratulations, many of you have experienced your first commodity cycle.
To keep the mining analogy going, at the moment, companies like Grown Rogue are experiencing the Orphan stage in the Lassande curve.
It’s during these times that you choose your players.
They say that the opposite of love is apathy. Most people are treating the cannabis space as though its stupidness is so self evident and obvious that it doesn’t even merit a balk or eye roll.
Even the value investing, commodity, down & out, contrarians won’t touch this.
Cannabis investing is a unique opportunity. A federally illegal industry that predominantly trades on the OTC. They’re overlooked companies in an overlooked sector in an overlooked OTC market. As things develop (God only knows the timeline) this industry will become more recognized. This is an entire sector that’s largely being ignored. It’s not like it’s a LEE, SURG, TSQ etc, in which a special situation, turn around, is occurring within a specific idiosyncratic company. This is an entire sector I’m talking about. I will note that more eyes are seemingly noticing things. It is slowly popping up in my Twitter feed by non-cannabis investors.
Not only am I pursuing my typical contrarian, down and out, out of favor, event driven, inflection investing style but I’m looking for the Costco to my Charlie Munger. And I can’t help but think that such a thing might be a cannabis stock… and St. Joe of course. With so much uncertainty, whether that be interstate commerce or intercountry commerce, it’s tough to know who’ll win.
However, it seems to me that you place your bets on those who’ve demonstrated a track record of competency. Or at least don’t buy the morons. Of course the hazard is that a lot of incompetent people will misjudge what competency looks like and thus will misallocate capital to incompetent operators.
Political sentiment is all wishy-washy or in the trash. And political sentiment is a proxy for the cannabis industry. This means that fundamentals at the business level are largely ignored and overlooked. This disconnect is creating an opportunity in my eyes.
I invite you to look at most newsletters or podcasts around the cannabis space. They talk first and foremost about whatever political/macro events there are and then they touch on more local level events and then they’ll end things with a brief mention of some company specific idiosyncratic event. Have you seen any mention of Acreage’s debt refinancing in your feed? No? But I’m sure you’ve seen dozens of takes and interpretations of Trump's Truth Media post.
At best, I’ve seen a sentence or two mentioned about Jushi or Gold Flora’s debt refinancing. It seemingly is a mere passive talking point to offer a pseudo degree of professionalism to their news coverage. Plus when you’re a victim of audience capture, you pander to the people. As such, they’re more than happy to pontificate and bemoan about politics for half an hour and to discuss the implications of whatever political event they’re discussing.
Just imagine if these people alternatively treated political events like they do corporate level events.
A politician said A talking point. The end.
Isn’t that how they treat companies in large part? A company refinanced A debt. The end.
But that’s not what they do at all. They elaborate and expound upon it. They discuss the implications, overarching thematic tie-ins and tangential associations. Of course, they could do the same with corporate level events but they don’t.
Outsiders view cannabis as a political event but they have the excuse of not knowing any better. Which leads me to wonder what the sector participants' malfunction is. What’s their excuse for acting this way?
I’ve said it before and I’ll say it again. 2023 was the bottom in this sector. It marked the bottom in my eyes, in aggregate.
People… we’re in a basing formation. This is a cyclical trough we’re experiencing. We’re at the market bottom. Sure, if S3 doesn’t happen we’ll take a stair step lower and perhaps will hit new all time lows but that doesn’t invalidate my observations.
As the stocks make new lows, people will tell me that things didn’t bottom in 2023. Of course they’ll miss the fact that a stock isn’t a company let alone an entire market. And that’s my whole point. Stocks are things to manufacture indignation about, politics are a thing to get emotionally riled up about and actual companies are merely a second thought. They only seemingly matter in the sense of inviting the CEO onto your media outlet to ask softball questions to get views. I’ll stop there.
The broader ETFs tracking this market have been basing for roughly 18 months now.
Inflection investing is all about catching the inflection which comes from a catalyst and getting in before that news hits. For instance, gross profit margins seemed to have bottomed in Sep 2023.
And some of that’s translated to EBITDA margins improving, too.
Return on Capital is ticking up as well.
Even without the political catalysts, these companies are righting the ship.
Although the loose capital is long gone, that doesn’t mean that companies aren’t able to prolong their demise get a second chance. So on one hand, companies are able to access money (bullish) yet the terms of those loans might not be the best (bearish?).
I would recommend reading the Viridian Capital Advisors Chart of the Week:
How about consolidation in the industry?
According to Stratcann:
Of course that’s the Canadian market, what about the US? According to mjbizdaily:
With this sort of desperation from operators who can’t turn a profit let alone repay their debts, it’s no wonder that cannabis prices are being suppressed in certain markets. Garbage fire sale prices aren’t sustainable, though. But inventories do take time to work through, not days or weeks but months and quarters.
So-called government missteps are forcing and accelerating consolidation. I’ve been of the belief that the longer those missteps continue the better it will be for the names I own. The risk to me, at least in the interim, is schedule 3 passing and interstate commerce happening. If you’re not of that mind then how can you be bearish?
Florida ballot, Trump jumping on the bandwagon, the S3 process moving forward with the Dec 2 ALJ hearing, fundamentals improving in many names etc. It’s largely been positive developments all year long, with a lot of unanswered questions being answered or more detail being provided and yet people still aren’t satisfied.
With everything I’ve covered today, I don’t know how you’re not at least taking a closer look. I don’t know how commodity investors aren’t taking a closer look. I don’t know how inflection investors aren’t taking a closer look. I don’t know why value investors aren’t taking a closer look. I don’t understand all the complaining.
To me, things are setting up positively. And I haven’t even hit on consumer trend changes.