Cannabis: The Macro, Meso & Micro

Mentally masturbating over abstract ideas doesn't help your P&L

If we as a community of investors required one another to have at a minimum a half-ass explanation for owning a stock, believe it or not, we’d be raising the baseline and standard on the whole. 

Most people can give you a 40,000 ft. view in narrative form as to why they own a stock. But what they lack is the ability to give you a ground level view and especially one involving numbers.

At the end of this piece I’ll demonstrate to you what a simple Macro, Meso & Micro thesis would be in regards to Trulieve. But before we get to that, it’s best to set some ground work. 

Most people concern themselves with abstract conceptualizations, patterns and general trends. That would be the Macro 40,000 foot view. But just as importantly, we need to understand those implications on the specific, idiosyncratic, individual, detailed, granular and localized level. This would be the micro level. 

MACRO, MESO & MICRO

What does this look like? Pertaining to the cannabis industry it might look like this:

Macro (broad abstract trend): Federal laws, regulations, policies, licensing, taxation, TAM projections, consumer preferences (alcohol/opioids versus cannabis), international & global implications, interstate commerce

Meso (intermediate level of amalgamated data which bridges the gap): State/city/municipality laws, supply chain (cultivation, procession, distribution, retail), regional markets, licenses, vertical integration, consumer preferences, medical versus recreational

Micro (idiosyncratic & specific): specific company, management team, specific markets, SKUs, KPIs, retail/wholesale focused, company specific performance metrics and valuations, business strategies, capital allocation, branding

So it goes from a low resolution, higher order abstract conceptualization (macro) and scales down to a higher resolution, company specific contextualized analysis (micro). 

It’s helpful to think of it as one lengthy continuum of due diligence.

Yet most conversations I hear are macro-centric. An inordinate amount of time is spent on the combinations and permutations of what might happen on the macro scale. For most, this leaves little time to focus on the smaller important details. 

They spend a disproportionate amount of time mentally masturbating and pontificating with little practical & pragmatic insight. It's largely just lofty ideas. The last half decade of failed prognostications should readily demonstrate this truth. 

They’ve made macro concerns the central key talking point and by doing so they’ve cleverly excused themselves from having to do any real detailed work. After all, why bother if everything is going to be determined by some key binary legislative issue. They’ve created a single point of failure or success for the cannabis industry. 

At the end of the day, either reform happens or it doesn’t and that will be the determining factor of the cannabis industry's success or failure along with any and all individual companies. At least that’s the contrived narrative and curated belief that they’ve created. 

That’s their line of logic. But it’s predicated on a false premise. Because the success or failure of any given cannabis company isn’t predicated on anticipated future legislative reform. Personally, I try not to incorporate cognitive errors such as “The Fallacy of Division” and “Hasty Generalizations” into my investing thesis. 

For instance, I don’t think that Green Thumb will go out of business if safe banking, rescheduling or federal legislation never happens. However, some companies will. It’s a case by case basis. In my opinion, the longer it takes for those things to occur, the better positioned Green Thumb will become. Matter of fact, as a GTI investor, I don’t want those things to occur. 

This idea of government reform being the key issue for many people reminded me of something I’ve written. Although the below excerpt pertained to a different topic it’s quite applicable here.

“You have a phrase (“reform is necessary for cannabis companies to succeed”) that’s then conceptualized as a problem that’s then conceptualized as a crisis. Then people parade themselves around as committed to that issue and deem themselves with higher moral virtue because of their allegiance to that superordinate idea. And now they can point to any piece of evidence (any financial metric or market dynamic) that indicates and supports their claim and that it’s not just true but an instant, imminent and immediate existential crisis. That now alleged crisis acts as a uni-dimensional governance over any conversation and everything you do.  All in reference to that singular frame and point of view. Numerous parties and members doing this results in global, universal governance (groupthink & herd mentality). And if you don’t put that issue at the top of your list then you’re immoral for not doing so and by extension are now part of the problem. 

But this all begs the question as to why the initial problem and adopted phrases are the key talking point. And what about other problems? What you realize is that it’s selected for you and it’s not a point of conversation to be had but is the topic de jure and anything which isn’t that topic is perceived as a threat and is you trying to sidetrack and derail the conversation of what’s considered above all else. You can’t have a conversation unless that issue is your conversation. 

It’s an uncontroversial, axiomatic, self evident and obvious first principle and it sets the precedent for everything else. It sets the stage for the main event which is the discussion. It’s considered an immutable point with extensions into everything. Considered from the outset as unignorable. It’s the prescript for all else. It’s with the crisis in mind that all things get addressed in relation to. Every prescription and proscription, every illness and cause will be viewed in the light of the crisis. 

You’ll find it’s often a specious pretext ( a reason given in justification of a course of action that is not the real reason). It’s not the goal, nor are the means carried out with the spirit of that goal in mind and it’s a rhetorical smoke in mirrors that gives them plausible deniability to their ulterior motives. But hey, you better play along if you know what’s good for you.”

MICRO DOESN’T MATTER TO MANY

It is my belief that you can choose good companies that will perform relatively better to a basket of industry peers with little to no knowledge of what’s going on with the macro themes. The macro themes are an afterthought and bonus to me, not a crucial contingency of my investing thesis. 

The statement, “If legislative reform happens then these stocks will go up”, is a reasonable inference and thesis. 

However people don’t stop there. They layer on how these stocks NEED legislative reform to go up. Take this for example: 

I guess Glass House can’t grow their revenue and margins with internally generated cash flow once they turn on Greenhouse 5? And as such, their stock can’t go higher although their cost of production is declining and the dollar value of pounds they sell is improving? Nope, guess not. 

I’ve personally received numerous messages along these lines and I’ve literally seen and heard hundreds. 

Here are but a few examples. 

For the sake of humanity I hope this next one is from a robot. I guess 10-Q and 10-K filings are just“noise”? LOL. 

This next one is something I plan on doing a short write up on at some point due to how atrocious of a statement it is. 

HOW DID WE GO FROM REFORM IS GOOD FOR POT STOCKS TO REFORM IS NECESSARY & NEEDED FOR POT STOCKS?

An obvious answer is that these companies have put themselves in a precarious position and are on life support and thus now need external intervention to save them. But duh. So instead, I’ll take a more Cupofcoffeecapital approach to this question. 

Things often start off innocently enough. 

Comments to the tune of, “If reform happens, pot stocks will go up” is known as affirming the antecedent. It’s a logical form of reasoning and is a reasonable starting point and hypothesis. It takes the form of an if-then conditional proposition. 

Original Statement: If A, then B. 

If reform happens, pot stocks will go up. 

1. If A, then B. 

2. A.

3. Therefore B. 

If reform happens (A), then pot stocks will go up (B).

Reform happens (A).

Therefore, pot stocks go up (B).

This is the correct form of Affirming the Antecedent: if reform happens, pot stocks will go up. 

So far, so good. 

But people can’t help but transform the initial logic into illogic. 

Transformation occurs in 3…2…1…

Inverse Statement: If not A, then not B. 

If reform doesn’t happen, then pot stocks won’t go up. 

1. If not A, then not B. 

2. Not A.

3. Therefore, not B. 

If reform doesn’t happen, (A), then pot stocks won’t go up (B). 

Reform doesn’t happen (A). 

Therefore, pot stocks won’t go up (B). 

This sort of reasoning leads to the  incorrect Affirming the Consequent: If pot stocks go up, then reform must have happened.

Right? After all, if reform doesn’t happen then these stocks are stuck in some sort of purgatory limbo. Isn’t that what people are saying? Isn’t that why it was suggested to me in the earlier shared comment that Glass House’s upside is capped without regulation improvement?

The Inverse statement makes it where reform is the only reason pot stocks can go up. The problem with the Inverse statement is that it’s said in an emotionally detached, bland, logical inference, if/then, cause & effect kind of fashion. It negatively frames matters in the light of their absence, not their presence. 

In other words, it’s not sexy. 

The final subtle yet necessary transformation occurs now. This creates an explicit, overt and direct statement. It positively frames things in an emphatic fashion. A sort of plea and call to action by stating an explicit requirement and prerequisite. It sets the groundwork for arousing emotion. 

Re-framing of the Inverse Statement: A needs to happen, then B. 

Reform needs to happen, then pot stocks will go up. 

Or,

If reform doesn’t happen, then these companies are screwed. 

We went from the Original Statement to the Inverse version of the original statement and we concluded with a heightened and escalated Re-Framing of the Inverse Statement. This is how we go from “reform would be good for pot stocks'' to “reform is necessary for pot stocks to go up.” reform went from being a nice bonus to a mandatory prerequisite. 

Although the reframed statement and inverse statements are equivalent in their internally structured reasoning they emphasize and state things differently.  

The reframed version emphasizes the importance of reform. And it’s in that emphasis that subtextual sentiment is expressed. EMOTIONS!

On the other hand, the inverse statement is more of a straightforward statement of fact via a logical implication and consequence in the form of a rational extrapolation. BORING BRAIN STUFF. 😞 

I’m well aware of the gravity of this sort of indictment and observation. After all, I’m accusing the vast swath of market participants and public commentators in this space of being emotionalist inverters of reality. 

This insidious slippage of reasoning occurs for a few reasons. 

1. People's predisposition to simplify matters even to the point of falsity. Remember it started by simply stating what a catalyst might be for pot stocks and it became an essential necessity and requirement for pot stocks to go up.

2. Feels over reals. The seeming necessity for humans to emphasize sentiment & emotionality. They can’t get enough of that stuff. This often manifests in the form of a rhetorical device known as antithesis. This is when you over emphasize one point and under emphasize another point in order to create contrast. This is what people do when they say, “I never get what I want” or, “small things don’t matter, big things matter.” It’s an exaggeration, distortion and inaccurate accounting of reality to express sentiment towards an idea. That is how you get to a binary extreme and reframed statement from what was once a valid inference and thesis. This is why reform must happen and other contributing variables that could improve the company's operations are reduced to nothing. It’s to create contrast. 

3. Macro is as far as they’ve taken matters. They’re hammers that treat everything like nails. It’s the limitations of their expertise that determines their speech patterns. Their macro focus causes them to not provide proper tribute to the micro. 

This is the arc of development: It starts with a macro thesis (which in and of itself is a partial and incomplete representation that excludes alternative contributing factors i.e. the micro) → People emotionalize and simplify what’s already an oversimplified thought → People steadily amplify and radicalize a simplified version of a simplified thesis → This is how you get statements like, “Without federal reform, cannabis stocks are doomed!”

The reason that I have a problem with this sort of faulty framing in regards to correlating the need for reform in order for cannabis stocks to appreciate in price is because it causes people to miss opportunities. As I noted earlier in the Glass House example, there are companies out there making incremental improvements to their business operations that will cause them to do well into the future. This is independent of any reform. 

Let's not forget too that it was the macro focus (micro blindness) that provided the rationale for buying stocks at 50x P/S. 

A reason for these peoples fixation on the macro thesis is that they don’t have anything else. A macro thesis is the easiest to adopt and feel like it’s the easiest to understand. It’s also the easiest to shift the goal posts on and engage in thesis creep. 

The point I’m trying to make is, why wouldn’t you buy companies that can do well based upon their internal merits and treat any macro reform as a bonus? You know, bottom-up versus top down. 

The answer, in part, is because that would require them to know something. And in order to know something they’d have to put in the work. And it’s seriously time consuming work.  

People. Are. Lazy. 

I’m asking for just a little arithmetic on the company specific level. Not too much, just a little. 

I already hear it, “But regulation does matter.”

I never said it didn’t. But buying individual companies with little knowledge of those companies is foolish. Of course, when your macro thesis is “If rescheduling happens then ___ stock is going to rocket ship emoji,” you seemingly need to know nothing other than whether reform is going to occur or not. We’ve seen how atrociously wrong the gurus of this sector have predicted over the last half decade so I’ll let you think about whether that’s a suitable investment strategy or not. 

Plus, it’s not helpful because inevitable doesn’t mean imminent. Ask any of the bagholders who are down 80% plus on their positions. This becomes, yet again, another simplistic & reductionistic modeling of the world. It looks like this, “If something is going to happen then you should just buy now and wait.” 

Yeah ok, just ask the Medmen shareholders how that’s going? 

What actually happens, more often than not, is that people don’t diamond hands their stocks but instead have their confidence dwindle over time. And since they have no underlying conviction in what they own because they don’t know its value because they never took the time to examine it then they end up selling it when the floating abstraction stock price falls. And it’s only in retrospect that the house of cards which was their thesis is revealed to them. 

TRULIEVE

I’m now going to provide you with a basic macro → meso → micro thesis example. 

It’s basic. It might be wrong. It might be wrong by a lot. But remember, you’re comparing it to no model at all, as that’s what most people have. 

Let's do this. 

Most of the figures I’ve seen in regards to 280E going away would reduce income tax expense by 50% to 60%. 

Most states that go from solely medical to also recreational increase sales by 2 -2.5 times. With Florida seeing a lot of tourists you could model Florida at being 3 times. Ok, let's say all this happens and gets set into place by 2026. What multiple are you paying for Trulieve today for 2026 numbers? 

Trulieve made $1.1B in 2023 with $151M in income tax expense. 

If Florida becomes recreational and they’re fully ramped up by 2026 then that means they’ll be making $4B in 2026. All else being equal their income taxes would quadruple and thus would be roughly $600M. 

If 280E goes away and they spend 50% less on income taxes that would give them an additional $300M. Since taxes are paid on profits, we could say that Trulieve doesn’t make a profit and that they might retain all $600M. 

Ok, so there you have it. Trulieve could be making $4.6B in revenue by 2026. With a current market cap of $2B you could say that it’s trading at 0.43x 2026 P/S as a consequence of them increasing sales by 300% due to Florida legalizing recreational use and tax reform occuring in the next 2 years. 

At a 2x P/S multiple then this will be a $40 stock in 2026. Thus it’s trading at a 75% discount to 2026 figures and has the potential to increase 4 fold i.e. 300%. 

Boom! And that’s why it’s cheap. 

There you have it. A basic rudimentary thesis that factors in the macro, meso & micro. 

IN CONCLUSION 

Most people are intellectually lethargic and personally incredulous.

What concerns me is how the vast majority of cannabis investors are unwilling or incapable of doing what I just did. It isn’t that what I did was remarkable, it's that most people are unremarkable in their due diligence and decision making process. 

People's ability to think has atrophied to such an extent that they can’t manage something so simple. Instead, they awkwardly stumble through the conversation… rudderless and sputtering. 

Most people will say that Trulieve is “incredibly cheap” because once the removal of 280E happens and Florida turns recreational the stock will go up “a lot”. That’s it. That’s the extent and detail of their thesis. I kid you not. It’s embarrassing. 

They have a sense that it’ll go up but they don’t know how much. They have an ill-defined, unrefined, rudimentary, cursory and ephemeral sense which they can’t articulate. Their understanding of reality is limited and incomplete. And why shouldn’t it be when all they have is a loosely put together macro thesis? 

Their understanding lacks clarity, intricacy and specificity and thus focuses on broader overarching ideas. It’s out of necessity not intention that they focus on the more obtuse ideas. They’ll post hoc rationalize matters by saying that they pride themselves on “Seeing the forest for the trees” or, “I try not to get bogged down in the minutiae of things” but that’s just cope & fallacy. However, it provides them plausible deniability and a rhetorical smokescreen for being lackadaisical and inept.