I hope you are as psyched about this cannabis content that we have coming at you on this podcast so far in 2022.
He runs a marketplace service there along with his other articles and other topics aside from cannabis.
He’s joined today by Jason Powers, who some of you may know from other cannabis podcasts.
But perhaps in honor of President’s Day Week in the United States of America, we bring to you this conversation about the intersection of politics and cannabis investing.
What about the fundamentals? What stocks are we liking, but really, this is a really in-depth conversation for cannabis investors to really ask some important questions.
Welcome to Seeking Alpha Julian, welcome back to the podcast, one of our favorite guests.
Julian, do you want to catch listeners up, kind of updating them, and maybe giving a brief intro for people that are new to you, maybe new to your marketplace service that you have on Seeking Alpha, if you want to describe that a little bit.
But upon coming across the cannabis sector, I’ve found valuations to be highly compelling, and the growth story to be highly attractive so much so that I started a marketplace service on Seeking Alpha called Cannabis Growth Portfolio.
But what ended up going through three, four or five years, getting really to see the meat and bones and how things are made, led to an understanding that I’ve noticed has been missing in a lot of these conversations.
And that’s not really just the nuance, but it’s really there’s a practical system that is working, you may think it’s not working, but there’s something that is happening in Washington that can be somewhat predicted somewhat analyzed and incorporated into investing, like an investing thesis.
So, where we are now in the beginning of ’22 is I think I’ve got five posts, I promised the readers that I’ll continue to put them up as things move, but I found that doing podcast interviews also helps fill in the gaps.
Because I’d like to keep being as useful as I can to keep the conversation honest, I think that’s really important.
And I feel like that’s something that you have done a good job of in terms of being, I’ve really enjoyed being in – I know Jason because he’s been in communication with me just through the podcast, and has asked some great questions.
So, let me start there a little bit, because I want to talk a little bit that intersection of I mean, it’s an obvious intersection of politics and the cannabis industry, a very frustrating one as of late and for the most part in general.
You’re just trying simply to position your investments in a way that using information you have an angle of approach you have taken or just a thesis you’ve created, that says this is going to move in a way that is going to provide me with some alpha.
And so, when it comes to politics, that is simply one more bucket of information that you can use to put into your thesis.
And what I think has been most telling is that over the last year, we’ve seen states come online, we’ve seen New York, we’ve seen major movement, as well as a lot of federal conversations.
In many ways, we’re certainly further behind than we were one year ago today.
But I think the political side is mostly a question of the risk and the likelihood of that big picture when these become fully capitalized, fully supported by Banking Markets.
And I think he also mentioned in one of his Reddit posts that he even bought puts a couple months ago, I mean, so he’s done very well.
I mean, make no mistake if federal legalization happens, it kind of strengthens the story mainly because institutional capital will be able to come in.
So like, it’s very curious to see how when new states come online, the stocks are still not benefiting, because it seems like investors right now they only care about federal legalization, they think that is the one or the be all end all for cannabis stocks.
So, how do we rectify if Ohio and Pennsylvania come online this November? How do we look at a growing green map and growing revenues and all of these things happening? And like you said, Julian, the market isn’t responding to that.
I wonder if maybe there’s more going on there.
I mean, no, I’m not going to compare them to the bubble of valuation tech stocks that would – obviously that would be quite unfair.
When in reality, longer term, I expect the sentiment to be more in line with how investors treat tech stocks, mainly because digital tech stocks, it’s one of the more attractive long-term stories that you could find.
But when you look at how tech stocks trade, a lot of tech stocks, they don’t have profits, even though but it’s very clear that they will have profits in the future, just based on their high gross margins, their operating leverage, it’s very clear that they’re over investing in growth.
But nonetheless, Wall Street tends to value these tech stocks not based on current lack of profits, but they tend to value them based on what they believe the long-term profit margins will be.
I think when I looked at the fintwit universe of price targets, it does seem like a lot of investors, they are looking to sell after maybe a 100% or 200% move upward.
And cannabis stocks, I think, have one of the more attractive growth stories, just because I mean, this is a whole economy coming online.
So, if you assume like a 40% growth rate will lead to a 20x price sales multiple, I mean, you just think about the long-term growth projections for these cannabis stocks.
So, I mean that’s just kind of how I think about why that rerating should happen once institutional capital coming in.
Institutions have had access to invest in the Canadian names for many years, and to represent a really good indication of what we could expect when the U.S.
But even at the current valuations, they’re trading very richly based on the low growth, they have very minimal growth, they have no profits.
We’ve got sort of – just sort of a full breadth of how this one particular product really can be hundreds and hit many, many different markets, is that unfolding sort of like, how Apple not a car company, Tesla is a tech company.
But I think in terms of growth, I mean, we just think about how in the near term, we’re going to see so much growth just from states coming online.
You’re just going to see growth from even where states have already come online, there’s that large illicit market that the legal market will continue taking market share from, that’s big growth.
And I mean, I like a lot of companies I’m not trying to say only about Trulieve, but Trulieve is generating a ton of profits, while only addressing 3% of the population.
So, upon when recreational sales began in Florida, it’s basically their total addressable market just increased to 6x overnight.
But the longer-term growth story here is where the average person starts using cannabis, where the person who’s not so open to cannabis right now I mean, I know plenty of people who as long as cannabis is illegal on the federal level, they’re not even going to consider thinking about cannabis.
And I was just looking at their charts virtually flat from the late ’90s until the late 2010s or the 2000s rather.
And so, when I think of the industry and now a lot of the people that I’m writing for people who think it’s going to happen tomorrow, it being federal legalization or SAFE banking.
And I think that’s really important, because it’s everyone you always hear this thing about all cannabis will be dead money until SAFE passes, or cannabis will be dead money until institutional capital comes in.
Like, if you were like trading near-term or kind of maybe sell a subscription service about market timing, yeah, you’re going to be really worried about dead money because you have this requirement that you need to make money now.
But if we have to wait six years to make the optimal returns, we could have made in those six years, then I think it makes sense to invest now even right.
I mean, I think you’re mentioning six years, maybe it’s like it might take that long or even longer for like SAFE or some kind of legalization to happen.
I mean, you’re already seeing that, where new funds are happening, where a new fund will get started up that doesn’t, they intentionally don’t write in some mandates saying they don’t invest in cannabis stocks that so like, new funds are able to invest in a sector.
So, I definitely think while I understand why some might be afraid that the stocks won’t do anything until they got a ticket and happens.
This is very similar to how, I don’t know if any of you remember Netflix , like 20 years ago, if you tried using it.
So, I view cannabis as being like that, where, because I could see it entering 50% 60% of households over the long term, I’m willing to overlook the fact that legalization might take some time, or I’m willing to overlook that.
Whereas the illicit market, I don’t see the illicit market losing grounds until normalization happens when the average person wants to consume cannabis.
But the other piece of this and if you, I really appreciate this conversation, because we’re taking a pause and not getting so anxious and worried about politics the way normally people talk about it day by day.
But if you listen to different not just politicians, but leaders, some refer to some of the Trulieve’s and the Green Thumb’s as the big boys, especially when you get more deeply into social justice before you even think about the MillerCoors, the Anheuser-Busch or the pharmaceutical companies that might want to be getting into this, you spoke very thoughtfully about the plant itself being not just incredibly safe, but the efficacious qualities of it.
I guess one thing that I’m trying to incorporate into both my own and anyone’s portfolio is the risk of what if 20 years from now, like you’re talking about Netflix, Netflix is going up against Disney Plus and Paramount, shouldn’t be buzz marketing on these, but all of these different companies they go against for streaming content.
JL: Yeah, I mean, I, of course, my view of the politics is not going to be have the same expertise as you do.
I don’t really see that happening in the near term or medium term or and I think it’s reasonable to assume that may not happen for a very long time, just because historically, the federal government tends to not do very much in the United States, it tends to be more of a state-by-state kind of, they determine what they want to do.
It tends to be more, a Green Thumb might be hurt, if Illinois suddenly says, Oh, we’re just going to become an unlimited licensed state and allow everyone to open a store.
JP: So, the risk that I think with politics is I do think quite a bit about all of these different levers of power yes, the states – but yes, the federal government, because when I think about well, so you mentioned – I mentioned some puts I want to be transparent, so yes, I used a put strategy into September, October, and it did pan out pretty well.
But I think the volatility and the direction of where these stocks will go and each of these, right, so if you’re looking at smaller Tier 3 type organizations and you have a different, I would expect you would have a different approach and sort of estimation of its of why you’re invested in that company versus say, a Trulieve.
And so, I think what people need to be really flexible with is watching the politics not just for legalization, but watching all I mean, I guess what I’m thinking is a lot of people talk about interstate commerce.
And I think all of these are on the table, because there will be a good time, my opinion, there will be a good time to buy Curaleaf and a time to sell Curaleaf and you’ll be making more or less money.
So, I know, people say you always need to know your why, but I think we’ve seen at least in the broader investor group, people have diluted that too.
It could be that the next Senate Majority Leader four years from now, it’s from California, and they say, California has got it figured out.
It’s incredible, really, truly incredible to see how broad and how many different voices have come into the conversation, everything from things like the more accurate expungement and executive order conversations to I mean, the Senate Majority Leader putting together a comprehensive bill.
But when you start to think about the players and the immediate sort of pieces on the board, you get lost in what I think is the bigger picture.
And the bigger picture of this capital market society unlike the Canadian society, I think, protection of the big players, and I think the larger industry interests of pharmaceuticals and big, big CPG companies has an incredibly powerful arm.
And so, when I think of things like the craft brew industry sort of being sucked up into buy and large two different groups, the Tier 1s which are the big boys who own a lot of them, and then these extremely hyper local ones.
I think that’s largely because again, even though I agree with you, Julian, that there’s really an incredible breadth of what can be possible with this plant and with this particular product, I think it will probably be most easily understood by most Americans, by most people as a product in line with alcohol and tobacco and then pharmaceutical versions.
But at the end of the day, I think that it’s less likely that a Green Thumb is going to be providing products that I get at a CVS, at a grocery store, and also at the local liquor store from all three different tranches.
So, zoomed out thinking that way, thinking about the fact that there is not just a Schumer bill in 2022, but there will be a Senator X bill in ’23 and Senator Y bill in ’25 and new presidents and new people running the show, I think there’s a lot more regulatory environment in front of us that we can’t even begin to really see.
I think that’s a really good example of, I don’t think history has changed in regards to being able to act quickly on the politics.
Yeah, so I guess, I could definitely see how kind of trading it based on the near-term political developments I mean, it’s clearly been very profitable over the past few years.
There are a lot of names and a lot of leaders that are no longer in some in business and several are no longer the leaders or they’ve been absorbed by companies that were maybe behind in some metrics or some sort of ways of thinking of things at the time when they were operating more strongly.
I like to think of it more in the space sort of consumer space, hospitality sort of industry, which is 30, 40 years from now, I think we’re all excited to see what that will look like.
And if you or you can trade it, I guess, and if you think of a company that can provide very wealthy people with five minutes and limited outer space as something to invest in, I think you probably five years from now will be disappointed.
It’s that at the end of the day, the product that had the right tools at the right time and sort of struck a chord with the right consumers would win.
And so, because of that, it’s the sifting sands underneath investors that I somehow am agreeing and disagreeing with Julian at the same time, because he’s exactly right that there’s incredible horizon of breadth of opportunity.
It’s just harder to plant money in some of these, no pun intended, with a long-term growth strategy in my opinion, because so-so much of this is based on regulation.
I’d love to – I’d welcome anyone who’s involved, who has political experience or to really get involved with the long-term conversation because too many people are shouting about something happening six days from now.
RS: I agree with that.
So, we sort of have a little data on this, which is if you look at last November, when Representative Mace put out her bill, we saw this almost just sort of parabolic increase right.
Volume is a trickier thing to really figure out.
But it is fairly funny that that it took such a beating in the market for people to realize that 50 votes plus a tiebreaker vice president is not really a majority.
But the last thing I’ll say is, and this is about responsibility with power, if you are someone who has a voice in this world and if someone who was listened to, it’s not enough just to say I’m going to put out my thoughts and then end my thoughts with but you do you.
So, when I’m talking about, when Senator Schumer puts out that CAOA will be coming out in April, that’s his guidepost at this moment, we know that the COMPETES Act amendment is done, it’s done.
And I’ve got to say, if you want to work across aisles, or you want to work across chambers in Washington, the last thing you want to do is make it more difficult for your own party to move legislation.
And I think there are some people who are very good, like leaders in the space who have a lot to offer, who need to really, I think, defer and slow down the conversation around the political side, because there really are very few people who get that.
There’s definitely seem to be a lot of people, a lot of investors who are definitely focusing way too much on kind of what could potentially happen in the near-term in like a perfect scenario, when in reality, it’s maybe not so realistic to be counting on like any of these pills to immediately lead to any big reform.
I think, in regards to also the commentary about not knowing who the winners will be tomorrow, kind of like maybe it will be dominated by some operator that we didn’t know, or maybe some of the losers of today will be the winners tomorrow, the winners of today will be the losers of tomorrow.
I mean, maybe just because a company is generating very high profit margins may not mean that they will always have the top share profit margins in the future.
Like for example, I mean, when you just kind of do a Google Maps look at all of their dispensaries I mean, they’re everywhere in Florida, even in the places with very low population density Trulieve is there.
So, you’re potentially looking at a situation where Trulieve is able to exert and maintain its market share for so long just because competitors don’t want to compete with them in the non-populated areas.
And when I see a strategy like that, I mean, you could tell that this is a company that has obviously thought about the long-term future about what happens when competition comes and where they want to maintain their profit margins.
And then you could kind of judge which companies are clearly positioning themselves for a mature market? I think those are going to be the ones that will have less of a shock, less of a shock later on, I mean when bargains compress and their revenues decline.
Tilray, yeah I think it’s like 60% of their revenues comes from their, they call it a distribution business in Europe where they’re, it’s like a pharmacy business.
In a world where, because when we think about wine and liquor and beer, while some people swear by their medical properties, obviously it’s very different.
I am not an expert in this, but my understanding is really that there’s a whole basket of things that can be explored.
If also regulatory environment were to allow for the sale of these things in whatever the state determined so maybe it’s restricted through their liquor stores, their liquor agencies.
So, it’s being grown by growers which could include yes, Curaleaf growers, Trulieve growers, et cetera but also now new fields literally and figuratively of growers.
Oh, my I do think those kinds of medications will probably be more for the serious, more serious conditions.
But in regards to, when cannabis becomes sold like as an average form will ever be in a liquor store, I mean, we got to remember that’s for about to happen, like for cannabis to be sold as a beverage any like, your seminal 11, or something like that I mean, the views on cannabis are going to have to progress so rapidly and by so much before that happens, right.
It’s going to have to be pure normalization, where for the average person is totally for cannabis, before you get the politicians being willing to open it up completely like that.
By that time, a lot of these MSOs, especially Trulieve, they’re going to have exerted such dominance, they’re going to have so much market share so much name brand, that I mean, they might be the wholesale suppliers to those, so perhaps the margins will be down a little bit.
But it feels like you’re talking about Apple or Google or Netflix in the 2090s, which I think is very something that we all need to remind ourselves again, because I think that’s true.
And so, I think that is it’s a great reminder that whether you’re putting $500 aside today, or $50,000 aside today, this is early days still.
It’s funny that you said that because when – I mean throughout this conversation, but pointedly as we’re coming to the end I was thinking to myself, like it’s such a privilege to have this podcast because I get to talk to so many thoughtful, smart, articulate people.
And that’s pretty much I feel like what I’ve done today, and I feel like very happy to be a part of this, or just kind of presenting this conversation.
Is there something specific that you feel like for either one of you sets you off course in some way or makes you question the course? Do you feel like something happening may do that? And within that, Julian, I would ask you kind of I mean, you said how you describe how you look for the top players in the space.
And the main thing that would concern me would be if any developments happen such that we wouldn’t be able to reach out long-term.
I think if that something has – something terrible like that were to happen, that would definitely make me very concerned.
RS: Sure.
So, I think, especially and this is also important to discuss in regards to sentiment, when the stocks were really high, like just 12 months ago, it’s really easy to get really optimistic think legalization is going to happen really quickly.
So, you start – like, the investors start questioning their thesis, they started viewing the draconian scenarios of like, complete margin compression of interstate commerce.
So, in regards to answer your question, I think you don’t have to look so far to find value.
They recently entered New York, which means they will have New Jersey, New York, and they’re going to have Minnesota, they’re going to have so many states that would provide huge catalyst real revenue growth over the next one year, two year, five years.
What I mean is like they’ve already positioned themselves so that you’re going to get large growth in the near term, large growth in the medium term, and sustained growth over the long term.
So, it’s an active portfolio in that sense, but it’s sort of a slower active portfolio than some investors who really almost every other day or moving around, at least the cannabis one is.
I do want to do a little more of a zoomed-out approach to the political landscape, talk about the parties in the next six years, look at the last maybe 10 years.
But I’ve been doing this all this conversation, I’ve been looking up some of the big names and I figured Netflix was appropriate considering we talked about it.
But what it became as a not only mature company and some would argue it’s maybe just becoming truly mature, and what investors or analysts might have thought it would become, maybe people thought there’d be a Netflix box that you’d have at your house in 2005, et cetera.
And I guess my biggest concern there would be both for the average investor, do they understand that and appreciate that truly? Does anyone know what it’s like to hold something for five years? And certainly, if you’re on Twitter getting your information, that can’t be true of you, because you’re on it every day saying good or bad things.
If we have this huge, if retail base is still so related to the float and so related to the price action, then how much of a diversion between the sentiment of the average investor, the small-scale investor and the company’s vitality, just so you’re saying, Julian, at some point, the debt markets are increasingly attractive to these people or to these companies.
At some point, you could see privatization.
So, in a world where an institutional investor could pre SAFE banking, find a legal back way to invest in the stocks, perhaps something like the swaps at MSOS.
So how can we shore up this industry, if it takes five more years? There’s a lot of questions there.
But I definitely think that I mean, even though, Jason, you’ve described yourself as a trader, I think your analysis and the way you look at it, I think it’s valuable, very crucial for anyone thinking about it long term and definitely a warning to the people trading it short term on a – with a bullish, like heavily bullish type thing.
Is that – we shouldn’t be afraid to ask questions even when we are bullish, even when we are investing longer than a year, maybe we’re invested five years, maybe we think longer term.
And until next time, Jason and Julian, I so appreciate this thoughtful and articulate conversation.
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