Today I’m joined by a very, very special guest, a face and a voice that you maybe haven’t heard on Industry Focus for quite some time, at least I haven’t since I’ve been hosting the Consumer Goods show; it is Motley Fool contributor, Keith Speights.
As listeners may be aware, in addition to the work that I do here on the podcast, I also moonlight as the advisor for our cannabis focus service here at the Fool and what people may be even less aware, actually maybe more aware of since you mostly work on the free side, you contributed a lot to fool.com articles.
But when I started paying attention to it, it was during this crazy kind of boom and bust cycle we saw in Canada in 2018 on the rumors that Canada was going to legalize and then the subsequent sell-off once legalization actually happened.
Speights: Yeah, you’re exactly right and a lot of it, Emily, the hype was just crazy before Canada’s magic date for when recreational marijuana was legalized.
So before we get into some of the fundamentals about cannabis I have to ask, what lessons do you think investors can learn from what we’ve seen happen in Canada as it applies to the cannabis industries.
I will give you an example, and this is one of those very low cap stocks that we will warn everyone about the risks with MedMen.
Both of these companies spent like crazy and ultimately had to raise a lot of additional capital through issuing new shares that caused dilution in the value of their existing shares.
It’s frustrating because the industry is so driven by retail investors and these retail investors do take financial media at its face value, which I think has really done investors wrong by focusing attention at the most over-hyped and over-pressed businesses.
I think it’s going to be a fun conversation, but I also think it’s important to acknowledge that the cannabis industry is still a challenging industry.
It’s an agricultural crop, so from that standpoint, yes, it is a commodity.
But I think this is an industry that should be viewed with the same lens as other consumer goods businesses because I think that’s the future of cannabis.
There’s limitations put on products’ abilities to have color, to have sweets or sugar in some provinces, anything that can be appealing, which I think has limited some level of differentiation in the products in Canada and the way that we don’t see in the U.S., at least not yet.
But like you said, in the United States, it has been more of a piecemeal approach and so you do have some states that have more restrictive guidelines and rules for their cannabis industry.
You’re never going to have a growth portfolio.” I think if you have personal or moral objections or you just aren’t interested, you can do fine by yourself, by never investing in cannabis.
There are plenty of investors who would want to stay away from cannabis just as they might want to stay away from tobacco stocks or other types of stocks.
I know that’s asking for a lot, but preferably even longer time horizon for these investments because it will take so long, not only for us to see big movement in terms of federal legalization, which would really open up the landscape for cannabis companies in the U.S., but also just time for competitive landscape to shake out after legalization.
has really been handcuffed by its limitation to banking services, and so this is a big story that comes on for 4/20 day.
Now that the Senate has presumably flipped Democratic, I think there is an assumption that the Senate will attempt to pass the SAFE Banking Act when it reaches its desk, but that’s never a guarantee, and it never a guarantee that even if that’s something the Senate would want to pass, that they will make it a priority over other pending legislation.
When you think about the cannabis industry, Keith, we always get questions about, “Well, how do I get started investing?” You’re telling me that all this high, all these excitements don’t trust what I read.
Speights: One alternative anyway is you don’t have to go with investing in a stock of a company that actually grows cannabis, there are ancillary stocks that you could buy that have ties with the cannabis industry in some way.
Of course, that picks and shovels phrase comes from the gold mining days when it was said that the folks making the most money weren’t the gold miners themselves, but those who were selling picks and shovels to the miners.
Picks and shovels, in my mind, are businesses that if the cannabis industry were to disappear tomorrow, well, their businesses would be more stable than a pure-play, they would also probably disappear.
There’s lots of ways that you can think about risk when setting up your exposure to the cannabis industry for people who want exposure, but don’t want the downside risk, I think ancillary plays a great place to go.
Look at their management teams. Unfortunately, Emily, they’ve been, I’m going to phrase this in as politically correct of way as I can, but there have been some characters who were less than exemplary, who’ve been attracted to the cannabis industry in some cases.
Look at all those things that you would look at with any stock when you’re looking at a cannabis stock.
I feel like whenever I talk about cannabis businesses, I say all those things you just said, but I never put it in the context of, this is the same thing that you look for when you buy any business.
The related party transactions are transactions that the company takes with executives or professionals that work within the company itself and a lot of times these related party transactions can be set up in a way where they reward management even if performance of the business is poor.
Speights: I love PayPal , which is one of the leading Canadian cannabis producers.
Then PayPal has actually invested a lot of money, I shouldn’t say invest, spend a lot of money lobbying the federal government to pass some banking reform.
Now it’s turned into this crazy growth story with Hawthorne projected to grow more than two times the rate of ScottsMiracle-Gro’s core business, which is already growing quickly as everybody started gardening during the pandemic.
Speights: Actually, Emily, I agree with you there, and if we segue to picks and shovels, ScottsMiracle-Gro was one of the top picks and shovels places that I really like right now for all of the reasons you just mentioned.
The question we always get, which is, OK, if and when the SAFE Banking Act changes, what happens to Innovative Industrial Properties? I love the fact that the management team has not only been really transparent with what they expect to happen, but their expectations have not changed since day one when they were asked about this question, which says to me that they are thinking really strongly about, OK, what the future looks like for this business.
One of the things that they have constantly said is, yeah, we expect their cap rate to compress, we’re not going to be able to get the same fees that we’re getting right now when competition in the market heats up.
Speights: One pure play that I really like right now is AYR Wellness and they used to be called, I guess, Ayr or Ayr Strategies, but they changed their name.
Flippen: I love that, and when you first said the company name, I thought I didn’t recognize it because I’ve been calling it AYR Wellness.
Speights: Actually, I’m going to be honest here, Emily, I had called it AYR because their previous name had caps, AYR.
Flippen: Well, I’d say that you save me some embarrassment, but I’ve managed to really put my foot in my mouth as a cannabis analyst now on this podcast by admitting that I hadn’t even heard the name spoken yet before investing in it.
The first one is, can they execute on their strategy and financial performance when they attempt to move outside of Florida? Do I trust management, in particular, management’s compensation structure? Each of those things, I think, are still big question marks, and going back to related party transactions, I think Trulieve is one of the worst offenders when it comes to looking at management compensation.
Well, with that, I think we have made our investors and listeners hopefully proud by covering candidates today on 4/20 in a way that is foolish and we didn’t manage to talk too much about Canadian players.
As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear.