US MSOs: If not now, when?

Guest columnist shares his U.S. canna thesis.

US MSOs: tremendously skewed risk-reward opportunities in the cannabis space

MSOS 0.00%↑ - if not now, when?

Like many of you, I'm bewildered by price action in U.S. cannabis both pre- and post-the S3 proposed rule announcement.

In situations like these (deep underwater on a portfolio position), I've found it helpful to revisit the core thesis and ask the following questions:

1. Given everything we know and have seen, would you add $MSOS (or a group of MSOs) to an investable universe today based on a set of investment criteria?

(note: I am biased towards the AdvisorShares ETF because, given my occupation/ role, I'm restricted from owning individual stocks; more importantly, I like the constituent weightings relative other cannabis ETFs)

2. Would you add the ETF(s) or cannabis #stocks to your portfolio today?

3. Every industry is presented with a set of challenges—but will the cannabis industry overcome these challenges?

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1. Given everything we know and have seen, would you add $MSOS (or a group of MSOs) to an investable universe today based on a set of investment criteria?

I would add US MSOs to my investable universe. Despite price action, the cannabis industry is not going away, ever.

Currently, 70% of Americans believe cannabis should be legal (a significant increase from ~45% in 2010) and this number should continue to grind higher.

At a high level, growth potential is significant. Many states have legalized medical and adult use cannabis; the market is expanding rapidly, resulting in new, generally loyal consumers. The plant is seeing widespread acceptance and adoption due to its long list of benefits and short list of potential harms. These are facts, not opinions.

Generally, well-established US multi-state operators (Green Thumb, Curaleaf, Trulieve, #Verano, Cresco, and others) exhibit the following:

Operating efficiency and business resiliency translating into -->

Repeat revenues, earnings predictability and stability, paired with -->

Long runways of growth (massive, growing TAM)

These companies should grow into high cash generating monsters.

Based on this criteria, I'd add several US $MSOs to my investable universe.

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2. Would you add the ETF(s) or cannabis #stocks to your portfolio today?

US MSOs would be added to my portfolio today because of their attractive fundamentals and valuations.

The fundamental growth story remans compelling: Mostly are organically grown, operationally efficient businesses run by competent management teams (some more than others) that are taking advantage of a growing TAM by increasing geographic footprint, expanding product mix, and implementing creative marketing campaigns.

Consumer habits are changing.

Will cannabis companies take share from the pharmaceutical industry? Absolutely.

Many people have switched to cannabis from prescription anxiety and depression meds, sleep meds, pain meds.

Will cannabis companies take share from the alcoholic beverage industry? Absolutely.

You've probably seen the numbers. Many people have significantly cut back on drinking because cannabis offers a similar experience without the damaging effects.

Valuations have become very attractive.

Enterprise multiples (EV/EBITDA) have contracted to extremely low levels, while fundamentals continue to improve. I don't think they'll go much lower.

Stock prices are in spitting distance from all-time lows and a quarter-mile from all-time highs.

Will we get back to ATHs? Probably not anytime soon. MSOs ran far too high back in early 2021 when the Fed amplified all asset prices by implementing ZIRP+ overloading the system with capital. This mistake, paired with lack of reform, resulted in significant value destruction over the last few years.

Given what I've outlined above, why aren't multiples expanding?

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3. Every industry is presented with a set of challenges—but will the cannabis industry overcome these challenges?

Here are the challenges.

Exchange issues - US MSOs cannot YET list on major US exchanges because cannabis remains illegal at the federal level. The low volume OTC venues are the only option for cannabis companies (not a good place to be). The SAFER Banking Act* and perhaps other significant changes in federal cannabis laws would fix this.

Custody issues - many large custodian banks (State Street, Northern Trust, Bank of New York Mellon, etc.) in the US cannot provide custody services to institutional investors that wish to own these securities because of the ongoing federal prohibition.

The SAFER Banking Act* and perhaps other significant changes in federal cannabis laws fixes this.

Burdensome tax - under IRS code 280E, businesses involved in the trafficking of Schedule I controlled substances cannot deduct ordinary business expenses from their gross income. This results in a higher effective tax rate (60%+) because they're taxed on their gross income rather than taxable income which, in turn, reduce profit margin.

Schedule 3 fixes this by eliminating 280E.

Illicit market competition - this clearly hurts sales; crackdowns are in progress (ex: New York City's 1000+ unlicensed cannabis shops) but this "gray market" remains robust mostly due to the slow rollout of legal dispensaries.

A serious, effective law enforcement policy and competent leadership fixes this.

*The Secure and Fair Enforcement Regulation Banking Act (SAFER Banking) provides protections for federally regulated financial institutions that serve state-sanctioned marijuana businesses.

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Recent Price Action

Cannabis stocks on the OTC market experience significant volatility primarily due to their pathetically low trading volume and wide bid-ask spreads which amplify price swings.

This attracts quantitative traders and volatility players (that have no interest in holding a position for more than an hour or two) who use advanced algorithms to exploit market inefficiencies. hey account for the majority of daily volume. Not retail.

This will continue to occur until MSOs can uplist to major exchanges (NYSE, NASDAQ) once they meet the exchanges' listing requirements, resulting in increased liquidity and access to a broader base of institutional investors. It's a waste of time trying to make sense of intraday price swings; it's simply not good for the psyche.

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Catalysts

Rescheduling Proposal - President Biden promised that he would change federal cannabis policy.

In 2022, the Biden administration initiated a review (via HHS) to determine whether or not cannabis should remain in schedule I. It is obvious that cannabis does not belong in a bucket with heroin and fentanyl.

It probably should be de-scheduled entirely (logical argument: if alcohol isn't scheduled, and cannabis is safer, why should cannabis be?).

We're currently in the comment period and it is highly likely that S3 will be finalized prior to the election despite apparent DEA pushback.

SAFER Banking Act

^ described above and perhaps we see a vote during lame duck session this year.

M&A - The easing of regulations, improved financial conditions, and strategic motivations (i.e. Ben's letter to SAM 0.00%↑ ) are likely to drive significant M&A activity in the cannabis industry, positioning it for robust growth and development in the years ahead.

State Legalization

Which states are next? Possibly Florida, Hawaii, New Hampshire, Pennsylvania...others over time.

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Now, given what I've outlined above, would you buy today? If not now, when?

“Never, ever invest in the present. You have to visualize the situation 18 months from now, and whatever that is, that’s where the price will be, not where it is today. If you invest in the present, you’re going to get run over.” Stanley Druckenmiller

I was taught that the market is a forward-looking mechanism. If you believe that the industry will be in better condition in a year, or two years, or three years, why wouldn't you buy today?

Because you're waiting for a clear capitulation signal?

Because you're afraid that $MSOS might drop to $5 or below due to seemingly never-ending algorithmic sell programs implemented by quants?

Because our busy, undereducated leaders at the top may kick the #SAFER can down the road again and again and again?

Maybe you believe that the DEA may try to interfere with the rescheduling process because they're "not on board"?

Or perhaps you believe that if Trump's reelected, he may install an anti-cannabis AG that would attempt to reverse rescheduling IF the rule isn't finalized prior to the election?

Ok, then I'll reiterate: despite what happens at the political level, this tiny cannabis industry is not going away. It's going to continue evolving. It's going to get bigger. Improving fundamentals and proficient leadership will translate to greater profitability and ultimately higher stock prices.

Additionally, consider what we've all heard before: you're given the opportunity to front-run institutional players (tidal wave of capital) that don't really have access yet.

What if MSOS 0.00%↑ rips back to $10, or $15, or it's trading at $20 in 12-24 months?

You're looking at 100-200% upside.

What's the downside scenario? -10%? -20%? Survivable.

I'm looking for investments that will 2-3x from here in 3-5 years. I plan to continue dollar-cost-averaging on any material weakness with capital that I don't urgently need.

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Three suggestions

1. I understand the frustration and downright anger w/r/t opportunity cost but I urge you to zoom out and look at the big picture and consider the future opportunity. Try to disregard the day to day moves; it'll drive you mad. A lot doesn't make sense right now, but it will. Eventually.

2. Set the bar real low. It'll feel that much more rewarding once we leap over it.

3. If you're an impatient investor that believes the thesis is broken and irreparable, then sell it and move on.

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(btw, I'm a generalist and thematic investor, not a dedicated cannabis analyst; nothing here is advice).

$GTBIF $GTII $CURLF $CURA $TCNNF $TRUL $VRNOF $VRNO $TSNDF $TSND $CRLBF $CBSTF $CBST $AYRWF JUSHF VFF 0.00%↑