Glass House Brands (GLASF) is a Hedgeye Cannabis Best Idea Long.
EVENT DETAILS:
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The cannabis industry has seen nothing but headwinds for the last couple of years, but momentum is starting to build, with the MSOS up 25% since September 1st. This all started when the HHS made a recommendation that cannabis should be rescheduled from a Schedule 1 drug to a Schedule 3 drug. Rescheduling is not a path to full legalization, but it could be the catalyst needed to push Congress to look at the SAFE Banking Bill on its merits and not as a political headline. Our Hedgeye Macro Team has also recently gone LONG cannabis during their 4Q23 Themes Presentation. There are still many structural issues with the cannabis space, but we believe that Glass House Brands (GLASF), the lowest-cost cannabis cultivator in the world, is the best way to have exposure to this industry.
INCLUDED IN THE PRESENTATION:
- California Retail & Whole Prices
- California Customer Demographics
- Current State Of California Dispensaries
- The Lawsuit Brought Against GLASF
- Where We See GLASF If Schedule 3 Happens?
- What Would Full Legalization Mean?
- SAFE Banking
- Interstate Commerce
- How GLASF Has Become The Lowest Cost Cultivator
Glass House is best positioned for interstate commerce:
Last quarter, Glass House's cost per pound of biomass cultivated was $139, with a long-term goal of reaching $100 in the coming years. In 2022, the company produced roughly 200 lbs of cultivation, which will grow to roughly 300 lbs in 2023. They are also in the works of expanding their greenhouse, which should be completed in the middle of 2024 and will bring an additional 250 lbs of cultivation capacity. With that type of capacity and being the lowest cost cultivator in the world, GLASF is perfectly positive to be the champion of cannabis interstate commerce in the United States.
Interstate commerce update:
In May 2023, we hosted a roundtable dialogue engaging preeminent experts in cannabis interstate commerce. It's apparent and has been for a while that the cannabis sector is navigating a pivotal phase, underscored by the dwindling or imminent demise of several small-scale farms and enterprises. Further, many legal patrons and consumers are veering towards illicit markets owing to inflated prices and inferior selection and quality across various state markets. The most substantial Cannabis ETF has nosedived by 90% since its zenith in February 2021, mirroring an industry trapped in turmoil due to balkanized, inefficient state markets engendering a considerable surplus in lawful cultivation capacity.
We posited that the existing scenario is unsustainable for the current cadre of cannabis investors and industry enthusiasts who discern the systemic difficulties of the industry. The prevailing architecture of state-isolated markets is slated for dissolution in the face of imminent federal legalization. A conspicuous discord in cultivation incentives may soon lack a competitive advantage. Since 2018, the cannabis domain has accrued more than $20 billion in debt and equity; however, the market valuation of the 15 preeminent publicly traded entities now stands at a mere $11 billion. This acute depreciation heralds a loss of billions, foretelling further financial hemorrhage unless industry fundamentals are revamped.
The cannabis companies that covertly resisted interstate commerce to safeguard their market stronghold are now championing it. A coalition of U.S. cannabis operators and investors has initiated legal proceedings against U.S. Attorney General Merrick Garland, seeking to forestall federal encroachment on state-sanctioned cannabis endeavors. Spearheaded by the legal firm Boies Schiller Flexner, the lawsuit endeavors to fortify states' prerogatives to govern cannabis operations within their jurisdiction. This lawsuit is against applying the Controlled Substances Act to cannabis activities that happen within the state. It says that doing so goes beyond federal authority and stops states from regulating and making it easier for people to get cannabis. The coalition stresses how the legal situation with cannabis has changed since the Supreme Court's decision in 2005. They are calling for federal laws to be changed so they are in line with state laws and congressional orders.
Summary Bullet Points:
Federal Interference: Challenging the federal government's enforcement of the Controlled Substances Act on state-regulated cannabis operations
State Rights: Advocating for states' rights to regulate cannabis within their borders, underscoring the limited federal authority on intrastate commerce
Legal Evolution: Highlighting the changed legal scenario around cannabis since 2005 and 38 states with regulated cannabis programs
Economic Impact: emphasizing the economic hardships faced by cannabis businesses due to federal prohibitions, including access to federal programs and banking services.
Legal Representation: Law firms Boies Schiller Flexner and Lesser, Newman, Aleo & Nasser LLP represent the coalition, along with notable plaintiffs and supporters from the cannabis industry.
Judicial Appeal: Expressing readiness to escalate the case to the Supreme Court to address the unconstitutional overreach of state sovereignty and align federal law with state regulations
Legislative Reforms: Mentioning potential reforms like the SAFER Banking Act but asserting the need to address the core issue of federal overreach on state-legal cannabis operations
