Replay | Cannabis Teach-In

Cannabis 101 – A look at the current setup for the Cannabis industry and how we see the industry playing out over the next few years.    

Summary thesis:

• Full descheduling of Cannabis, a Schedule 1 drug, will not happen until at least 2026.  A triggering event may happen by 2023, but changes to the Controlled Substance Act will take years.   
• Given this timeline, the US MSOs will build a substantial moat around their business, making it expensive for the larger Canadian players to enter the U.S. market.  We are long a basket of US MSOs focused on the limited license states.
• There are some signs of life in the Canadian market as a retail presence grows across the country.  Unfortunately, ATMs have saved some of the weaker players, adding to a prolonged clearing period.  We have a LONG bias the two most expensive companies on an EV/Sales basis (CRON & CGC), but they also have the best balance sheets to survive and win in a prolonged downturn.  Our focus on the SHORT side in Canada is on ACB, TLRY, and APHA.

We believe the U.S. cannabis sector is poised for significant growth in the years ahead and that the industry is misunderstood by new people analyzing the space.  Things move fast in the Cannabis industry, and that also may be a hurdle to invest in the space.  Over the past few years, some consumer analysts (beverage and tobacco) have been exposed to the group as STZ and MO have made significant investments in the space.  As those analysts know, legalized drugs make for some of the best consumer businesses, and Cannabis is becoming the fourth such industry.  Just in the past nine months, we are seeing an increase of institutional investors into space. 

To lower the hurdle that some may have, we are hosting a call to teach investors the terminology, metrics, supply chain, and fundamentals to lower the knowledge bar to invest in the sector. Unlike most new industries, we already have excellent visibility into demand with tremendous growth drivers with proven historical results. Investing in Cannabis while currently in federal prohibition is a once in a lifetime opportunity, as the industry is just getting started.  Given the November election results, it is increasingly likely that legalization (STATES/MORE Act) will occur in the next few years, opening up the space to new capital and new investors.  When Cannabis is legalized, the demand drivers from medical use, recreational use, and edibles are predictable. The market will more appreciate this in the months to come.

The winner of the election was not "blue" or "red," but "green." Four more states just voted to allow adult use of marijuana. One in three Americans now live in states where marijuana is legal for anyone over 21. The election showed there is broad public support for cannabis legalization. Just like other industries, not all of the companies benefit similarly from legislative changes. We think the market is extrapolating the election's outcome too far into the future for some companies, while other companies have a head start and are positioned well for years to come.