A Historic Set-Up for Cannabis?

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? I remember exactly where I was when I started thinking seriously about investing in cannabis...

It was early August 2020, and I was walking up a steep hill on my normal walking route.

Usually, on the first two miles of the walk, which is flat-to-downhill, I listen to a podcast – most often some kind of interview. Uphill, it's music... fast, upbeat music.

But this time, as I started the climb, I was so engrossed in what I was listening to that I just let the podcast continue, for the simple reason... it was a conversation between two old friends of mine – Stocktwits founder Howard Lindzon and longtime trader Todd Harrison – and the topic was the opportunity in cannabis stocks.

?? Specifically, they talked about the part of the cannabis market that hadn't yet ridden the weed wave: under-the-radar U.S. companies...?

Todd felt they were primed to start... especially with a new cannabis exchange traded fund ("ETF") about to launch, combined with continued legalization in state after state.

Other than taking a puff or two (or three or four) when I was in my late teens and early 20s – some 45-plus years ago – cannabis was a topic I hadn't paid much attention to... and knew little about. It seemed too speculative for my taste.

But Todd, a gifted writer, talented trader, and exceedingly compassionate person, knows more about it than most...

In 2017, when almost every cannabis name was a penny stock, he founded CB1 Capital, which focuses exclusively on cannabis.

But he was talking about it well before that, even tweeting in 2012:

? I started thinking back on that interview when I saw a blog post last week by yet another old friend, Aaron Edelheit...

Today, Aaron runs the private investment firm Mindset Capital. But back in 2009, when he was a hedge fund manager – and when anything related to residential real estate looked like death – he launched a small fund to buy single-family foreclosed homes, fix them up, and rent them out.

He started with 16 and ended up buying 2,500 before selling the company six years later to a publicly traded real estate investment trust ("REIT") – in what was then the largest single transaction of homes ever in the U.S.

He now sees the same set-up for cannabis, whose stocks have been a genuine downer for the past eight months.

After two years of research, which included writing nearly two dozen cannabis-related posts on his newsletter and blog, he is starting a private fund to invest in nothing but cannabis. As he explained in a post headlined, "The Cannabis Manifesto"...

"Imagine an opportunity to invest in a mythical $100 billion market on its way to $200 billion in which capital is scarce, institutional participation is tiny, and where many publicly traded companies involved are not listed in any major index or traded on any major U.S. exchange.

"Now imagine that these publicly traded companies have defensible moats, strong management teams, and possess 10 years of growth and reinvestment opportunities ahead.

"Then imagine that this magical sector has crazy inefficiencies where similar companies trade at wildly different multiples for no apparent reason and where you can buy industry-leading companies growing at over 50% while trading for single-digit cash flow multiples with little if any leverage.

"This is the reality of the U.S. cannabis industry. Thanks to the conflict between state legality and Federal illegality, a U.S. company that "touches the cannabis plant" cannot trade on any major U.S. exchange and instead trades on secondary and tertiary Canadian exchanges. Add in concerns regarding custody issues with major brokerages and prime brokers, and you are left with little institutional involvement (estimated at a measly 4%), no index involvement, and thus a wonderful opportunity."

He went on to say that cannabis reminds him of another incredible investment opportunity...?

"[When I was] bidding on foreclosed homes on the courthouse steps in Gwinnett County, Georgia, and feeling like I was the only one in the investment world who saw the generational opportunity in the housing market.

"In 2011 and early 2012, I told everyone and anyone how ridiculous it was to be able to buy three-bedroom, two-bath homes in safe suburban neighborhoods for $45,000."

... Until the big investors discovered what he had done and bought him out as they built his concept into an industry. Aaron expects something similar to happen in cannabis, and when it does, he says, "Valuations and prices will change overnight."

? And that's the part of this that intrigues me...?

When I listened to that podcast with Todd, I thought I had already missed the big "gold rush" in cannabis. Yet here he was talking about a niche that still hadn't been touched.

Thanks to his comments, I did some work and a few months later bought shares of the ETF he had mentioned – the AdvisorShares Pure U.S. Cannabis Fund (MSOS). A few months later, I sold it at the peak of the market melt-up in February, after it had roughly doubled. It was a combination of dumb luck and a weak stomach on my part.

I never looked back until I read Aaron's blog. You see, I didn't know whether a bubble had burst... and whether I had gotten out while the getting was good.

? Yet Aaron thinks the fun has just begun...?

And Todd, who believed in the space before most others, isn't wavering... not one bit.

In his blog and his newsletter – both excellent starting points for anybody researching cannabis – he acknowledges the risks, challenges, and what a roller coaster the investing space has been. But he also says...

"The fact remains that U.S. cannabis is an under-owned and misunderstood growth story trading at value multiples, and we expect incremental Federal change to complement continued state-level adoption and drive an expanding TAM (total addressable market).

"Given that large swaths of the global population still consider cannabis to be a vice product – a gateway drug – we expect the perceptional migration to wellness to both illuminate and inflate the consumer curve as this secular bull market matures."

He adds...

"It's easy to get discouraged after eight straight months of market malaise. We remind ourselves often that the last few years – and importantly, the next few years – are the fulcrum of a historic and seismic shift as The War on Drugs is repealed and cannabis moves into a taxable realm. There are numerous agendas and political motivations driving this gut-wrenching volatility.

"It is not easy, nor is it supposed to be, and therein lies our task at hand."

To be sure, if regulators don't get in the way, Aaron makes it clear it could simply take much longer for the thesis to play out than he expects in a wildly volatile market that has no patience.

But to hear him tell it...

"This is a generational investment opportunity in an industry with phenomenal growth and limited access to capital. We aim to invest before full legalization occurs and believe that patient capital will be well rewarded in the years to come."

Patience? Years? For those who get it right, that's the difference between investing and trading... And some would say true wealth creation.

As always, feel free to reach out here or via e-mail at [email protected]. And if you're on Twitter, feel free to follow me there at @herbgreenberg. My DMs are open. I look forward to hearing from you.

I look forward to hearing from you.