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3 Ways To Protect Your Cannabis Portfolio From An Un-SAFE World

We have years of data showing we can’t count on politics catalysts to power our cannabis investment portfolios. Instead, build an all-weather portfolio based on more enduring characteristics.
3 Ways To Protect Your Cannabis Portfolio From An Un-SAFE World
Photo by Nelly Antoniadou / Unsplash

On December 7th, the 2021 NDAA funding package was finalized and once again SAFE Banking was not included. Cannabis investors were disappointed, as democratic leadership elected to not push for banking reform in hopes of passing broader legislation including more social-justice reform at a later date.

The Secure and Fair Enforcement (SAFE) Banking Act is legislation that impacts the ability of federal banking regulators to intervene in the actions of banks dealing with a legal cannabis business. Currently, regulators can terminate the deposit or share insurance of a bank because they are doing business with a cannabis company. Banks cannot tolerate this risk, so they do not provide basic banking services to any cannabis-related businesses.

There are several consequences to not having SAFE Banking. Without it, legal cannabis companies can’t accept credit cards, get loans, set-up bank accounts, or cut checks. No other industry has these massive handicaps. Imagine a business where you can’t access banking services, but you still get to pay taxes, and actually even more taxes than everyone else. Perverse indeed.

Personal Experience

When I ran a dispensary, we had our bank account cancelled for buying jars from a website with “marijuana packaging” in the name. This happened a second time when trying to make a monthly payment to Weedmaps. We learned you have to buy gift cards for any payments that are remotely cannabis related. Clumsy, inefficient and blatant discrimination.

I felt it again when I started writing about cannabis investing and created the Green Giants website. Originally, there was a free and premium version. The free version gets what most of you see today, whereas the premium version includes position-level portfolio details and trade alerts. Within the first few days I received an email from Stripe (the payment process that integrates with the Ghost blogging platform) that my account had been cancelled.

At first, they told me it was for giving advice about naked options, which was untrue. Next, they said it was for marketing to cannabis packaging companies, another blatant lie. Finally, I was told they reserve the right to cancel any account at any time, and mine was cancelled. Hence, I cannot currently take paid subscribers on the site.

The implications to cannabis stocks are much larger than my personal complications. Absent SAFE Banking, they cannot access all the traditional baking functions that fuel small businesses—access to capital markets being one of the biggest. In this challenging regime, it’s critical to consider how your stocks are positioned.

3 Ways To Stay Safe

1. Get bigger

The lack of basic banking hurts smaller players the most. Massive MSOs are able to borrow money at about half the interest rate of a small single-state operator. In September, I wrote an article titled Green Giants Get Lower Lending Rates. The piece shows how Item 9 Labs, Arizona is borrowing money at 16%, while Green Giants like Green Thumb Industries ($GBTIF) are able to borrow big amounts at 7%, less than half of smaller, single-state operators.

The Green Giants portfolio is positioned in premium players. Not necessarily just the biggest names, but big enough that they have ample affordable credit options. We do have one smaller name in the book, but they just secured a loan and have more creative flexibility due to their substantial real estate holdings. I don’t think it's time to blindly puke smaller names, but do feel it is worth reviewing each name and understanding their cash needs and how they can fulfill them in this un-SAFE environment.

2. Overweight finance-savvy CEOs

I come from the investment management business. I studied economics in college, worked for Franklin Templeton, Fisher Investments and went on to manage a couple hedge funds. So, I’m probably biased toward leadership with similar sets of skills.

Today, Green Giants has seven stocks in the portfolio and 4 of the 7 are run by CEOs with meaningful Wall Street experience. Ascend ($AAWH) is an excellent example. Their CEO Abner Kurtin has an MBA from Harvard, was a Managing Director at the legendary value-oriented Baupost Group and went on to run his own hedge fund for a decade. You can learn more about his background and the excellent limited-licenses they’ve acquired in my recent conversation with Abner.

A Harvard MBA and over 20 years of intense buy-side experience are valuable skills for building a capital-intensive business. Abner is an expert in deal structuring and financing. In the current environment, a background in investing and capital allocation are competitive advantages and you can find a similar story with Jason Wild at Terrascend ($TRSSF) and Jim Cacioppo at Jushi ($JUSHF).

3. Increase exposure to expanding markets

Medical markets flipping to adult use are the cannabis investing sweetspot. In these instances, moving from requiring medical cards to allowing anyone over 21 to purchase often increases sales multi-fold in a short time.

New York and New Jersey are massive markets moving toward adult use. Both rollouts have been slower than anticipated, but this is par for the course. When they do open, it will be a big catalyst for the industry, but more so for the companies with exposure in these key limited license, medical flipping recreational states.

As the image below reflects, sales are expected to jump 5-10x over the first few years, hitting $1 billion in in New Jersey by 2024 and $2.3 billion in New York by the fourth year of their adult-use program. Firms like AYR Strategies ($AYRWF) and Ascend ($AAWH) are in an excellent position to expand revenues when these new adult-use markets open.

Moving Forward

We have years of data showing we can’t count on politics catalysts to power our cannabis investment portfolios. Investors regularly expect progress, and are disappointed. I suspect over time the needed political progress will occur, but investing based on hope is not a sustainable strategy. Instead, build an all-weather portfolio based on more enduring characteristics.

Size matters and drifting outside of most of the top 15 US cannabis companies is an increasingly risky venture. Financing is too expensive and could dry up quickly. Leadership is always a critical factor and tilting toward those with most experienced and most talented finance teams is more important than ever. Finally, increase exposure to new markets or those flipping from medical only to adult use. This recipe will help keep your cannabis portfolio safe from an un-SAFE world.