6 min read

Green Giants February 2022 Newsletter

In another volatile period, the Green Giants model portfolio earned its first positive month since we started trading on October 1st, 2021. Year-to-date, we are comfortably ahead of our cannabis-investing peers.
Green Giants February 2022 Newsletter
Photo by Markus Winkler / Unsplash

In another volatile period, the Green Giants model portfolio earned its first positive month since we started trading on October 1st, 2021. Similar to January, the first two weeks were very strong—the portfolio was up 18% through February 16th. When the war rhetoric heated up, all risk assets sold-off simultaneously and the month ended with a -15% drawdown.

In the end, the Green Giants model portfolio bested the global YOLO ETF and the Russell 2000 small-cap index, but fell short of the US-only MSOS ETF. Year-to-date, we are comfortably ahead of our cannabis-investing peers.

*Inception date of Green Giants model portfolio is 10/01/21

What Happened?

The month began with exciting M&A news. On February 1st, Verano announced their acquisition of Goodness Growth in a $413 million, all-stock transaction. Goodness Growth gives Verano exposure to New York and New Mexico (two soon-to-be adult use markets) and one of two vertically-integrated licenses in my home state of Minnesota. The New York piece gives them one of only ten vertically-integrated licenses, including cultivation, four active dispensaries, and licenses to open another four stores in busy parts of town. This expands Verano’s footprint to 18 states, with active operations in 15.

Two days later on February 3rd, Columbia Care closed their $185 million private placement of 9.50% senior-secured first-lien notes. The funds will help them expand in key east-coast markets like New Jersey, New York and Virginia. These are all existing medical markets moving to adult use. In addition, Columbia care is exchanging $37.5 million of 13% notes due in 2023 for the new notes for aggregate proceeds of $153.25 million.

The price of equities would leave you to believe cannabis business are broken and one would be insane to lend any of them money. Columbia Care stock ($CCWHF) is down 58% in the last year. Despite abysmal stock-price performance, they secured their lowest lending rate ever. This is not unique; while stocks have been cratering, lending rates continue to decline. If the business were as broken as equity-prices indicate, credit rates would be rising.

Source: Needham

Weedmaps ($MAPS) kicked off earnings season with an encouraging report. Q4 revenue was a record $54 million, a 39% year-over-year increase, and they added 300 new paying clients. Weedmaps CEO Chris Beals is scheduled to join us on CEO Interviews later this month. In related news, Leafly, one of Weedmaps primary competitors, began trading on the NASDAQ on February 7th under the ticker $LFLY.

Finally, still no news on when New Jersey is allowing adult-use sales. They missed their self-imposed deadline and appear to be flirting with a 4/20 opening day. The formal statement is “within weeks…” New Jersey will be a massive catalyst for operators with stores in the state, but also may serve as a much-needed boost for the broader industry. I encourage you to read Aaron Edelheit’s piece on all east-coast states potentially moving adult use in the next 12-18 months.

How Will Cannabis Perform During Hard Times?

I was working at Fisher Investments when the tech-bubble burst in 2000. Ken Fisher called us into the conference room and told us he was turning bearish, and asked us to cancel our holiday plans and make sure all of our clients were approved for (put) options. During this memorable meeting, he also taught us about demand curves and how different sectors may perform in a bear market.

Luxury goods have elastic demand—when we have more money, we will splurge on nicer things. Healthcare tends to have more inelastic demand. Patients need their doctor visits and prescriptions, regardless of the economic backdrop. For this reason, when looking to get defensive, areas like healthcare and consumer staples have long been places to seek shelter.

Source: Quora.com

While running a dispensary, I found that medical users mirror inelastic demand curves, while the recreational users act more elastic. My dad is a chronic-pain patient and uses cannabis for relief. This is his primary medicine, part of his budget, and his use is unaffected by the latest inflation results.

Recreational users may pickup some flower for the weekend, but it’s not serving a specific medical need. Cut their budget by 20%, and cannabis consumption immediately drops. I remember seeing people not order in a while and I would wonder what we did to lose them. Usually, it had nothing to with us, instead they lost their job, or had another place they had to spend that extra cash.

Over a long time horizon, I expect cannabis to reflect this mixed-use profile. When we see an inevitable economic downturn, sales will slow. Medical patients and committed recreational users will still show up, but some will completely cut out cannabis, or reduce their use. Look no further than January sales to see how just overspending in December can impact the following month’s sales.

Looking Forward

The Green Giants portfolio remains fully invested and no changes were made in February. I remain disciplined in identifying where I have an edge and where I do not. While I admire market timers, this is not my strength, and I have not seen many people timing cannabis stocks consistently. For most, it is an ego-driven fools errand.

Instead, I encourage investors to extend their time frame, focus on fundamentals, and be patient while wait for new states to come online and growth to accelerate. As Abner Kurtin commonly says, “it is a stair-step growth pattern” and currently we are in a flat period.

We are entering earnings season and I expect to see slowing growth. As Covid (at least temporarily) winds down and restrictions loosen, people are going out to dinner more, traveling, and not at home using cannabis as much. Plus, without stimulus checks, spending is becoming more normalized. Add in delays in New Jersey, and there hasn’t been much to celebrate. This is evident in studying the publicly-available sales data. How much of this is already priced in is anyone’s guess.

There are potential catalysts on the horizon. New Jersey sales will likely start in late March or April. Senator Schumer is scheduled to releases his CAOA text in April and we may see a SAFE Banking vote in May or June. California is also showing signs of life, with more cities repealing taxes and new stores coming online at a faster rate. There’s hope that over the summer we will see the cultivation tax eliminated and possibly some relief on the excise tax. Lower taxes and more stores are the keys to igniting the California market.

Personally, I am grateful that the Green Giants audience continues to grow. Last month, subscriptions increased 118% and the Glass House Brands research was well received. Part two, where I document the greenhouse tours and evaluate the flower, is my next priority. Please subscribe and it will be automatically emailed to you.

Remain patient, be kind, and thank you for your continued support.

Sincerely,


Jesse Redmond


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