If cannabis stocks made a New Year’s resolution to perform better, it lasted two weeks. Through January 17th, the Green Giants model portfolio was positive. This changed when inflation fears surged, all equities collapsed, and cannabis stocks sold off in sympathy. Over time, I expect less correlation between risk assets and cannabis, but in a liquidity-driven sell off—everything correlates.
Below is the January performance of the MSOS ETF and the Russell 2000. During this period, cannabis stocks acted like levered beta.
The Green Giants model portfolio beat the industry-leading MSOS ETF in January, but fell short of the non-investable American Cannabis Operator Index.
January was a light month for cannabis news. We continue seeing delays with New Jersey transitioning from medical to adult use. The state missed their self-imposed January 22nd deadline, and this is putting operators that expected a more prompt opening in a predicament. What do you do with the employees you hired? What do you do with the flower you grew?
There are no easy answers to the employee issues, and for the excess flower most are adding vaults to store the surpluses. Flower does degrade over time. In California, it can stay on the shelf up to one year after the harvest date, but I’m bummed if it’s older than six months. A portion of the New Jersey excesses will likely be processed into extracts, topicals, and tinctures.
The latest rumor is New Jersey will announce sales start on 4/20. This would be huge for MSOs with stores in the state, and the launch coinciding with the stoner holiday could be an industry-wide catalyst.
Other news came from debt deals. Trulieve announced they are borrowing an additional $75 million at 8%. This is important, because as equities have been experiencing nuclear winter, credit costs are at all-time lows. This is a major hint that cannabis stocks are experiencing an investor demand issue, not a fundamentals problem. If the fundamental were flawed, rates would be rising.
Curaleaf also successfully closed their acquisition of Bloom dispensaries in Arizona. This gives them 13 stores in Arizona, and 121 across the US. This was a $211 million all-cash deal and gives Curaleaf a strong presence in a key west-coast market. For an overview of Curaleaf, check out my recent article.
Portfolio Update: Getting Bigger
January marked the first significant changes to the Green Giants model portfolio. We launched with seven MSOs: three tier ones, three tier twos, and one smaller name. While still focused on bigger MSOs, I was of the opinion that there was value in some of the mid-tier names.
The current conditions are increasingly difficult for smaller operators. They are less diversified, tend to have higher cash-burn rates, less access to capital, and at a much higher cost. The biggest MSOs are borrowing around 8%, whereas smaller operators are in the low-to-mid teens. Curaleaf and Trulieve just did deals at 8%, versus the very capable, but much smaller, Schwazze’s 13.5% convertible-bond offering they are using to expand into New Mexico.
These pricier deals are being done in an ultra-liquid environment. The cost of capital is at all-time lows, and there’s plenty of money sloshing around. With the fed now raising rates, borrowing costs are rising, and availability is diminishing.
In response to these evolving conditions, we eliminated our smallest name, eliminated one tier two, and added Verano and Curaleaf to the portfolio. Currently, we are in 7 of the ten biggest MSOs. This portfolio should have less volatility, similar or better returns, and a higher probability of outperforming if we don’t get political progress (SAFE Banking), see more downside volatility in the broader markets, or credit conditions tighten.
If we are pleasantly surprised with strong stock markets, SAFE Banking, and continued low interest rates, the whole MSO space will explode and new money will enter. New cannabis investors are more likely to start with the bigger, more-proven names. Experienced traders might dip down into smaller single-state operators in hopes of hitting a home run rather than triple, but this will be the exception. Investors I am speaking with want liquidity, proven management teams, and well-capitalized businesses.
Cool Story, But What Stocks Are In The Portfolio?
When I launched the website in September 2021 there were two types of subscriptions. Free subscribers receive emails when new articles are released; premium subscribers also got the holdings of the Green Giants model portfolio and trade updates. I was hoping the premium subscriptions revenue would make writing on the website a viable economic opportunity.
Days after launching, the payment provider that integrates with the Ghost blogging platform cancelled my account. Initially, they said I was giving advice about options contracts, something I have never discussed. Next, they said I was marketing to marijuana companies. Obviously false. Finally, they gave me blanket language about being able to cancel any account, for any reason, at any time. Consequently, I have been writing for five months without almost any compensation.
The good news is that Green Giants has been growing. Subscribers increased 584% in January. I hope to find a way to make this economically viable and share more about the underlying portfolio. For now, your free subscriptions are appreciated.
It’s early February and SAFE Banking talk is heating up, again. It passed the House for the sixth time, and will be included as an amendment to the China competition bill. I have no edge in predicting politics—and am not convinced others in the space do either. The market has liked hearing the SAFE news, and as of February 9th the Green Giants model portfolio is up over 10% month-to-date.
It would be rewarding to print a positive month, but weekly or monthly returns are not what this is about. I see this trade as a minimum 3-5 year opportunity. We will get SAFE Banking at some point, up listing will occur, decriminalization or legalization is quite possible as well. Meanwhile, more people are discovering the benefits of cannabis, it’s becoming normalized, and more available. Currently, only 12 states do not offer some form of legal cannabis. Absent the big catalysts, just state-driven demand is driving double-digit growth.
Be patient, build a portfolio you can live with, and don’t get shaken out of the trade. Thank you for your support.
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