5 min read

Green Giants November 2021 Newsletter

November was a wild month for cannabis stocks. Despite pockets of optimism, we closed with back-to-back brutal days and ended down -4.94% for the month. Misery loves company, and the MSOS ETF, American Cannabis Operators Index and Russell 2000 all suffered as well.
Green Giants November 2021 Newsletter
Photo by Danika Perkinson / Unsplash

November was a wild month for cannabis stocks. Despite pockets of optimism, we closed with back-to-back brutal days and ended down -4.94% for the month. Misery loves company, and the MSOS ETF, American Cannabis Operators Index and Russell 2000 all suffered as well.

Below please find the October and YTD returns for the model portfolio and benchmarks:


October

YTD

Green Giants

-4.94%

N/A

MSOS ETF

-2.15%

-27.39%

American Cannabis Operator Index

-7.05%

-29.03%

Russell 2000

-4.33%

13.00%

(Note that MSOS held a 10% cash position for the second half of the month. It worked this time as the sector slumped -20% in the last 15 days. However, I question the sustainability of these market-timing decisions. Perhaps, they have a long-term edge in timing markets. I don’t and remain fully-invested to capture the long-term, top-down trade.)

While October was a painful slow bleed, November had some bullish periods. As the chart below indicates, there was a 25% intra-month run that reversed later in the month.

Source: Charles Schwab

What Happened?

Politics and earnings were the story this month. Earnings seems to matter about 5%, and the other 95% was driven off political speculation. I have learned to be acutely aware of where my investment edge lies, and it is not in handicapping politics. Based on the chatter I see on social networks, even the most sophisticated political analysts are unable to accurately handicap pot politics.

When Biden was elected the cannabis community expected—based on his campaign promises—rapid reform. The hopes included social justice changes (releasing prisoners), SAFE banking, and decriminalization or legalization. To date, Biden has been silent and not fulfilled his promises. I know, it is shocking that politicians would lie. This lack of action is the driver of the ten-month, and roughly -50% drawdown in cannabis stocks.

On November 5th, news leaked of a republican sponsored legalization bill and stocks shot up. The excitement was driven by not just the possibility of pot being legalized, but the fact it was coming from a Republican senator. Historically, democrats have been the pro-cannabis party and they used legalization as a carrot with voters. The potential for bipartisan support on cannabis reform set the sector on fire and the Green Giants portfolio shot up 25% over six trading sessions.

In true buy the rumor, sell the news fashion, cannabis stocks sold off the day of the republican press conference and finished the month with 8/11 negative trading sessions and gave back the big intra-month move.  Frustrating, but just noise when you step back and look at the bigger picture.

Cannabis stock are still trading off political news and current speculation is whether SAFE Banking will be included in the year-end NDAA bill. While we wait for news, the space has gotten clobbered while they conference. If it does not get included, you can directly thank Senator Booker and Senator Schumer. They made promises during their campaigns and are not delivering.

For an intelligent conversation on the politics, I suggest listening to my friend Rena Sherbill’s The Cannabis Investing Podcast Episode with Brady Cobb. A self-proclaimed recovering lawyer and political junkie, Brady gives an excellent analysis of the situation and expects to see SAFE Banking passed in conference. You can find the episode here, or search for The Cannabis Investing Podcast in our favorite pod catcher.

Earnings Roundup

The other notable November news came from earnings announcements. I read all the earnings releases from the sector and participated in the calls for the top 15 US MSOs and a couple smaller California-based operators. Here are three takeaways from Q3:

  1. Despite tough comps coming off higher usage and stimulus checks during COVID lockdowns, we saw solid year-over-year revenue growth, respectable margins and expanding footprints. In particular, Trulieve’s results stood out with industry-leading margins, plus beating on revenue and EBITDA. Completing their acquisition of Harvest should make the next few quarters even stronger. Green Thumb Industries also deserves acknowledgment for keeping their 10-quarter streak of beating consensus revenue. Ben Kovler continues to excel on both execution and appropriately managing street expectations.
  2. New York and New Jersey adult-use programs are progressing more slowly than hoped and this is pushing back revenue for operators with stakes in these key limited-license opportunities. This impacts names like Ascend, AYR and Terrascend. However, when these markets do turn on, there will be a meaningful jump in revenue for these companies.
  3. California is very tough right now. Wholesale flower prices have fallen 50% in the last six months and that made comps and expectations hard to match. Glass House Brands, The Parent Company and Lowell all had similar stories. Currently, Glass House is our only dedicated California exposure and we remain comfortable maintaining a small position.

Looking Forward

December has the potential to be another tough month. Many expect for SAFE Banking to not be included in the NDAA, further pushing back desperately needed political reform. This, coupled with lack of identifiable positive catalysts and the potential for tax-loss selling, paints a potentially gloomy short-term picture for cannabis stocks.

For me, this seems too obvious. Markets move off surprises—unknown information—and are incredibly efficient at discounting all known information. One of my mentors, Ken Fisher, calls the stock market “The Great Humiliator” and believes it is designed to humiliate as many people, for as much money as possible. When an investor got caught up in the consensus, we use to call it getting “TGH’d”. One day, all the short sellers and capitulators will feel the force of The Great Humiliator, and likely when we least expect it.

Meanwhile, our thesis isn’t phased by what happened in November or what takes place in December. The Green Giants portfolio has the resources to excel without the benefits of SAFE Banking. Speaking to the top CEOs, they often state that pushing back political progress allows them to built “deeper moats” that will further distance them from the less-capitalized, less-experienced competition.

The tweet below from Terrascend President Jason Wild succinctly summarizes the state of affairs for the Green Giants.

Source: @jasongwild Twitter

Please note that we rebalalanced the portfolio ahead of Charles Schwab starting to charge $6.95 for OTC trades. No change in views, just bringing the weights back in line with our intended exposures. If you are interested in position details and trade updates, please email us and become a premium member.

Thank you for your continued support.

Sincerely,


Jesse Redmond


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