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Green Giants October 2021 Newsletter

October was another brutal month for cannabis stocks. We entered October in a 8-month post-election free fall and I hoped we might catch a bounce in our first month of trading the Green Giants strategy. We were not so fortunate.
Green Giants October 2021 Newsletter
Photo by Maxim Hopman / Unsplash

October was another brutal month for cannabis stocks. We entered October in a 8-month post-election free fall and I hoped we might catch a bounce in our first month of trading the Green Giants strategy. We were not so fortunate.

The most frustrating part of the month was the consistent down days—despite broadly good news. Meaning, little changed about the sector or our holdings—they just got consistently cheaper. Below please find the October and YTD returns for the model portfolio and benchmarks.

Taking a step back, the Green Giants portfolio is a top-down trade. We’re bullish on the cannabis opportunity over the next decade and believe through deep due diligence and an informed perspective we can do better than passive options—while controlling our custody and tax situations. However, this does mean that when the industry is getting hammered, we will more than likely feel that pain.

One of the frustrating parts about October, was the lack of negative news driving lower share prices. Many days, the portfolio would drift a point or two lower, but when reading the news there were only positives—new stores opening, increasing public acceptance and even lower lending rates. The latter is a really weird one—credit costs improving, while equities are falling.

For example, Verano—a Green Giants candidate—borrowed $100mm in May at 9.75%. October 20th, just six months later, they were able to amend the agreement, add $120mm in borrowing power at 8.5%. Sophisticated credit analysts looking at Verano felt the company’s financial conditions improved and deserved a 13% lower cost of capital.

Meanwhile, during the same period Verano ($VRNOF) stock fell from $19 to $11.50, a 40% decline. When else have you seen the equity fall 40% and credit groups lower lending rates? Someone is wrong.

The answer lies in cannabis stocks still nursing a post-election hangover. After Biden took office and democrats assumed control of congress, investors expected rapid movement on the safe banking and legalization fronts. Stocks soared in anticipation. Since, nothing promising has happened politically and impatient investors have stampeded out of the sector. Here’s a look at how the sector has sold off since Georgia runoff elections.

Source: Google Finance

Broadly speaking, the plant touching MSOs have felt the most pain—as they have the most to gain from banking reform and legalization.

Source: Sammy J on Twitter

Some hope a version of safe banking will pass before year end, but that is purely speculative. A more realistic expectation is before the mid-terms in 2022. As an investor, I feel it is key know where you edge lies—and mine is not in predicting politics. With 76% of states offering medical or recreational cannabis and 68% of the country favoring legalization, I’m comfortable speculating change is on the horizon, but to predict exactly how soon seems like a fools errand.

Moreover, the Green Giants do not need legalization to succeed. Safe banking would be helpful, but the top names have access to financing, are continuing to win licenses and expand their moats. It is the smaller cannabis businesses that will suffer the most, and go extinct, if there is no political progress.

Looking Forward

Most MSOs (multi-state operators) report earnings in November, so expect more individual stock talk in the coming weeks. Coming off of the COVID lockdowns last year, Q3 comparisons will be tough. When most of us were locked down, cannabis use spiked. As the world has (somewhat) reopened, consumption has normalized this year. This should be already priced in, but some disappointments are likely. As always, guidance will be key.

Make no mistake: now is a hard time to be a cannabis investor. Shares are declining, politicians are disappointing and it feels like it might never change. If I have learned anything in my 25 years of doing this, these are not the times to panic. I started my career at Franklin Templeton and Sir John Templeton once said “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell”. I don’t think we are at the point of maximum pessimism, but sentiment is increasingly bearish.

I’ll close with a quote from Boris Jordan, Execute Director of Curaleaf. He was asked in a Reddit AMA “What’s the message to retail investors, or prospective retail investors, that see a 9-month declining trend in share price, on low liquidity exchanges?”

Boris responded, “Cannabis and Curaleaf are long-term plays in a new, emerging industry. We are in the early stages of growth, and as such volatility in the markets is par for the course. This is not a market for traders; this is a market for investors. Those that stay the course, will be rewarded."

Thank you for your support.

Sincerely,

Jesse Redmond

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