Since I started working in the cannabis industry, wealthy friends often ask, “what’s your best cannabis investing idea?” Simply put, successful cannabis investing does not require illiquid private equity, speculative venture capital, or overly-complicated funds. Instead, one can simply invest in a liquid portfolio of dominant, publicly listed, cannabis companies. After sharing this idea several times, I created this website to distribute the advice in a scaleable manner.
Framing The Opportunity
Cannabis in the United States is coming off almost 100 years of prohibition. In 1937 cannabis went from the fourth most prescribed drug in the United States to federally illegal. Prior to this, it was viewed as a medicine that had great utility and a common recreational substance.
There are many theories as to why it was made illegal, and most agree it was to the economic advantage of wealthy families looking to profit from industries that would benefit from a lack of cannabis. Hemp was widely used at the time and paper companies would benefit from its eradication. It is also possible big pharmaceutical companies would be more profitable building new drugs rather than relaying on nature’s solutions. At the time, The American Medical Association was adamantly opposed to cannabis prohibition.
While Cannabis is still federally illegal and a Schedule One controlled substance, states are permitted to make their own regulations. Currently, 38 out of 50 states allow medical cannabis or recreational. Recreational means anyone over 21 can purchase cannabis without a doctor’s recommendation—similar to how alcohol is regulated in the United States.
Source: Business Insider
Every state that had cannabis on the election ballot in 2020 passed, and just 24% of the country does not currently allow one form of cannabis usage. It is very likely that cannabis will be made federally legal (or decriminalized) and removed from the Schedule One list. Experts predicted this might occurring during Biden’s term, however, timing on these types of things in always difficult to predict.
The current landscape is similar to when alcohol was removed from prohibition in 1933. We went from a period of illegal bootleggers to powerful national brands. Names like Jim Beam, Budweiser and Bacardi flourished when prohibition ended. Today, these are among the most dominant US brands and the best opportunity to invest was when they were coming off prohibition.
While California is the cannabis capital of the world, today’s top brands are usually participating in multiple markets. We call these MSOs, or multi-state-operators. These are businesses that began in one state, found success and are leveraging their success to take on new markets. For example, a business that is succeeding in growing and selling cannabis in Ohio may move to Pennsylvania and attempt to replicate their success and diversify the business. These MSOs are the biggest, most liquid, most proven names in the cannabis business. I refer to these companies as Green Giants.
Succeeding in cannabis is not easy. It’s a hard plant to grow well, the licensing process is highly competitive and every state has unique regulations. For these reasons, we see hundreds of less-proven operators start up, blow their budget and never be heard from again.
Most cities and/or states put a cap on the number of cannabis businesses they will allow. For example, Santa Barbara has three storefront dispensaries where anyone over 21 can purchase cannabis. They had an ultra-competitive application process for these sought after storefront permits and the businesses that won licenses are thriving. It’s not uncommon to see these small stores generating over $1mm/month in sales.
The businesses that won the three licenses are not small start ups. All three went to proven operators with large, established businesses—Glass House Brands, Coastal and Jushi. Glass House and Jushi are public companies with experience in winning licenses, and Coastal is a chain of privately-held cannabis assets. They have been awarded licenses previously, know what’s important in the application process, are politically savvy and have highly competent management teams.
The same skills that allow the Green Giants to win licenses also are the reason they execute well. In the Santa Barbara example, Jushi is also establishing a store an hour north in Grover Beach. They can leverage their experience in not just the California market, but with a very similar demographic profile to their store in Santa Barbara. Jushi can use the same contractors to build a beautiful store and pass code inspections, the same distributors to fill the store with popular products and leverage their sales and marketing experiences to make sure the shelf space is optimized and the website is top tier. Finally, they have the management teams in place to recruit and train employees to keep a similarly satisfying in-store experience.
Green Thumb Industries Example
Green Thumb Industries (GTI) is an excellent example of a Green Giant. Founded in 2014, GTI is a national cannabis brand headquartered in Chicago. Ben Kovler is the founder of GTI and his great-grandfather invested $5,000 in 1935 to found what would become Jim Beam—a liquor businesses that did $1.27 billion in sales last year. Seeing his great grandfather succeed with alcohol coming out of prohibition has inspired Ben to try and do the same with cannabis.
Established in 2014, GTI operates in twelve states, has 13 manufacturing facilities and 97 retail licenses. Their core markets are Illinois and Pennsylvania with an emphasis on mid-west and East Coast markets. They are vertically integrated—meaning they control cultivation, manufacturing and retail—which leads to higher margins and greater control of the supply chain. For example, in Pennsylvania they own the farm that grows the cannabis, the manufacturing facility that packages the products and the retail storefront in which the products are sold. They have successfully done this in several markets, are prepared for further expansion and investors are benefiting.
After establish a footprint in 2014-2017, GTI has been dedicated to building production facilities and opening stores. Now, positioned for sustainable growth they are emphasizing building brands, developing loyalty and increasingly automating processes. GTI is so far ahead of a new startup that it makes it extremely difficult to catch up.
Source: Green Thumb Industries August 2021 Investor Presentation
Increasing Institutional Ownership
Because cannabis is federally illegal and a Schedule One controlled substance, US institutions are not currently investing in the space. Almost all institutional investment management guidelines prevent these large allocators from investing in something federally illegal. As a result, even the largest, highest-quality cannabis stocks are currently owned by individual investors and family offices.
Jeffries Analyst Owen Bennet estimates that despite being a “generational wealth opportunity” that institutional ownership of US plant-touching businesses is less than 4%. Said differently, 96% on the biggest US investors are not currently investing in US plant-touching cannabis stocks. Plant touching refers to things like grow facilities, manufacturing and retail dispensaries—as opposed to ancillary businesses such as technology or packaging that may grow with cannabis, but are not directly involved with the plant.
By way of comparison, institutional ownership in big tech is 70% and 45% in global staples. It is common to see roughly 50% institutional ownership across sectors. When cannabis becomes federally legal, money will pour into the cannabis stocks. Especially to the most proven names—the Green Giants. A weighting comparable to global staples would be a 10x increase in institutional buying. This influx of capital represents a significant and ongoing opportunity as more and more big buyers enter the space.
Now Is The Time To Invest
Part of the investment thesis is that we are in the very early stages of an emerging industry. Now is the time to invest in cannabis and the Green Giants portfolio is a superior solution. The US market is at a key inflection point where the most proven brands are becoming dominant and lasting alliances are being formed. Just as Bacardi and Budweiser flourished when alcohol prohibition ended, the dominant cannabis brands are being formed today.
Currently 38 states (76%) offer offer either medical or adult-use cannabis and the US is at the tipping point for full nationwide legalization. This will open the industry to an influx of new capital and it is also likely many new people will try cannabis when it becomes more accessible and acceptable.
Investing now — before the United States legalizes cannabis — presents an opportunity that will not exist post legalization. Upon legalization, or decriminalization, institutional investors will be permitted to access cannabis investments and the sheer influx of capital will move these names. Institutions will be seeking the most proven, the most liquid names and will flock to a portfolio of Green Giants.
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