Cannabis investing $YOLO

[3259]

Been looking into US MSOs a good bit. Had trouble finding credible thought leaders on the business side so I started reading law review articles, blogs at top law firms, and policy papers from lobbying groups in the space. The more I learn, the less I like the Cannabis space. At best, I'm putting it in the too hard pile.

 

My two cents. I think federal legalization is inevitable, its uncertain how current MSOs fare in that scenario, and my guess is not well. I expect industry will be regulated like insurance and/or liquor. After federal legalization, I think the present MSOs' cultivation, licensing, and distribution assets might be worth less than they are today. Upon federal legalization, I expect there will be a battle among cannabis, alcohol and tobacco companies (and maybe pharmacies), all of which will push to use their distribution networks. I'm not confident the current MSOs win that battle.

 

Some ways I see you could making money in the US MSOs:

1. If congress punts on full legalization and passes SAFE banking act. I would sell the news.

2. Buying smaller players and hope they get bought by a larger MSO. I would sell the news.

3. Buy & hold Constellation, British American Tobacco, TPB, MO or BUD at reasonable valuation and revisit when federal legalization is legitimately being debated. BUD & BTI appear cheap. BUD has dividend withholding issues. The others appear roughly fairly valued.

4. Buy something like Trulieve and hope that it takes lot longer for feds to legalize.

Edited January 6, 2022 by 3259

[3259]

1 minute ago, MMM20 said:

Did you read anything particularly helpful on BUD/cannabis? 

No. Just general ideas about their distribution abilities in a post-interstate commerce world.

[chrispy]

I disagree but appreciate your opinion. The sector certainly has many ifs and could turn out to be a terrible investment. But I am more bullish on the MSOs.

 

If Biden today said cannabis will become legal today then how long do you think before it actually happens? 6 months, 2 years, 5 years? New York will take 2-3 years to go from medical to adult use. The US still has it ranked worse then fentanyl. 

 

Growing cannabis at scale is very difficult. What makes anyone believe that British American Tobacco can with zero experience?

 

Constellation burned billions on a terrible investment in Canadian operations. They dont appear to be very competent in this sector.

 

Local municipalities zoning have and will continue to limit cannabis retail locations (and cultivation unless one believes interstate commerce will happen). This is what no one talks about and it has nothing to do with federal legality. How does MO or BUD all of a sudden get retail in a suburb which already has 3 dispensaries and the NIMBYs dont want anymore?

 

So if they cant grow, they cant get land for new grows, and they cant get retail then their only option is to buy an existing operator.  And this will all take many years to play out which means the MSOs will be bigger and the tax revenue will be greater to states who wont want to give it up.

 

The question to me is when.

[3259]

2 minutes ago, chrispy said:

If Biden today said cannabis will become legal today then how long do you think before it actually happens?

Best guess would be roughly 5 years. Feds will need to pause the dormant commerce clause and there will be lots of other issues (social equity) to resolve.

[3259]

5 minutes ago, chrispy said:

Growing cannabis at scale is very difficult. What makes anyone believe that British American Tobacco can with zero experience?

Certainly open to other views (I'm not an expert on cannabis growing / distribution) but long term and post interstate commerce, I don't think BTI will need to grow it just like they don't grow their own tobacco. Long term, I think the winner will be whomever can establish a national brand. I'm not confident any of the MSOs can / will win that fight. OTOH, you could have an MSO that builds a brand prior to interstate commerce by focusing on the key areas (CA, NY, FL) but that MSO might still be saddled with a bunch of stuff (stores, greenhouses, and warehouses) that aren't optimal for a post-interstate commerce world.

[3259]

14 minutes ago, chrispy said:

Constellation burned billions on a terrible investment in Canadian operations. They dont appear to be very competent in this sector.

Agree. But I think the market dynamics will be different post federal legalization. I'm not confident the current MSOs fare well in that environment. I think the odds are against them.   

[KJP]

13 minutes ago, 3259 said:

Best guess would be roughly 5 years. Feds will need to pause the dormant commerce clause and there will be lots of other issues (social equity) to resolve.

 

This is a big question mark with federal legalization:  What form will it take?  Will a federal legalization continue to permit states to require all cannabis sold in the state to be grown in the state?  What about online purchasing?

[3259]

20 minutes ago, chrispy said:

Local municipalities zoning have and will continue to limit cannabis retail locations (and cultivation unless one believes interstate commerce will happen).

Thanks for your post. It helps me think through my own thesis.

 

The issue of interstate commerce and local protectionism (zoning, licensing requirements, social equity programs) is where this space starts to go in the too hard pile for me. I think federal legalization is inevitable (no idea when that happens but definitely won't happen while we're dealing with Covid). Once that happens, a lot of the protectionism goes away due to the dormant commerce clause issue. What protectionism gets thrown out and who benefits from the future regulatory structure is a big part of why I put this space in the too hard pile. Zoning might provide some protection. I don't know. I imagine some pharmacies and large convenience store operators would like to get involved. Does zoning protect liquor stores? In my state, you can just go to Costco.

[3259]

4 hours ago, chrispy said:

How does MO or BUD all of a sudden get retail in a suburb which already has 3 dispensaries and the NIMBYs dont want anymore?

The same way they get liquor and cigs in retail now. Pharmacy, convenience store, and grocery chains with more lobbying money, more assets, and superior management are going to want to sell it.

 

NIMBYs? We're not talking about strip clubs. Many (most?) folks under 40 are less concerned (politically and health wise) about edibles than drinking alcohol or smoking/dipping tobacco. I live in the bible belt and can buy liquor at Costco & tobacco at Sam's Club.

Edited January 6, 2022 by 3259

[KJP]

19 minutes ago, 3259 said:

Once that happens, a lot of the protectionism goes away due to the dormant commerce clause issue.

 

Maybe, maybe not.  The Commerce Clause is only "dormant" when Congress doesn't act.  But when Congress uses its Commerce Clause power, it can create (or accept from the states) restrictions on interstate commerce that would be unlawful for the states to impose on their own. 

[3259]

 

13 minutes ago, KJP said:

The Commerce Clause is only "dormant" when Congress doesn't act.

 

Not sure I follow you here. The commerce clause applies even if Congress doesn't act. 

 

13 minutes ago, KJP said:

when Congress uses its Commerce Clause power, it can create (or accept from the states) restrictions on interstate commerce that would be unlawful for the states to impose on their own.

 

Although there is uncertainty about what regulatory framework Congress will use, I think it is likely that framework will be less protectionist (and potentially much much less) than current state and local policies that insulate the local / state markets from competition. Opening up to more competition is good policy. It would lower prices, allow brands to form which would have safety benefits, it would do a better job getting rid of the black market than protectionist state policies do, and at some point the big boys are going to start lobbying hard to get into the game. FWIW, if you look at the nascent Cannabis lobbying groups, the US MSOs and the big corps ain't on the same team.   

[3259]

1 hour ago, KJP said:

Will a federal legalization continue to permit states to require all cannabis sold in the state to be grown in the state?

 

I know most folks don't give a hoot about state pot regs, especially when there are lots more important things going on in the world. But folks should be outraged by these policies. Bad for consumers. Keeps prices too high. Makes it impossible to get rid of the black market. Makes it harder to build a brand.

[KJP]

49 minutes ago, 3259 said:

 

 

Not sure I follow you here. The commerce clause applies even if Congress doesn't act. 

 

 

Although there is uncertainty about what regulatory framework Congress will use, I think it is likely that framework will be less protectionist (and potentially much much less) than current state and local policies that insulate the local / state markets from competition. Opening up to more competition is good policy. It would lower prices, allow brands to form which would have safety benefits, it would do a better job getting rid of the black market than protectionist state policies do, and at some point the big boys are going to start lobbying hard to get into the game. FWIW, if you look at the nascent Cannabis lobbying groups, the US MSOs and the big corps ain't on the same team.   

 

I know you know this, but just for others reading, the "Commerce Clause" refers to Article I, Section 8, Clause 3 of the U.S. Constitution, which gives the federal government (specifically Congress) the power to "regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."  The courts have inferred from this enumerated federal power a limit on the authority of states to act in certain ways even when Congress has not acted.   To simplify (a lot), the courts have held that states generally cannot engage in protectionist legislation that is meant to protect their own industries over the industries of other states.  This doctrine is referred to as the "dormant" Commerce Clause, because courts invoke it even when Congress has not acted at all on the issue.

 

But when Congress does act and expressly legislates on what states can and cannot do in a particular area, then there is no more scope for this "dormant" Commerce Clause doctrine.  Instead, the express language of federal statutory law controls.  And as part of its express power to "regulate Commerce . . . among the several States," Congress may expressly permit States to favor their own domestic industry and engage in protectionist regulation. 

 

Turning back to cannabis, if all Congress did was drop all federal restrictions on cannabis, the dormant Commerce Clause would then kick in and I doubt states would be permitted to, for example, require all cannabis sold in the state to be grown in the state.  But in any legalization legislation, Congress could permit states to continue to do that.  I cannot predict what form any federal legalization would take.  But, as one example, I'd be nervous about companies whose economics depend on the fact that they have one of a very limited number of state cultivation licenses.

[chrispy]

Cannabis is a schedule 1 drug and while the sentiment is changing, it is far from normalized like alcohol for instance. I cant use a one hitter at the thanksgiving table.

 

California which is regarded as the north star for cannabis culture in the US (along with CO and a couple of others), the following example shows the level of NIMBY even after many years of state legality:

 

"Only 161 of California's 482 municipalities and 24 of the 58 counties have opted to allow commercial cannabis activity of any sort"

 

And New York just had their opt-out deadline:

 

"However, there are still a significant number of areas where cannabis commerce won’t be immediately permitted, with one list from the Rockefeller Institute counting 642 dispensary opt-outs and 733 consumption site opt-outs as of Sunday."

 

While I expect normalization to continue, the above examples provided physical evidence of the local zoning and regulations that will not be impacted by any federal legalization.

[Spekulatius]

I feel like TPB get's a free ride on the growth  in weed use, no matter the regulatory framework. I don't have to deal with weird CEO's, lack of FCF, community adjusted EBITDA or low weed prices, greenhouses etc and all that nonsense.

 

While not egregiously cheap, i could see TPB becoming a multi-bagger in a few years and maybe even just a solid double digit compounder in a more baseline scenario. I guess the one issue that is hard to handicap is the exact nature of the Zig Zag licensing agreement with Republic Industry (which produces the paper).

[LC]

9 hours ago, chrispy said:

 I cant use a one hitter at the thanksgiving table.

 

Not with that attitude

[nafregnum]

I've kept my eye on MSOS and stuff like Verano and Green Thumb - there's a little breath of life in these the last few days -- I'm curious if anyone knows if something's about to turn around?

[willie2013]

Could just be the ban on naked short selling in Canada. 280E isn’t going away but perhaps the chances of SAFE banking are improving. 

[nafregnum]

Everything in this space is up 30%+ today on news of a Federal pardon of all simple possession convictions.

 

 

[MMM20]

3 hours ago, nafregnum said:

Everything in this space is up 30%+ today on news of a Federal pardon of all simple possession convictions.

 

 

 

Much more than that, it's about re/descheduling at the federal level and the likely downstream effects. This is about as much as Biden could do. I have seen credible typically skeptical DC sources saying this is the biggest news for cannabis since the Cole memo.

 

Who will now stand in the way of a CA/NJ interstate cannabis trade agreement, which has long been in the works? Or other states that opt into the same?

 

Will the MSOs be the ones to fight against freedom in cannabis markets? More likely they'll become Glass House customers.

 

IMHO, GLASF should be up 3-5x on this news. 

[rogermunibond]

Is now the time to take a small bet on the cannabis ETF?

 

Seems like chances of legalization are pretty low with a Republican House but...

[MMM20]

29 minutes ago, rogermunibond said:

Is now the time to take a small bet on the cannabis ETF?

 

Seems like chances of legalization are pretty low with a Republican House but...

Agreed…