Editors’ Note: This is the transcript version of the podcast we posted on Wednesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast embedded below, if you need any clarification. Enjoy!
Listen on the go! Subscribe to The Cannabis Investing Podcast on Apple Podcasts, Spotify, and Stitcher.
Rena Sherbill: Hi again, everybody. Welcome back to this show. It’s great to have you listening with us. As always, super happy to bring back Jon DeCourcey from Viridian Capital Advisors. He writes over there, he writes for us at Seeking Alpha, some great takes on some undervalued stocks, he would call undervalued stocks as well. We get into some of those today, including MariMed, which we’ve also covered recently on CEO interviews.
Some other stocks, he likes low oil, and he gets into that today a number of others. And in general, why he likes the mid-tier play. He got into that in his last appearance with us last in late 2021 and he made the case for mid-tiers, then he makes them again today in light of what’s been called disappointing earnings, what Jon would call overblown, talking about some catalysts that have seen some protracted delays like New Jersey and other states that have been promised to come online that haven’t yet.
And other talk about near term headwinds, but why those don’t matter that much, because the long term picture is bright green to make a very obvious color metaphor.
So a great conversation, an interesting one for investors and for thoughtful followers of the space. I hope you enjoyed this conversation. And let me know what you think. Jon, welcome back to the Cannabis Investing Podcast. Welcome back to Seeking Alpha, even though you write for us, throughout, even between podcast appearances. But welcome back to the show.
Jon DeCourcey: Thank you very much. I’m really happy to have to be here. And I’m going to compliment you guys on the content that you’ve been putting out. I know, I said this in an email the other day, but, I think you guys have really come up with some really good stuff now that it’s a once a week platform. And, it’s a good voice for the space and for investors in the space that I know, I certainly listened to. So, I appreciate that. And I’m glad to participate again.
RS: I really appreciate that. And speaking of great cannabis content, I hope people are reading you from Viridian and also checking out your articles on Seeking Alpha. You’ve got some great stuff on some under followed Cannabis, some, some have some better followed, but also some under followed cannabis plays, that I think investors would get gain a lot from kind of looking at that insight.
So thank you for sharing your great cannabis content and for coming on also.
JD: Yes, absolutely. And it’s a great platform. And the only thing I will mention regarding that platform is I always feel bad about this. And I’m glad to kind of have a platform to mention it that if anybody ever has any direct questions for me, they can feel free to reach out to me, I know a lot of people will put in questions in the comments, but I get a little bit weary. So unlike some of the other probably publishers on the platform, I work for a traditional investment bank. And so everything I do goes through a lot of compliance. And so I’m always leery of responding to comments, I do read them. But it’s kind of one of those CYA situations for me.
So, if anybody does have any direct thoughts on the companies or anything of that nature, feel free to reach out to me via email, as well as commenting. Because, always happy to discuss anything with anybody regarding this space, as I think there’s a lot of interesting moving pieces going on. So that is something just pay attention to if you do read the notes that get published to Seeking Alpha.
And again, yes, I just — I try to focus on what I believe are the most quality and underappreciated names in the space. As you know, there’s a lot of content out there, but it traditionally centers on the biggest MSOs and kind of the genesis for my coverage launch at Viridian, which was about a year and a half ago now. And just kind of my thoughts on the space in general are it’s not necessarily as clear cut is saying the best MSOs the biggest MSOs are necessarily the best in this space. I think there’s a lot of really interesting companies and that are a bit smaller, with some really favorable fundamentals and growth opportunities than in some cases are translating and will translate to better growth moving forward.
And then additionally, by playing the second tier and third tier sites, guys, you’re really getting the benefit right now from consolidation in space at a time when there’s not a lot of other opportunities to generate alpha. And probably and I’m sure we’ll get into this, but probably not a lot of other opportunities to generate alpha in the near term other than market share gains and consolidation. And so that’s where it really — I think that’s the most interesting part of the market. And it’s starting to bear fruit.
I put out a note yesterday talking about Q1 returns, and you’re really seeing a lot of — and again, we’ll get into this, but I’m sure but you’re really seeing a lot of benefit and track greater traction for second and third tier sized operators. The biggest MSOs were down 15 or so percent in the first quarter, whereas the medium sized guys, so I bracket that is kind of the next 10 sized market caps were down just 2%. And then the smaller guys were down 4% or 5%.
But within that category, there were several big, big winners in the space that actually generated positive returns, and my coverage, which predominantly focuses on those kind of quality names within that tier, the second and third tier size, so combination of small and medium size, that actually did — would have generated a bit of a positive return hopefully moving forward, we can actually get that true positive return instead of relative.
But nevertheless, it does, it shows good traction for kind of those second and third tier sized space. So sorry, to kind of just jump on topics.
RS: No, no jump on the topic, jump on the topic. And it’s also I think it’s a good segue from your first/last appearance on the podcast, which was talking about where you were making the case for these mid-tier stocks. And we got a lot of interest in that vantage point.
So kind of catch us up in light of recent earnings, we got on and you said that you’re happy to be near the end of it. Talk to us, like how you’re feeling with this group kind of given the recent earnings.
JD: So, as I’ve said before, and I actually have gotten grief for this from my wife, who’s listened to me say it before, and some others that I like in earnings at this point to my wife and I, at one point, I have a son who’s in kindergarten, and we had to go to progress report update for him. And they treated it as if he was a junior in high school, and we’re going to look at colleges soon. And if that is then today even I kind of joke about on the way out that saying I don’t really care how he’s doing as long as he’s behaving, he’s eating his lunch, and he’s making some buddies.
As long as we get to that kind of end game of these a reasonable human being, by the time that they start really teaching things. In later parts of elementary school, that’s fine with me. And I think everybody and I’ve tried to say this before, I think everyone should kind of think about that, with earnings yes, we have this pay attention to earnings. It’s my job as a sell side equity research analyst to pay attention with earnings. But the quarter-to-quarter hits and misses, this shouldn’t be overly concerning.
It’s more — admittedly, I’m a bit frustrated with the space. And in that, I think, I wish the powers that be and management teams were a little bit better with messaging, as if the messaging is better, and the company’s gotten front of some near term underperformance rather than waiting for the earnings. And particularly since everybody reports so late in the cycle. I think they get some credit for it almost like a pre-announcement in the tech space or something like that. I think that would be very useful, and very helpful.
But at the end of the day, earnings were disappointing. Q4 was challenged for a lot of operators, and more importantly, key one is going to be challenged, and the first half is going to be challenged.
That was to all probably be expected. And, unfortunately, that lack of messaging makes some folks like myself, who model these things out and take the company’s word for it, in some ways, that makes us look foolish. And that’s a problem. But at the end of the day, I think anybody who’s looking at this space and concerned about first quarter or first half, even this year, isn’t kind of missing the forest through the trees.
And so I think earnings were disappointing, but it was kind of to be expected and in my opinion, was relatively overblown. I had a call with some people back in February timeframe who were so concerned over slowing growth rates for Massachusetts for Illinois these are these were the hot markets.
And I was explaining to them that listen, number one is we’re against really challenging comparisons were at this time, well, in the earlier part of the year, last year, we were still very much in kind of lockdown mode, people were getting stimulus and these markets were pretty new. So people were just willing to try it out. And so the comps are kind of unreasonably challenged at the beginning of this year and that’s getting better.
Back to that Illinois reference. Everybody’s so concerned about January sales, as I think they declined slightly, or they just was very, very modest growth. Things came bouncing right back in February, with much better growth. And I saw the results from March yesterday, and even better growth.
And so I think the near term headwinds are they matter, but not that much. And they will be overshadowed, as we kind of go forward with this year, and as some new markets come online, that the markets coming online that was another hindrance to this year, that is beyond any of these companies control, that a lot of them had baked in maybe a bit of contribution from New York, some significant contribution from New Jersey, some more contribution from Illinois on new licenses issued even the Virginia market expansion, these aren’t happening yet. And that’s expected to be as nothing comes quickly in this space, as everybody’s learning and or has learned.
But at the end of the day, all of those things, amongst many other favorable macro opportunities are going to come to fruition in 2030. And so growth will slow this year, and it should, it’s just inevitable, but it will rebound right back in 2023, and beyond.
And then on top of that, all of these companies have been building out assets and cleaning out their operations, again, it would be great if they cleaned up their reporting, to give people a heads up. But everything else has cleaned up so much and executed so much better, that the fundamentals are better than they’ve ever been before. And so once that kind of macro backdrop comes back to being a positive, we’re going to see some real results coming in 2023 and beyond, or actually, even in just the second half of this year, you’ll start to see things kind of ramp up, and then you get to ’23 and beyond that.
So long story short, I think the earnings well, disappointing and well present some headlines of maybe this phase is it is it is exciting as everybody at hope. And here we go again, it’s disappointing, that’s overblown. And at the end of the day, the fundamentals in the macro are really, really positive.
And actually, and I think investors are even starting to really understand that is we put out a chart of the week. So early and we put out a weekly chart of the week. We put out a chart of the week, a week or two ago, just looking at the earnings reports and correlated stock performance outperformance underperformance relative to the benchmark ETFs. And there was no correlation.
So essentially, it said didn’t really matter one way or another if the stocks underperformed or over performed for the Q4, and it’s just more about are you still in position to be a positively positioned operator kind of moving forward?
RS: One of the things that I wanted to touch on speaking of these delayed catalysts, let’s say, was the New Jersey announcement, I guess it was last week about the most recent delay and attributing it to an under supply. What are your thoughts on that? Kind of the announcement itself? And then how it –what it means for investors? Do you think that’s going to one of the things that’s going to come in the second half?
JD: Yes. So I mean, I think so I don’t have a crystal ball out. So I don’t know if New Jersey will I think the current thinking is now it’s probably a couple weeks into May that things could start out. And I know some of the bigger MSOs who are involved in this space have kind of said summertime AYR (OTCQX:AYRWF) — companies like that have said summertime, so they’re putting in a little bit of a buffer.
I live in Massachusetts, which has been from a regulatory standpoint, the biggest nightmare for any of these states. Unfortunately, I think we’re seeing that replicated across the East Coast in new markets that come to be, it’s a state dynamic that isn’t always favorable to just progress in general on anything.
And I think you’re going to — and that there’s a lot of people who have differing interests that all need to be met and all need to be accommodated. Before progress can be made, even again, if it’s a, even if it’s beneficial for everyone to have in this case, the cannabis industry. I don’t think anybody is actually saying they don’t want cannabis, per se, it’s more of a situation in which just everybody’s needs need to be met.
And in a little bit of a different situation on the East Coast and happened on the West Coast, that always needs to be factored in with any kind of rollout expectation is that a lot of these laws have been written so that local municipalities and towns are able to opt out of cannabis, which then obviously muddies the waters and challenges the waters for licensing and things like that. So long story short it’s not surprising by any means that this thing, that new things in New Jersey got delayed very well could happen again.
With that said, I think New Jersey is the delays are actually just making it so that you’re going to have a smoother rollout back to Massachusetts, that things are delayed here, but they still didn’t take enough time to really permit things to be as ready as they probably should have been. And you saw a situation in which there were just a couple of operators that had really unfair competitive advantages for a while, because just there was an imbalance of licenses.
And you saw that wholesale pricing was just sky high, because there was limited supply in the market. And so with every delay, it’s going to just make the New Jersey market rollout better. And I would say the same thing for when New York comes online, that every delay, aside from a lot of social equity interests and things like that, that might muddy the waters unrelated to the actual industry.
Any delay is actually going to make it so that the actual rollout will be smoother over time. And so I don’t think it should be overly problematic for investors, I think investors should just continue to look at who’s positioned well in New Jersey, and that’s the heirs, the ascends the tier ascends. Who is position well in a state like New Jersey, and then just kind of say, well, whenever this happens, the subsequent periods will be very, very solid. And we’ll see a lot of profitability, we’ll see a lot of incremental revenues and things like that. And up until that time period, we’ll kind of just have to wait this thing out.
RS: And in terms of the supply and demand in the sector, do you feel like that that’s been exacerbated by kind of kinks in the system, or some of the issues that have been particular to the past couple of years in terms of everybody having their supply chain working as efficiently and effectively as possible? Well, how do you think about that? And how should investors be thinking about that, do you think?
JD: Well, I think what we all need to kind of think about is just the two kind of sides of the situation, you have a California, which, just because of the illicit market, and the way that operations have been taxed in the state, but primarily because of the illicit market. The wholesale pricing is at the bare minimum for the industry, and it’s a really challenging market to operate. And as everybody knows, it’s been a really challenging market.
Just about everywhere else is, this is a, it’s a profitable business, it’s a profitable wholesale business there’s grades about profitability, but nevertheless, it’s a business where you can be profitable. And whether it’s a retailer, whether it’s a wholesaler, whether it’s vertically integrated it is a high margin product at the end of the day.
Where places like the East Coast and all new markets are going to have really inflated pricing in the early days is it’s just hard to get up to scale. And particularly in markets where there’s not an illicit market that’s present it’s hard to get up to scale. And this is a product category that is sought after. And so there will be a lot of demand that regardless of how the market actually rolls out, and so you’re going to see that you’re going to see kind of fits and starts with the wholesale pricing, as capacity comes online and his cultivation is built out.
You look at it in Massachusetts, and just about every MSO is ramping cultivation capacity in the state. And they’re doing so at a faster rate than new retail dispensaries are coming online. And in particular, city like Boston, which is obviously the biggest population center in the city, as well as Cambridge, which is probably number two, which is, or otherwise, it’s just a big metro area, that’s essentially Boston, these guys in those spaces, the dispensary openings are still even slower than elsewhere in the state.
And so every — it’s became news with the latest earnings reports that the pricing was coming down in Massachusetts, and it was becoming more of a challenging environment. Well, number one that’s inevitable, and will snap back as more retail comes on. And as kind of that supply demand imbalance levels out.
But also the prices are still at well over $2,000 a pound. And so even with was it three, and so that’s come down a lot, but even so, it’s still a very profitable business for well-run operators. And so the concerns for now about pricing and state like Massachusetts, are the still overblown in my opinion, as just over time, execution will get better from the operators.
And so as pricing maybe creeps down further, it will never get to that California love that and really cheap California level. But as pricing comes down further these guys will be that much more efficient in operations and have that much more scale of retail, et cetera, to offset that.
And so long story short, I think pricing declines are inevitable everywhere. But that’s okay, because it’s still a business where you can be profitable. And the guys who are actually executing will be able to kind of offset that by enhanced scale, enhanced efficiency in operation by building out better brands of products and things like that.
And so, it’s almost a, that we’re getting to a time period where company — investors need to just focus on who’s going to be really well positioned and or ready to execute quite well. Because those guys — those are going to be the ones area of the offset pricing pressure, and gone are the days and while they will come back in new markets, but gone are the days when this is an easy market to just generate a profit where you could put any bag of flower and get a premium price for it.
RS: So who are some of the companies in this mid-tier that your or lower to mid-tier that you’re excited about? And kind of like, what are the things that you’re is it location that you’re most paying attention to? Is it kind of quality of operations? Is it both? Is it something else?
JD: I’d say it’s everything. I think it kind of goes across the board there are some really good operators, there’s some really good operators who will do well, just on operations, and just by enhanced efficiency in operations with that you get a name like a merman that a lot of people follow that these guys have for a long while, we’re a company in which the valuation was really depleted. And they were kind of an afterthought, because of they weren’t expanding, and well, they had some, they also had some debt issues at that result.
But that it was in large part because they were just seen as kind of a boring plan in the space, they were primarily managed services and just a couple of states. Well, very quietly, they’ve flipped to those managed services to owned operation, but have continued to really execute well with their operations and are one of the most profitable businesses in the state in this space. That’s a name that is pretty exciting from an execution standpoint.
I’d also say, get a lot of traction on the topic a couple of times Schwazze (OTCQX:SHWZ), which is a Colorado primarily in Colorado operator, they’ve recently expanded into New Mexico and so will be kind of the biggest player in the early days of New Mexico wrap which started on this past Friday as a new market, not that’s the biggest market in the world, but it’s a good market. And New Mexico can be a pretty big market.
Schwazze was Medicine Man technology. I think I mentioned these guys to you the last time we spoke. Swhwazze was Medicine Man technologies back in 2019, which was trying to roll up Colorado, the fragmented Colorado market just after the law change to permit public companies there. They’ve it took a little bit of time because of COVID. But in the last year, they’ve made a lot of progress and have acquired I think it’s something over 30 dispensaries in Colorado some significant cultivation scale. And you know, a really ramping up in are arguably the biggest player in Colorado.
And now they’re just positioned to execute on these assets and really expand operation — expand retail scale, expand margins. And I might add whereas, and this is something I’m sure we’ll get into, but, unlike, a lot of operators in this space that are run by investor by former investors, Schwazze is run by one of the former heads of Albertsons, which is a grocery chain, which essentially did the same thing, rolling up the grocery industry back in the 90s.
And these guys are doing the same thing, and the grocery chain. And cannabis, grocery industry and cannabis are actually fairly similar. It’s a boots on the ground kind of industry, it’s a know your local market and cater to that local market industry. It’s a cannabis is a more attractive industry, as I just talked about the margin opportunity.
But, so they’re using that same expertise, and are scaling up through a roll up strategy and through execution of a roll up strategy, and I think it’s going to really bear fruit. I have them as growing, they were one of the biggest revenue growers in 2021. And for 2022, I have them growing even further have them really enhancing their margin profile. And again, that’s one of my top picks.
Other kind of names in that category that I really like are I really, like Jushi (OTCQX:JUSHF) is kind of an underappreciated MSO. It’s bigger than a Schwazze or MariMed (OTCQX:MRMD), but it’s still not, it’s still about a billion dollars. These guys are really smart, they’ve been very pragmatic, about expansion. They’ve positioned themselves really well. So they’ve done expansion, but they’re not trying to be everywhere, they’re trying to go deeper in certain markets. And I think that will really bear fruit.
They are really well positioned. So back to kind of how some are just a topic based on positioning, they are really well positioned in Pennsylvania, which could pass REC legislation this year, probably will. They’re well positioned in Ohio, same thing. And they are positioned better than anybody else in Virginia, which did pass REC legislation, but it’s going to not come on until ’24.
So they’re an operator that in then, obviously, they’re also in Massachusetts, and a few other states that are pretty interesting. But so there is an operator that just by further macro progress are suddenly going to shoot right up the list of revenue scale, margin scale, et cetera. And they could very well be in play to be acquired. Because of that, as we just proved with the Columbia Care (OTCQX:CCHWF) deal.
RS: Yes, what do you think about that Columbia Care deal [they did with Cresco (OTCQX:CRLBF)]?
JD: I guess I would say, is a cop out, but I would say it’s kind of a, the best answer is to be determined. Quite frankly, there’s so many redundancies and assets, and there are so many kind of things that are going need to sell, that we don’t even know what the ultimate takeout price is. With that said I really like the hustle for lack of a better phrase.
I think the idea of the scale that they can achieve with what they’re doing is really, really impressive. And I think that will generate a lot of interest.
I caution that, I’m not sure. And this is something that I’ve kind of talked about with writing on the M&A landscape in this space. I’m not sure if the ultimate goal is necessarily to be the most operationally efficient is possible. And if that was kind of the target of the M&A transaction it wasn’t necessarily one plus two equals three, in my opinion, and I’m just speculating, but it doesn’t seem to be the case, it seems like it was more about, well, we want to be the biggest in scale.
And if then that will bring institutional investor interest, which is a good and worthwhile goal. But if you’re looking for a company that’s actually going to operate — if you’re looking for a deal, that necessarily is going to be all about execution, and there will have to be a lot of execution on this. It’s a big integration.
I’m not sure if that was the ultimately the goal, and I think it’s even case in point. I have a couple of calls with investors. I don’t cover either name, but I end up speaking with folks about it kind of a lot. Just as I speak with anybody in the space and obviously that was big news last week when that came out.
There was a lot of confusion with the $2 billion valuation that they quoted, as you know, if you look at the kind of how Columbia Care was valued, if you just looked at fully diluted shares outstanding, et cetera you were getting closer to $1.5 — $1.4 billion. And it seems to be that they took an ultra-conservative approach to get to $2 billion valuation just to kind of be able to put that out there, that we are the biggest market cap.
And so ultimately, I’m not sure if that was a way of thinking with this kind of deal coming to light, I’m not sure if execution is really the goal here. I think of a deal like the recent Verano (OTCQX:VRNOF) Goodness Growth (OTCQX:GDNSF) deal that that kind of made more sense from a strategic play. And or even Gage and TerrAscend (OTCQX:TRSSF) which was another recent big deal. That was you that was more complimentary in and of itself.
With that said, though as I, as I said, I think it’s, I like the hustle. I like the idea of being kind of the biggest player. And I think that’s the — quite frankly, I do think that’s the motivation for a lot of M&A. Right now is there’s — if I don’t personally believe there’s the legislative catalyst this year, that’s going to kind of bring everything to light. And I don’t think even new state news is going to kind of bring a lot of upside in the near term for investors.
And I think what can be the next catalyst for big investment is for institutional investors to just say, well, geez, these companies are just getting huge. The growth is there, as again, macro gets better in the second half of this year, and next year.
And this is just too big to ignore, particularly when everything is so cheap. But even if they weren’t so cheap, it’s just too big to ignore, given the growth opportunity. You know, obviously, again, I’ll say it is too cheap, the space is too cheap. So I think that will be a motivating factor.
But I think in institutional investors will still find even without legislation this year, we’ll find a way to get involved in the space. And I think it’s going to be scaled it does it. And so I think that in the case of this deal, I think Cresco and Columbia Care thought to themselves, okay, well, let’s get to that scale as quick as possible. So that when we can be the drivers of that kind of institutional motivation, and that’s a good thing, because that would drive upside stock returns.
RS: So you’re saying just based on the sheer numbers, it’s going to interest more institutional investment?
JD: Yes, so it’s some point everybody asks, what are going to be the catalyst for upside stock returns, at some point, it’s going to be a combination of the space is cheap, the growth opportunity is re accelerating, or re accelerated, depending on if it’s we’re talking about the end of this year, or into ’23 or ’24, this space is re accelerating in terms of growth, because of new markets coming online if just without even any new legislation this year, you’re going to see Connecticut, New York, New Jersey, all coming online, either the end of this year, or in ’23.
And then you add in Pennsylvania, Ohio, some states in the Midwest, more states in the South, which all could pass legislation this year, and you’re going to see that grow through accelerate. And so the combination of if things stay cheap. And if the growth is either re accelerating in the near term, or accelerated depending on again, if it’s 2022, or ’23, we’re talking about.
And then as these companies start to report scale, a greater scale of results, institutional investors are just going to be unwilling to continue ignore the space and legislation or not, and they’re going to find a kind of a workaround to get involved, whether that’s just going to their traditional banks and saying I’ll take it out. I mean, pushing those banks and saying your custody, my custody my assets, or I’m going to take trades elsewhere for other things, or they’re going to push the issue further, where you’re going to get the factor of greater institution investment, not all institutional investors will do this will be willing to do this, but you’ll see this some do that and that will bring outsized returns for the space.
Is it’s just going to be too big to pass up, I was looking at a comp table this morning and even without factoring in further consolidation, which I do think will come. But even without factoring in further consolidation, I think seven or eight of the top 10 MSOs are projected next year based on analyst estimates, to have more than a billion dollars in revenues for ’23. That’s real scale.
And EBITDA in the mid 30% margin range. So again, that’s, that’s real scale for these things, and as execution on these growth initiatives this year, so unfortunately, 2022 is probably going to be more or less your setup year for things to bear fruit. These guys are great cash cows to you by that point, and I can’t imagine, but the institutional investments that are remaining on the sidelines right now, are going to continue to say, I’ll stay here, while these companies are so big, and scaling and the growth outlooks looks great and the valuation is where the space is valued, is if it’s a mature inflation oriented growth market.
And so you’re going to see as the scale comes, that’s what will bring more institutional investors, in my opinion. And so that is the motivation for a lot of the M&A that’s out there right now is kind of, to drive that into interest, as well as to be at the top of any kind of comp table for one that comes. So you’re the name that just gets that kind of marking, and you’re the name that gets that credit for when the institutional investment comes.
RS: Do you think it’s kind of a similar reasoning behind the politicians putting forth bills in the House and Senate that are probably going to get passed in the Senate?
JD: Yes. So that’s a little bit of a challenging question. But I think — so I think there are folks that actually have true interest in this in the house, and that they’re really actually pushing it for viable reasons believe in believe that it’s foolish, that there’s no banking access, believe that it would be good for the economy believe that it’d be good for individual states, believe that it could even provide a safety factor. And even I’ve seen it, it was just fine when it was included when safe was included in the defense spending bill last year, that it was a fight against organized crime.
So there are all these warranted and justifiable things that are being pushed for I think true reasoning in the House. And I think the folks pushing at there they do believe in it. I think they understand and have understood that it was going to sell in the House. I don’t think that they’re foolish. And I don’t think that’s the case at all. I think what you’re kind of alluding to is, maybe a bit of a lip service kind of situation. I do think that is true.
RS: A little lip service, but also even just to drive the interest and kind of awareness more than they can without repeated kind of?
JD: Yes, so I can see. So yes, I think that’s probably true. Because I was going to say that honestly, I do think that and I said this before when he first put out his proposal in the summertime I do think that Chuck Schumer’s proposal is lip service, I don’t, I think ultimately, he doesn’t care about the cannabis space. But more importantly, be I think he will, he knows it’s not going to pass this year in kind of full, I think it’s more about him appeasing the kind of both sides of the democratic party.
And there’s because there’s really, there’s really three parties at play, when it comes to legislation regarding cannabis, there’s the Republican side, which is obviously more conservative. There is the more medium line traditional Democrat, which is okay with cannabis. And then there’s the more progressive side that is very progressive about requiring social equity and things like that.
With this issue, I think the Schumer proposal is kind of trying to walk the balance of putting something out there to appease constituents that want cannabis legislation as well as trying to walk the fine line between what’s realistic but also not making the progressives upset.
And even I said that the timing, so supposedly, Schumer’s proposal is coming out later this month and towards the end of this month. And I said at the time when that was when that kind of word came out that the timing was really interesting, because I think that likely lead to, it’s more of a conservative and less about social equity than the progressives will probably like, and the reason that he waited until he was waiting until the end of April was that he didn’t want a primary challenge from AOC and in the liberals, in the more progressive Democrats.
And so I do think it’s a bit of a situation where we’re kind of walking that front line between lip service and really a genuine interest on that.
RS: Yes. Like, like politics itself.
JD: Exactly. And I should mention it. So…
RS: You’ve got a webinar coming up talking about this?
JD: I do. Yes. So I was going to mention that, because I think it will be really interesting in this space. And I think anybody listening to this would probably be really interesting. So we host a, what I’ve branded the experts series, at Viridian. And just try to find bid thought leaders in the space to kind of talk about topics and yes, so next week, on Thursday, the 14th, I’m going to be hosting one with so a gentleman that used to be representative promoters lead legislation, aid and actually wrote the initial language of safe as well as the Congressman’s current legislation, and so I think it would be — and so we’re going to obviously be talking about this, these guys understand the day to day dynamics a lot better than I do of how legislation passes I try to follow it as closely as possible is it really matters, and would be a huge catalyst for this space.
But these guys obviously, understand that day to day a lot better than I and I, one thing I want to find out from them is kind of what happens if the Republicans lose — if the Republicans win in the midterms, and the Democrats either lose the house, the senate, or both?
I think there’s still a pathway to banking legislation under that kind of situation. And I think ultimately, it could be more of a streamlined banking, which would maybe even be easier to install. But time will tell kind of on that front end. And is safe is still not completely off the table for this year as I’ve said I thought that it would probably come this year is attached to something else. But at the same time, now, I think it’s just got much more challenging given, with every day that passes were closer to the midterms and things that we have more contentious, we still haven’t had the Supreme Court Justice approved, and that will get contentious.
And then obviously, the situation in Russia is something that kind of muddies the water further and will likely result in issues that will and quite frankly should be prioritized over cannabis, whether that’s a something like a stimulus related to gas expenses, or issues related to inflation, or God forbid, defense related needs, it just becomes a bit more challenging to push cannabis banking, which we all want. But not so prioritized for the greater good.
So if anybody wants to join that call, they can reach out to me via my email as well.
RS: What’s your email? Let’s put it out there.
JD: So, it’s on any of my notes for Seeking Alpha, but then it’s jdecourcey@viridianca.com.
RS: Do you — how much time do you spend, I imagine you spend some time thinking about the valuations that come from federal legalization? Or is it so dependent on kind of like, how and when that happens?
JD: I think I can answer that saying it is dependent and it’s something that it’s really going to depend on when and how things are implemented. So, but I spend, admittedly, I spend a lot of time thinking about what happens to the market and what happens to stocks. I’ve run an analysis and I do it, do it for my own purposes, as quite frankly my job could very well change with that as more banks kind of come and I have more competition from other banks and traditional banks and things like that, and so even for personal reasons, I look at this I’m not allowed to invest in the space, but I certainly have skin in the game.
But I’ve run analyses of just looking at where, where these companies are valued relative to more comparable industries, and just based on growth profile, and things of that nature, you’re looking at an easy 2 to 3x, the current valuations, no matter the situation of timing. And with each day that passes, the upside probably just gets that much better, as you get if — so if say that passed last year, then the valuation would be hindered a bit by slowing perceived growth for 2022. And they’d be hindered by the fact that the earnings to the point that I made at the beginning of this call, and this is just my sour grapes. But as an investor, I added some sour grapes on it too.
But earnings reporting and kind of getting in front of things isn’t ready for primetime, the valuations will be hurt by that. The earnings would be hurt by the idea that the build out of operations, and a lot of states for a lot of these operators isn’t really there yet, and is progressing, but we’ll have fits and starts and will be challenging, and will likely all take longer than anticipated, be more expensive, and then getting things to full capacity will take longer, and be more expensive.
And so you know, and then finally, the valuations would have been hindered by the lack of M&A that’s been happening and quick scale that a lot of these companies are expanding with as M&A is a real thing in this space, and a real way to generate alpha in a real way to play the market in the short term.
And so I think it would have been hindered by that. And so again, that was a very belabored way of saying, with each day that passes, and as we get further down the line, the long term upside from investors, they get from new institutional investors getting into this space will certainly be greater as time progresses, just because operations get keep getting better, the fundamentals keep getting better.
And for anybody who’s at all skeptical of that kind of long term, upside opportunity just really needs to look at the institutional investment from some of the better tech plays and non-plant touching plays in this space, particularly the tech plays, because it’s a bit of a stretch sometimes to say that some of the more conservative ancillary services plays, are true comparable.
But if you look at some of the really solid private — so some of the solid private kind of software plays in this space, their institutional investment is all the big boys and all of the top investors in traditional markets you’ll look at like a leaf link or a duchy or one of those, and you’re catering to really great institutional investors.
And I had a call with a Hoodie, which is a really impressive company, a really impressive software play that I think people should pay attention too. Seeing last weakened, it’s a really, I think, institutional investors will love a company like that, and will jump right in at the kind of opportunity that’s there. And these institutional investors yesterday, like these companies, yes, they are impressed by these companies, but they’re playing those faith, they’re playing them because of the attractive profile that cannabis presents.
And so that all anybody needs to do is just look at those and say, Okay, well, these same institutional investors will play cannabis, and will get involved in cannabis, as well as other more traditional institutional investors as well. But just in general, that’s a great way to kind of remind yourself that as things take time, they’ll be okay, and the upside opportunity is there.
RS: Yes, that’s a great way of looking at it from kind of a different — a slightly different vantage point. Yes, it’s an interesting point.
JD: And look, it also says the same thing about the Canadian companies. The Canadian companies have a lot of institutional investment, as well, despite the fact that they’re have much smaller growth profiles. And that market is, in many cases, much more challenging than the U.S. is from a competitive standpoint or regulatory landscape, as well. So it’s the way to think about it. But I think the tech plays is really interesting.
RS: Well, this feels like my favorite conversations are ones that I feel like we’re pretty much in the middle of a longer conversation. So I am happy to continue that next time, I feel like we touched on some really great points that I think are really interesting for investors to think about.
I feel like it’s kind of like really extrapolating from where we are in the industry, but like, from a really clear perspective, and not being caught up on kind of the noise. I think that that a lot of investors get caught up around the industry.
JD: Yes, I think so and I think I would just say to anybody out there who’s thinking about the space stay the course. And it ultimately will work out and in the interim really dig into these smaller and medium sized players as market share gains, and potential for M&A, I have the opportunity to derive a lot of upside.
For investors some — while things were down for the market overall and as I mentioned kind of my coverage was just about flat. There were some real winners in this space. I think, there were some companies that with investment could have generated a lot of alpha in the quarter, and I think that will continue that some and it’s fairly obvious as I — two of my topics and our law firms, which I think is just an obvious takeout, it’s a really interesting name, they’re short on cash, it’s a good branded play in California that any MSO would probably love to have that brand in their portfolio, as well as kind of using the California operations as a hedge on future interstate sales and or just easier market conditions in California. And that takeout would come into premium.
Same thing with I keep saying Planet 13 (OTCQX:PLNHF). Planet 13, has been so disproportionately impacted by COVID. In my opinion, there’s a one of the best run operators in this space, they’ve just been really just hurt by a lack of tourism, to Vegas, and more recently to California as COVID, and I’m knocking on wood hard here, as COVID stays better and we get some tourism, that business should re accelerate and do very well again.
And at the end of the day as I said, a lot of these companies are looking for plug and play for scale, there’s no better asset in this industry, then that superstore in Las Vegas, which isn’t going to go away anytime soon, because of the gaming laws there, you’re never going to get closer to the strip than that and the strip will always cater to tourists. And so that it’s a non-diminishing asset.
And that that thing can even in crappy COVID times was running at $100 million run rate for revenues. That’d be a pretty nice plug and play for anybody to acquire and again that would come at a premium valuation. And so you could have nice upside.
RS: Yes, both of those are like super strong brands in the industry that I feel like would be…
JD: Sure.
RS: Yes. Great stuff. Jon. I’m looking forward to next time. If you’ll come back, and I’m looking forward to it.
JD: For sure. Well, thanks so much. I really appreciate it and everybody have a good day.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
Be the first to comment