Looking For The Bud Light Of Cannabis

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Alex Carchidi is bullish on the cannabis sector but not ready to invest in stocks, except for Innovative Industrial Properties.2 cannabis stocks worth considering are Green Thumb Industries and ...

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Tilray the only international option (13:30). Who looks good in Canada (16:40). Why Alex avoids MSOS ETF (22:30). Legalization, rescheduling and incremental change (23:20). Transcript Rena Sherbill: Alex Carchidi, welcome back to the Cannabis Investing Podcast. Always great to talk to you. Thanks for coming back on the show. Alex Carchidi: Hey, thanks for having me. I'm so happy to be here and I'm excited to talk about the cannabis and psychedelic industries, because there's been a fair amount going on actually. RS: We too are excited to talk about it and excited to talk about it with you specifically. You've been on talking about psychedelics. You've even been on our Investing Experts talking biotech and pharma. That's where your background comes from in many respects, but you've also been writing recently about some cannabis stocks. There's definitely been some news out there regarding rescheduling, possible rescheduling, possible new regulations coming on a federal level. But how are you thinking about cannabis stocks these days and that sector? AC: So, my thinking is essentially the same as it has been, which is that there are a number of plays, which are – they have the potential to become something good. I'm not willing to myself invest in any of them at this moment. And aside from that, there are also a number of stocks that I think are - perhaps investors are interested in them, but I don't believe they'll make good investments whatsoever. So, this is kind of the situation. It's an industry moving towards hopefully more profitability in terms of the quality companies and the rest are floundering still, despite some pretty big regulatory changes across the globe at this point. RS: So, would you say, you're not investing right now because it's not there yet? You're still waiting to see how it shakes out and that affects who you would choose or when you would choose them, how would you articulate why you're not investing? AC: So, the play that I own in the cannabis space right now is Innovative Industrial Properties (IIPR). It's a REIT that specializes in cannabis growing real estate that they will rent out to the companies in the space. To me, that is sufficiently upstream from cannabis sector itself, primary production, that it's a bit of a safer play. Now, as far as what I'm looking for, for the companies that are in the space, the thing that I keep coming back to is two things. One of them is operating profits consistently regardless of the price of cannabis in the place that they're marketing at. And two is who can develop a competitive advantage in either low-cost production at scale or branding. And there's progress on all those metrics in the past few quarters, but there still is not to me. I'm looking for the Bud Light of cannabis. That's what I'm trying to invest in the company that makes the Bud Light of cannabis products. And I believe that eventually there will be one, but I don't quite see it yet. RS: Let me ask you, sticking on the REIT topic for a second, first of all, how long have you been in IIPR? Would you say now is still a good time to get in there? AC: So, I've been in IIPR since a few years now. I want to say 2 or 3 years. And my shares are deeply underwater, full disclosure there, but I do think that it is actually a good play. I would be willing to invest in it now, although I don't plan to add to my position, but essentially, the thesis remains the same. These marijuana banking reforms that there were bills introduced into Congress about over the past couple of years, they haven't yet materialized. So, companies in the space will still need to access financing. And in some cases, they have the ability to buy real estate. So, they won’t be able to trade that real estate essentially for cash to IIPR. And then they'll become a tenant. So, I think that that is still a very appealing business model. I don't see the banking stuff moving any faster through Congress than it has been. And interestingly, the DEA just committed to reschedule cannabis from schedule 1 to schedule 3. I don't believe that that will really solve cannabis companies' banking and access to financing issues either. Though I think it is like a green light for investing in the industry as a whole in the U.S. because it does suggest that at a minimum medicinal markets will grow and there will be easier access to medicinal marijuana pretty much across the board. So, it's a long-winded way of saying, yes, I would be confident in investing in IIPR today. Because I do think that they're pretty strong with this model and it'll continue to be that way. RS: Do you like any other REITs in this space? Like (OTCQX:NLCP) is one that I, we've had Julian Lin talking before how he's bullish on that REIT. Do you have any thoughts on that REIT or other REITs in general, or maybe things to watch out for, pay attention to, when looking at REITs in the cannabis space? AC: So, yes, I haven't followed up with NLCP for a while. However, it did look quite good, especially after they were listed initially. So, I assume that they are probably in decent shape still. Maybe don't go and slam by right now without doing a little bit more diligence, but I think bullish on them in general. And as far as how to evaluate them, it really is all about who their tenants are and the extent to which they will disclose to you, this tenant is having this trouble with this or not. And certainly, the more their biggest tenants listed by how much revenue they bring in, the more their biggest tenants coincide with the biggest multi-state operators, I think that's a good setup, good starting place for what to look for. As far as what to avoid, this is a bit of a harder question. One thing that would make me feel a little bit leery is a situation where the REIT was perhaps in some way had some financial relationship to their major tenants outside of the tenancy, basically. Not that that is a deal breaker, but because it can signify that perhaps there's some conflicting incentives or really it could be structures that you just don't know about and it'll be hard to figure out about. So, I would try to steer away from those, but I'm actually not aware of any specific instance of that happening as of yet. RS: Okay, so when you're looking at the rest of the sector, what do you think is the best versus the rest? AC: In the REIT specifically or just the cannabis? RS: No, it's broadly in cannabis, yeah. Cause you were saying that there are some that you don't like, even though people are talking about them, there are some that you do like more than others. AC: So, the ones that I do like more than others and the ones that I think probably I would be comfortable with buying sooner or later, Green Thumb Industries (OTCQX:GTBIF) and to a lesser extent, Trulieve Cannabis (OTCQX:TCNNF). And for Green Thumb at least the appeal is that it's growing and it's profitable. And that's a rarity in the cannabis industry right now. Of course the stock is seemingly, it has a high valuation, right? Nonetheless, I think even some of their brands are starting to look pretty appealing. I've seen a good amount of traction with their Dogwalkers brand and a few of their other ones as well. So, they seem to have the right mix of – the financials look good, the branding is starting to look good, and it doesn't seem like they have any major impediment in the near term, at least, and they don't have too much debt, they have enough cash to realistically do something new if they wanted to. So, I would say Green Thumb is the one that I would feel the most comfortable with at the moment. RS: And is there a specific catalyst or them achieving something that would put you, that would cross the by-line for you, that would make you want to invest? AC: It's just the consistency of the, especially the operating margin. If they can show, yes, we can turn money into more money on a reliable basis, regardless of the prevailing price that they can buy cannabis at wholesale, if they choose to do that, that's the biggest sign right there. Because for many of the companies in the sector, as the price of cannabis fluctuates, they will have to claim fair value adjustments that essentially make their earnings very difficult to follow closely. So, the ones that don't emphasize that so much, the ones that are able to just dutifully post a little bit of revenue growth, dutifully post a little bit of earnings growth, regardless of the market factors that they have to deal with, to me that's huge. Because it means they're not going to be in a bad way or having to explain their earnings results a lot to investors if they're forced to make an adjustment to the value of their inventory, basically. Ideally, they'd be able to do that and no one would care because they would still have positive earnings. Does that make sense? RS: Yeah, it does. Does anything – is something that we've talked about when talking about Green Thumb, because there's a lot to like there. There's a lot of smart, savvy analysts that like Green Thumb. And something that we talk about putting a point of concern perhaps, for some it's not necessarily a concern, but something to pay attention to is the lack of transparency from the C-Suite. Is that something that you're looking at, thinking about, care about? AC: It is something that I'm looking at, and it is something that I care about. What I will say is that if the results continue to look good over the next few quarters, this, I mean, the transparency issue is still an issue. However, it is an issue that you can consider holistically as it's a part of the package that is not the most appealing. The rest of the package is still, I think, pretty appealing. RS: Does that fall under the category of, if you're winning, not many people are looking under the hood? AC: Yes. Certainly, yes. And maybe that will be a problem at some point, but this is the thing that I would do a lot more diligence on before I would take the plunge actually. RS: And how would you do that diligence? AC: Well it's a lot of research work, right? I mean, pore through the earnings transcripts to see what is actually being asked, what is actually being discussed, look at all their press releases, and then the next step would be LinkedIn for everyone in the C-Suite, as well as the important people of the board. Pretty time consuming. And then honestly, from there, it would be asking questions to people who are perhaps not the person that I know has the answer exactly in the company, but someone who knows them and can give me some color on exactly what they're thinking and what's going on. I will say, in the past there have been, not for Green Thumb specifically, but towards other companies in the cannabis industry, there have been certain allegations of corruption, which I would be very deeply concerned about when I heard those. Those would definitely warrant - probably that's a red flag, even the allegation, but then I would want to follow-up certainly.. RS: Which might be a nice segue to talk about Trulieve. Some headlines around them that people are willing to forgive for a good reason, I think in many respects, some not. What are your thoughts on Trulieve? AC: Yes. This is one of those cases where I was very bullish about the stock before the first set of allegations come out. And at that point, I dropped it immediately because I did not want to, I don't think it's ever a good idea to really be in the situation where you're saying, oh yeah, buy the stock, this corruption allegation, it'll just blow over. That's not really the position that I think that is smart to be in as an investor. Since then, I think they've cleaned up their image a little bit and their financials continue to look pretty good. They're not a preferred pick for me. They could become one, however, once again, if they continue to post good quarterly results. I think currently right now they're technically unprofitable. That would need to change. And then also, convincingly not getting into another situation where people are alleging something. RS: Yeah. AC: Controversy is not something that I would ever want to invest in, especially if it's active. RS: Yeah. Well, let me ask you this. Is it only American cannabis companies that you like? AC: No. So, I say like, but what I mean is, could become a good opportunity to purchase and invest in even if I don't feel like it's fully cooked yet. On that note, Tilray (TLRY) would be, I think, pretty much the only international one that I would invest in ever given what I know right now. And for them, once again, not ready to invest in them today, but it's their positioning in the EU that is the real, the real gem for that company, because they have the potential to be the master of that entire domain in a way that American cannabis companies are not positioned for. They'll get eaten by the tariffs, among other things. Whereas Tilray, they have on-site production in Portugal, so they can export to the rest of the EU. No tariffs, huge advantage right there. And also globally, they have massive scale. I think they're technically the biggest or they claim to be the biggest. And that matters a lot, ultimately. Once again, they're not exactly in a place where I would invest in them today, a little concerned about their habit of burning money and not consistently creating free cashflow, right? Nonetheless, they're also taking a leadership role in helping EU countries that are interested in reforming their own cannabis policies to reform those policies. They had, I think, a policy roundtable with legislators from Germany a good while ago, and I believe that was influential in their forms that Germany announced relatively recently to their marijuana policies. The ability to take a policy leadership position on behalf of the industry like that, I think that's a positive thing. It shows leadership, which I approve of. RS: What's your timeline there in terms of waiting for how it plays out in Europe? AC: That's a good question. The general “progress towards legalization.” I don't think it is going to follow the model of, oh, the end point for every country is recreational cannabis is going to be legal. I don't think that will happen. My timeline for there being enough marginal changes where there's a larger opportunity, I think that's within the next year. And I think most of the additional opportunity will be medicinal markets. I'm happy to be proven wrong there, but either way, Tilray is the one that's positioned to take advantage of it because they're already supplying to many of the medicinal programs in a few countries and they have pilot programs set up in the other ones. So, I think they're the ones that can take the biggest advantage of it. Hopefully within a year, first revenue growth and then hopefully shortly after that, you will see earnings growth as well, but we'll see about that part. RS: Anything to like or anything that you like in Canada in terms of some of the bigger players, some of the smaller players, some of the private players, Organigram (OGI) is a name that's gotten tossed around as a stock that some analysts are bullish on in Canada? Anything to like there? AC: Yes. I think that in the Canadian market, so Tilray is a huge player there as well, but the smaller name that I pay pretty close attention to is (SNDL) aka Sundial, because they have this very interesting mixture of refusing to add to their top line unless they think it'll be profitable, which I think is a pretty good policy to have for a company in I think a very competitive industry. So, they're conservative with reaching for more revenue growth. And at the same time, they have this cannabis financing segment of their company, which they were able to start because they issued a huge amount of stock when retail investors bid their – price their stock up. And I think that they've made okay utilization of that capital for things like lending and investments. And over the long run, I think that will really be a factor in their favor. It's a little bit too risky of an opportunity as a company for me to want to dabble in today, but I am pretty impressed with their leadership, honestly, and I think that they are on a good trajectory, certainly. Whether or not there's any further attempts to expand outside of the Canadian market or not, I think that they can probably stay there comfortably. RS: Any other names that you would put under the bullish or quasi-bullish column? AC: No, I don't think so. RS: So, what are the big stocks that you think investors have wrong or the bullish cheerleaders have wrong? AC: So, I see a fair number of people really talking up Canopy Growth (CGC) in particular and to a lesser extent Aurora Cannabis (ACB). And Aurora, I think there is the potential for a valid turnaround play for someone to invest in Aurora and have that investment gain value because they have done a tremendous amount of work reconciling the size of their operations to the market that they're actually in and their ability to compete in it. It's still not a company that I would say is in the best shape, not one that I want to invest in. And on Canopy's part, I mean, for me, this is almost an application of like the Warren Buffett principle of don't invest in things that you don't fully understand. Because for Canopy in particular, they have this, as I'm sure you know, this strategy for how they will enter the U.S. cannabis market, despite being in Canada and having an asset light model there. And it's a series of acquisitions that they are making, or perhaps they've already made some of them. And they have those acquisitions being made by a parallel organization called Canopy USA, which from my understanding of it, there is a governance issue there in the sense that if you buy Canopy Growth stock, you technically are exposed to the increase of value of Canopy USA shares. However, there may not actually be a mechanism of direct control of Canopy Growth management over Canopy USA. Perhaps I have that part wrong, but the point is that this parallel structure and this bizarre way of entering the market, I don't know if there's a better way, but to me it's like too close to being unintelligible that I feel like I would miss a major detail. So that's like one of the big things that scares me away from it. And my sense of it is that it should scare other people a little bit as well, but perhaps they can understand it better than I can. But yeah, it's just this Byzantine process where they will make these acquisitions and have a parallel organization that it scares me off, as well as their financials also scare me off, if I'm being honest. RS: And in terms of not liking the other major U.S. players, the major U.S. MSOs, is it just because they haven't reached, they haven't hit the milestones and the consistent markers that you've been talking about? A nd a follow-up to that question would be what are, I mean, you mentioned profitability, what are, do you think the most salient metrics to be looking at, at this point in the cycle? AC: So yeah, the U.S. MSOs, my main problem with them is total lack of consistency in just showing that they're able to run a cannabis operation that creates more money than it takes from investors who are borrowing. I believe that many of them will be able to figure that out in the long-term. For the metrics, it's – the operating margin is the first one that I go to and it seems to be the one that the companies struggle with the most. And it's troublesome because the other important thing to look at is, how much they're spending on marketing, so SGA, and compared to their revenue and whether that is actually resulting in consumers durably coming back to buy from them or not. Because that would be, once again, a sign of a competitive advantage, probably in branding, which is something that I'm like, that's the biggest single thing that I keep looking for. There's no single metric to like, there's no number to put to that, right? Unless you get a huge market share, but no one has that yet. RS: Any thoughts on (MSOS), the ETF? AC: Yes, I would avoid it personally. I know some people are in favor of it. I'm sure some people have done well with it, but I would want more granular control over which companies I invest in. And if you want broad based exposure to the space, sure. I think that's valid. And if you're looking and you're thinking, oh, there's going to be a huge catalyst. They're going to legalize marijuana recreationally across the country somehow in the next 12 months. If you believe that, yeah, getting, yeah, it makes sense to buy that ETF in that case, because that'll definitely go up if there is such a legalization catalyst. I don't anticipate that happening, however, although it would be welcome. RS: You don't anticipate what happening? AC: Legalization, full total – stroke of the pen or legislation or whatever. I just don't. I don't see it happening in the near-term. I'm happy to be proven wrong on that part. RS: How do you see it playing out? AC: More slow grinding, more incremental, more hopeful things that fall through. RS: What do you think is the, I mean, everybody's just throwing darts at the wall, but what do you think is probably the next step in the process? AC: That's a good question. So, I think the rescheduling is like the step of the moment and what comes after that, de-scheduling. That doesn't necessarily mean that there wouldn't be some residual legal structure that prevents the companies from going as hard as they would like to penetrate the market, but I'm not sure really. I just don't see, I don't see the momentum in the legislature there yet. It could develop pretty quickly, depending on how things play out though. RS: How much time do you assign to that, paying attention to the political regulatory measures, promises, broken promises, etc. AC: So, if there is a change or if there's talk of a change, I'll have heard of it. Unless it obviously if there's something like a rescheduling this debate over, oh, will they reschedule? This was broached many months before. So, a few hours a week, basically keeping up just what's going on. Maybe that is almost too much time to devote to it. What I will say is that this is the last thing that I have to say about it, but basically, I've been encouraged by some of the market pricing dynamics per gram of cannabis intended for, like legal cannabis sold wholesale in the U.S. It seems to me that the market is starting to show some pretty good recovery in the sense that prices are not as depressed as they once were. And I believe that that is occurring in Canada as well. And a full recovery to the high point, I don't know how long that will take, but green shoots is what I would say. So, I think that's a positive factor. Related Articles: Biden administration reportedly moves to reclassify marijuana (update) Trulieve Cannabis: Up Over 122% In 2024, But Where Does It Go Next? Cannabis stocks rally as DOJ proposes reclassifying marijuanaEditor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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