We cover many fundamental questions in this deep, broad and colorful conversation with two terrific SA authors and investors in the cannabis space: James V. Baker and Julian Lin.
Why there is time for current MSOs to build a moat, importance of passing MORE Act, descheduling the plant and why getting rid of 280E gives the industry life.
Fallacy of free cash flow, MSO rollups, generating profits without economies of scale. Thoughts on Green Thumb-Trulieve rumors and why momentum investors will get shaken out.
James V. Baker is a long-time investor and has enjoyed a successful career as a commercial banker, investment banker, city treasurer, investment adviser, NASD arbitrator, consultant, and tenured university professor. Julian Lin, newer to the investing game, runs an SA Marketplace service, Best Of Breed, a research service uncovering high conviction investment opportunities in the high quality space.
They join the show to discuss some of the more pertinent and fundamental questions facing cannabis investors and provide a compelling look at the cannabis space that interested investors really shouldn't miss.
- 5:00 - James' background PhD in finance, owns investment firm, own family of mutual funds, in October of 1987 was 100% invested in stocks and 3 days before the crash went into cash. Began looking into the cannabis space in 2014, as an original investor in Tweed and Bedrocan, which Tweed bought. That led James to dig even deeper and heavily invested in the space. Julian has been investing for 5 years - started in tech world. Taught himself investing, strategy based on fundamental investing. Cannabis interested him after originally seeing it as a 'gateway drug'; realized the fallacy that exists around the plant and the industry - importance of regulating the industry.
- 9:30 - James' thesis on cannabis industry: companies will never have enough cash, most of them never will and a number of them think they do. They will be serial issuers, just like we saw in Canada. Why Canopy (NYSE:CGC)/Constellation (NYSE:STZ) deal is a terrible one. Why he's bearish on Canada and US space. Julian views the sector as an entirely new economy which is exciting and full of potential, but also many ego-driven companies (ie, CGC's operating expenses outpace revenue). Also some positives to being an MSO vs single state operator. Illegality helps moat building, which we didn't see in Canada.
- 13:00 - MSOs issuing debt vs issuing shares - a philosophical debate.
- 17:30 - What James likes about Trulieve and the Florida market.
- 22:00 - OTCQX:GTBIF's auditor MNP resigned - signs of trouble? Will Trulieve also move beyond MNP? Thoughts on Green Thumb-Trulieve rumors of merger.
- 32:00 - Canopy's numbers, cash flow from operations, they're doing well on adjusted EBIDTA - but where's the cash? Financial community encourages companies to focus on adjusted EBITDA and other uneconomic things.
- 48:00 - Advice to investors: you have to use some fundamental analysis and not rely on momentum - you have to crunch some numbers to do real due diligence. Knowing when to sell before momentum investors tell you to. Find a company that has 3-4 quarters of earnings, positive cash provided from operations and invest in those.
- 55:00 - Thoughts on MORE Act and increased legality. Believe cannabis will be descheduled, which gets rid of 280E and breathes life into the industry. More Act > Safe Banking Act. Descheduling the most important.
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