Do Politics Affect Cannabis' Long-Term Growth Story? (Transcript)



  • Federal cannabis legalization is not the end all, be all - investors would be wise to think it will take longer than expected.
  • How should we think about a growing green map in the US when the market's not responding to it?
  • Cannabis' growth story and what that means for valuations.
  • Julian Lin and Jason Powers' compelling and essential conversation for cannabis investors.

Listen on the go! Subscribe to The Cannabis Investing Podcast on Apple Podcasts, Spotify, and Stitcher.

Rena Sherbill: Hi again, everybody. Welcome back to the show. It's great to have you listening with us. I hope you are as psyched about this cannabis content that we have coming at you on this podcast so far in 2022. As I am to bring it to you, I really feel like we're having some really terrific conversations, today is no exception.

We're bringing back Julian Lin, who you know from Seeking Alpha. He runs a marketplace service there along with his other articles and other topics aside from cannabis. But he also runs a marketplace service geared towards cannabis investors called Cannabis Growth Investor. Listeners of the podcast know Julian for his sound, fundamental analysis. No different today.

He's joined today by Jason Powers, who some of you may know from other cannabis podcasts. Some of you may know from Reddit, he writes on Reddit. He comes to us from the world of politics in Washington. And this wasn't designed this way.

But perhaps in honor of President's Day Week in the United States of America, we bring to you this conversation about the intersection of politics and cannabis investing. There's an obvious intersection, because so much is dependent on legislation and the regulatory picture. But we also get into the fundamentals and timelines around how long our timelines are as investors and how much that matters to our picture.

What about the fundamentals? What stocks are we liking, but really, this is a really in-depth conversation for cannabis investors to really ask some important questions. I feel like I overuse the word salient. Some really important questions. For those of you that follow me on Twitter know that I'm trying to embrace you all. So, hope you all enjoy this one.

Julian and Jason, welcome to The Cannabis Investing Podcast. Welcome to Seeking Alpha Julian, welcome back to the podcast, one of our favorite guests. Jason, one of our favorite people to be in contact with around the podcast. But first time on the show. Thank you very much for joining us, both of you.

Jason Powers: Thanks for having us.

Julian Lin: Yes, I'm always excited to talk cannabis.

RS: Awesome. Always excited to talk cannabis with you, Julian and I think a lot of people benefit from it as well. Julian, do you want to catch listeners up, kind of updating them, and maybe giving a brief intro for people that are new to you, maybe new to your marketplace service that you have on Seeking Alpha, if you want to describe that a little bit. Just kind of catch them up on what your thesis is on the cannabis sector and what you're like really kind of very brief at this point of view is where we stand today.

JL: Sure. So, I'm not a cannabis exclusive investor. I'm a general investor. But upon coming across the cannabis sector, I've found valuations to be highly compelling, and the growth story to be highly attractive so much so that I started a marketplace service on Seeking Alpha called Cannabis Growth Portfolio. There it's a cannabis exclusive portfolio where I focus on finding the highest quality and most undervalued stocks in the cannabis sector.

RS: Awesome. Jason, I guess I would ask you the similar question if you want to introduce yourself to listeners and tell them where you're coming from and kind of your brief overview of the cannabis sector?

JP: Sure. Yeah. So, about a decade and a half ago I started working in Washington and politics, I was a Hill staffer for an appropriations chairman. Never thought 12-13 years later that I'd be using that to help with inform the cannabis industry and all these listeners. But what ended up going through three, four or five years, getting really to see the meat and bones and how things are made, led to an understanding that I've noticed has been missing in a lot of these conversations.

And that's not really just the nuance, but it's really there's a practical system that is working, you may think it's not working, but there's something that is happening in Washington that can be somewhat predicted somewhat analyzed and incorporated into investing, like an investing thesis. And what I noticed after getting into the cannabis investing world in 2020, was that there was a huge just as much asymmetry as there may have been between the investing thesis and the actual market cap of these companies, there was also an asymmetry in the investors and the understanding of what an election means, what a statement or a tweet means.

And so, I wanted to get into it and I found Reddit to be an interesting sort of first opportunity to post. So, I wrote a lengthy post or got some attention and ended up really creating a bit of a continuing saga. I call it Understanding Washington, and I've found quite a bit of good response from it. So, where we are now in the beginning of '22 is I think I've got five posts, I promised the readers that I'll continue to put them up as things move, but I found that doing podcast interviews also helps fill in the gaps.

RS: In terms of informing your own kind of thoughts around it?

JP: Yeah, it's certainly a moving target. And I say it in every post, I'll put predictions out there, I'm happy to appease the interest. But tomorrow morning, we'll get a statement from someone, two days later, we'll get something else. And it can have either drastic or dramatic effects on what is now a prediction, or it can have none. And you can miss read either of those two the other way. So, getting out there more routinely, I always answer comments, I answer personal direct messages. Because I'd like to keep being as useful as I can to keep the conversation honest, I think that's really important.

RS: I agree that is really important. And I feel like that's something that you have done a good job of in terms of being, I've really enjoyed being in - I know Jason because he's been in communication with me just through the podcast, and has asked some great questions. And I feel like many times, I've tried to ask them, and have fumbled them. And I feel like it's just better to get it from the source.

So, let me start there a little bit, because I want to talk a little bit that intersection of I mean, it's an obvious intersection of politics and the cannabis industry, a very frustrating one as of late and for the most part in general. But Jason, how do you see it coming from that angle, the Washington angle, how do you view the political side in terms of investing? Like, how do you see them influencing each other or catalyzing each other? Yeah, I'll leave it there.

JP: Yeah, I think an apt metaphor would be or just a parallel - So, if you think of investing in general, and Julian, you can comment more thoughtfully on this, it's really just a ton of analysis to get an edge. You're just trying simply to position your investments in a way that using information you have an angle of approach you have taken or just a thesis you've created, that says this is going to move in a way that is going to provide me with some alpha. It's going to provide me with an edge over just either allowing someone else to manage my money or to manage it through an ETF.

And so, when it comes to politics, that is simply one more bucket of information that you can use to put into your thesis. And in whether you're talking about semiconductor chips in the Competes Act, there's an element there, right. There's an element of how the legislation affects that industry.

Cannabis just happens to be in a very sort of an eccentric version of that, because it is completely reliant, at some level it will be completely reliant on the federal picture. And what I think has been most telling is that over the last year, we've seen states come online, we've seen New York, we've seen major movement, as well as a lot of federal conversations. And the truth is that we really aren't much further in terms of the market picture.

In many ways, we're certainly further behind than we were one year ago today. But we are also comparably not really seeing progress in any way that can show a toehold and an actual growth. And what I want to get to the bottom of in each piece that I write each conversation is what can we really predict in the next 12, 18, 24 months? And then how does that translate into the risk component of investing?

The metrics for the, you know, what is an appropriate valuation multiplier, that is something that I leave up to better thoughtful people. I've asked you some questions every now about that. That's part of our conversations. But I think the political side is mostly a question of the risk and the likelihood of that big picture when these become fully capitalized, fully supported by Banking Markets. When does that happen? And that just I think that is something that has really in the last year, been hard for people to pin down.

RS: Julian, do you have any different ways of thinking about that intersection between the political picture and the industry and the sector as investors?

JL: Yeah, I mean, let's start off, I'm very familiar with Jason's work. I mean, he's been spot on. And I think he also mentioned in one of his Reddit posts that he even bought puts a couple months ago, I mean, so he's done very well. I'm gauging the political climate here. And I think I do agree with a lot of his previous commentary, especially cautiousness in terms of hoping for legalization. I think if I had to add anything regarding the politics side of cannabis and investing, it would be that cannabis stocks have traded.

So, in line with the legalization hype over the past few years that it's easy to think that they only can go up. If cannabis stocks are legalized - sorry, if cannabis is legalized federally. I mean, make no mistake if federal legalization happens, it kind of strengthens the story mainly because institutional capital will be able to come in. But it's not the only way to create fundamental value in the sector. Right.

I mean, even in spite of the lack of federal reform, these companies are still growing very rapidly. They are taking market share. They are benefiting from every new state that is coming online. So like, it's very curious to see how when new states come online, the stocks are still not benefiting, because it seems like investors right now they only care about federal legalization, they think that is the one or the be all end all for cannabis stocks. But that's not really the case.

RS: Jason, anything to kind of point out before I kind of ask my next question?

JP: So, I'd love to dig into that a little bit, which is sort of the why and understanding I've had some really great conversations with a lot of people that I respect in the market around just the market dynamics, the actual inflows and outflows and how these things are actually working, because of the fact that we have this systemic barrier to investing from the institutional side.

So, how do we rectify if Ohio and Pennsylvania come online this November? How do we look at a growing green map and growing revenues and all of these things happening? And like you said, Julian, the market isn't responding to that. And the conversations in the last couple of years have sounded like this coiled spring approach that it's just it's even further and further as a metric and therefore when something passes, it's just going to 500x in a moment.

I wonder if maybe there's more going on there. And if we want to look at it like a CPG, if we want to look at it, thoughtfully I do wonder if maybe we've almost put too much into this idea that there's an explosive to rerating. I think there is a - certainly there is a rerating but is it as explosive as we thought 12 months ago, 24 months ago? And what happens if we're two three years away from any kind of federal legislation? Does the rewrite keep shrinking?

JL: As I mentioned earlier, I mean cannabis stocks make up a large, large allocation on my portfolio. But I'm a generalist investor, so I invest across most sectors. In particular, I like to focus on the growth stocks. So, what really attracted me to the cannabis sector was when I compared the valuations to undervalued tech stocks that I was also covering. I mean, no, I'm not going to compare them to the bubble of valuation tech stocks that would - obviously that would be quite unfair.

But I'm just talking about it in regards to undervalued tech stocks. And this is important, because the way that investors treat cannabis stocks versus tech stocks is very different. When in reality, longer term, I expect the sentiment to be more in line with how investors treat tech stocks, mainly because digital tech stocks, it's one of the more attractive long-term stories that you could find.

So, with cannabis stocks, it almost seems like if legalization does not happen, then 280E taxes will not be removed. And these companies will not produce much profits. So, it's, some people think, Oh, they're just dead money. But when you look at how tech stocks trade, a lot of tech stocks, they don't have profits, even though but it's very clear that they will have profits in the future, just based on their high gross margins, their operating leverage, it's very clear that they're over investing in growth.

But if they wanted to, they could show profits very quickly. But nonetheless, Wall Street tends to value these tech stocks not based on current lack of profits, but they tend to value them based on what they believe the long-term profit margins will be. So, you see how with the tech stocks, Wall Street or in any stocks, in general, Wall Street tends to be very long term, very forward looking. They're not going to focus just on the lack of profits today, they're going to look at how much profits they're going to make in the future. But that just doesn't really happen with cannabis stocks. And I think that is the underlying reason why a big rerating should happen.

I think some of my targets tend to be on the optimistic side of things. I think when I looked at the fintwit universe of price targets, it does seem like a lot of investors, they are looking to sell after maybe a 100% or 200% move upward. But that doesn't quite cover it. Just to give an example, a very commonly used valuation metric would be to compare the growth rates. Basically, if something is growing at a 40% rate, you might expect a 15x prices sales multiple in the tech stock world.

And cannabis stocks, I think, have one of the more attractive growth stories, just because I mean, this is a whole economy coming online. So, my idea is like if you thought video streaming was an attractive growth story, cannabis is even more attractive. Consider that even in a state like California, where cannabis is legalized, about 20% of adults use cannabis. That's astonishingly low when you think about just what cannabis is.

But anyway. So, if you assume like a 40% growth rate will lead to a 20x price sales multiple, I mean, you just think about the long-term growth projections for these cannabis stocks. They're roughly around 30% annually. So, you could expect them to trade around 15x sales once institutional capital will come in. And right now, I think they're trading around 3x 4x next year's sales price, next year's revenue estimates.

So, just based on a two-year horizon, there is this at least 3x to 4x rerating just on multiples. And then you got to take into account the growth over the next 10 years. And then you get some really fancy numbers that can be exciting and scary to think about. So, I mean that's just kind of how I think about why that rerating should happen once institutional capital coming in. And sorry for the long run. But this is not unprecedented.

It's important to note that Canadian cannabis stocks have been trading uplisted for many years. Institutions have had access to invest in the Canadian names for many years, and to represent a really good indication of what we could expect when the U.S. cannabis companies uplist or when they're able to add institutional capital flow in. And you can see with Canadian names, I mean, they've been hit recently.

But even at the current valuations, they're trading very richly based on the low growth, they have very minimal growth, they have no profits. They're still trading at really rich multiples, because you could tell Wall Street really, really likes that cannabis growth story. So, it is very - it makes a lot of sense to assume that when U.S. cannabis names can have institutional investment, they're going to be treated in a similar manner as those Canadian.

JP: Would you say then that, and we're talking about all of the different sort of vectors for growth, right. We've got more states, we've got more clientele, we've got deeper pockets, then we've got new products. We've got sort of - just sort of a full breadth of how this one particular product really can be hundreds and hit many, many different markets, is that unfolding sort of like, how Apple (AAPL) 15 years ago was making computers but in reality, what they do today is 400 different things. And so, you think that analysts should be sort of like Tesla's (TSLA) not a car company, Tesla is a tech company. This is the tech company of CPG, in your opinion?

JL: I think at least the growth side is very similar. I'm not going to pretend that there's going to be so much innovation. I mean, at the end of the day, we're kind of selling some CPG products. It's not going to be entirely different, I guess, 10 years ago from now. But I think in terms of growth, I mean, we just think about how in the near term, we're going to see so much growth just from states coming online. And that's so easy.

You're just going to see growth from even where states have already come online, there's that large illicit market that the legal market will continue taking market share from, that's big growth. And just regards to like the states coming online and think about in Florida, right, a lot of people think, oh, Trulieve's (OTCQX:TCNNF) tapped out, right? Trulieve's 50% market share prices will go down, they're in trouble.

But in reality, they're just, there, it's only a medical market, and only about 3% of the population are registered medical patients. So, I mean, Trulieve's generating all this profits. And I mean, I like a lot of companies I'm not trying to say only about Trulieve, but Trulieve is generating a ton of profits, while only addressing 3% of the population.

But we know that on average 20% of adults use cannabis. So, upon when recreational sales began in Florida, it's basically their total addressable market just increased to 6x overnight. And but that's the thing. This is only, that's all near term. This is like when states come online recreational that's all near term. That's basic stuff.

But the longer-term growth story here is where the average person starts using cannabis, where the person who's not so open to cannabis right now I mean, I know plenty of people who as long as cannabis is illegal on the federal level, they're not even going to consider thinking about cannabis. They still think cannabis is like going to kill you or going to get you addicted or, you know, has no medicinal benefits. But there still needs to be that tipping point where normal valuation will happen, where cannabis becomes more normal and becomes something like alcohol, becomes something like Tylenol. That is the longer-term story here.

And I think that that's the thing that kind of Wall Street will like pick up on and that will be cannabis stocks - U.S. cannabis stocks will eventually trade at a premium multiple to even tech stocks I think.

RS: Jason, do you have any follow ups there? Do you feel satiated?

JP: Well, I feel I think you've got the right two people here because I often get called a bear lately. And I think what Julian and I bring to the table is it really is truly about your timeline. I just feel a heck of it pulled up Amazon (AMZN) from '97 on to today. And I was just looking at their charts virtually flat from the late '90s until the late 2010s or the 2000s rather. And then obviously, we see this massive growth.

And so there could be 10, 15 years where the stock doesn't do a ton. And so, when I think of the industry and now a lot of the people that I'm writing for people who think it's going to happen tomorrow, it being federal legalization or SAFE banking. And people get really dismayed at the idea that we might have to wait another session which is two years, another Congress, another president.

But I'd ask Julian, if I told you, it's six years away if I had that crystal ball, how would that affect your current investing? Would it at all? Would you just continue buying more and more because you knew it was six years? What's your timeline look like for all what you just described?

JL: Awesome. And I think that's really important, because it's everyone you always hear this thing about all cannabis will be dead money until SAFE passes, or cannabis will be dead money until institutional capital comes in. But you got to make it remember that there's nothing special about cannabis investing versus general investing, it's all investing. So, like this issue about whether or not something's going to be dead money that could happen anywhere, that can happen in any sector.

That's always a possibility. But I think if you're going to invest on fundamentals and as a long-term investor, it's not really something we worry about, right. Like, if you were like trading near-term or kind of maybe sell a subscription service about market timing, yeah, you're going to be really worried about dead money because you have this requirement that you need to make money now.

Whereas when you think about long term investing, the goal is that long-term average return, right. We're really trying to make a lot of money on average every year over the long-term. There might be certain years where you don't make as much as your average. But if we have to wait six years to make the optimal returns, we could have made in those six years, then I think it makes sense to invest now even right.

Although I think it's important to clarify that I don't think that cannabis stocks will do nothing for six years. I mean, I think you're mentioning six years, maybe it's like it might take that long or even longer for like SAFE or some kind of legalization to happen. I think that cannabis stocks, they won't like stay zero percent returns until legalization happens. Because at some point, they're going to get so cheap, that institutions they're going to just make it possible to invest in the sector. Right.

I mean, you're already seeing that, where new funds are happening, where a new fund will get started up that doesn't, they intentionally don't write in some mandates saying they don't invest in cannabis stocks that so like, new funds are able to invest in a sector. I think, when you look at the multiples, like you're looking at a Verano or Trulieve trading around like 6X next year's EBITDA, I mean, very, very quickly needs to become so cheap that it's going to be worth the trouble to rewrite those institutional mandates to be able to just invest ahead of SAFE.

So, I definitely think while I understand why some might be afraid that the stocks won't do anything until they got a ticket and happens. At the end of the day, the fundamentals will carry the stocks higher, I mean assuming those fundamentals stay strong.

RS: Julian, I was going to follow up. Do you feel like there's anything to dissuade you from that growth story on the industry? Or do you feel like, it's really just a matter of picking the winners?

JL: Sure, I mean, I think, if I wasn't so confident in the plant itself, right, if I didn't, if I wasn't so confident that this plant was safe, and this plant could really help people with pain, with insomnia, with anxiety with sex, with all of this stuff, right, if I wasn't so confident than I mean, I wouldn't be this bullish on the sector.

This is very similar to how, I don't know if any of you remember Netflix (NFLX), like 20 years ago, if you tried using it. I mean, the stock wasn't very good. And then we tried using Netflix, it was like, they only had very, very poor content. It was like not really something you would want to use. But that concept of Netflix, that concept of video streaming, that was that's very strong. It's embedded the double growth story. At some point, it's going to become as big as it was now.

So, I view cannabis as being like that, where, because I could see it entering 50% 60% of households over the long term, I'm willing to overlook the fact that legalization might take some time, or I'm willing to overlook that. If legalization or decriminalization takes some time, it's - there's going to be pricing pressures, right, because the legal market is going to be, the operators are going to be competing upon themselves in a smaller legal market.

Whereas the illicit market, I don't see the illicit market losing grounds until normalization happens when the average person wants to consume cannabis. So yes, I think it's really critical to judge it based on your assessment on the plant itself, and how will that play out.

JP: So, something that, we all talk about timelines. But the other piece of this and if you, I really appreciate this conversation, because we're taking a pause and not getting so anxious and worried about politics the way normally people talk about it day by day. So, let's just let's take a five-year picture of it. Instead of the timeline being the issue, what about the fact that we don't really know what legalization will entail in terms of regulatory elements?

And I don't just mean 280E and I don't just mean FDA oversight, et cetera. I also mean, sure, Senator Schumer has said that he wants to keep calling the big boys out. But if you listen to different not just politicians, but leaders, some refer to some of the Trulieve's and the Green Thumb's (OTCQX:GTBIF) as the big boys, especially when you get more deeply into social justice before you even think about the MillerCoors, the Anheuser-Busch or the pharmaceutical companies that might want to be getting into this, you spoke very thoughtfully about the plant itself being not just incredibly safe, but the efficacious qualities of it.

I guess one thing that I'm trying to incorporate into both my own and anyone's portfolio is the risk of what if 20 years from now, like you're talking about Netflix, Netflix is going up against Disney Plus and Paramount, shouldn't be buzz marketing on these, but all of these different companies they go against for streaming content. Netflix made it of course, but there are others that didn't or won't.

So, what if at the end of the day, it's Curaleaf (OTCPK:CURLF) and all these others, get gobbled up by other regional players or moved in? How would you start to really look at the horse race at that long of a timeline?

JL: Yeah, I mean, I, of course, my view of the politics is not going to be have the same expertise as you do. My view of politics is I mean, of course, I acknowledge anything could happen. Like I mean, I'm an investor in Facebook or Meta (FB) rather. I mean, at any point the government could enact some policy that hurts another. But in regards to cannabis, the way I look at it is that the federal government can't really do that much.

For example, I mean, I don't think the government will be to legalize cannabis for 50 states. I just I mean, a lot of people seem to think, oh, they're going to do this and they're going to allow the interstate commerce, they're going to allow international commerce of cannabis. I don't really see that happening in the near term or medium term or and I think it's reasonable to assume that may not happen for a very long time, just because historically, the federal government tends to not do very much in the United States, it tends to be more of a state-by-state kind of, they determine what they want to do.

So, I guess, the way I look at it is, yeah, there is the risk of regulations have hurting the cannabis companies. But to me, it tends to be more from the state level. It tends to be more, a Green Thumb might be hurt, if Illinois suddenly says, Oh, we're just going to become an unlimited licensed state and allow everyone to open a store. That I think would be a bigger risk to me I think.

JP: So, the risk that I think with politics is I do think quite a bit about all of these different levers of power yes, the states - but yes, the federal government, because when I think about well, so you mentioned - I mentioned some puts I want to be transparent, so yes, I used a put strategy into September, October, and it did pan out pretty well. And I'm transparent about that.

But I think the volatility and the direction of where these stocks will go and each of these, right, so if you're looking at smaller Tier 3 type organizations and you have a different, I would expect you would have a different approach and sort of estimation of its of why you're invested in that company versus say, a Trulieve. Today Canopy Growth (CGC), talking about the big ones, right, it's trading at just under $9 a share. And five years ago, this month, it was trading at $9 a share. But since then, of course, there's been a lot of change.

And so, I think what people need to be really flexible with is watching the politics not just for legalization, but watching all I mean, I guess what I'm thinking is a lot of people talk about interstate commerce. They talk about Europe, and they kind of say their second tier, third tier issues to think about behind SAFE or CAOA.

And I think all of these are on the table, because there will be a good time, my opinion, there will be a good time to buy Curaleaf and a time to sell Curaleaf and you'll be making more or less money. And that's what we're doing here. If you are understanding why each of these companies including non-cannabis touching companies right now, that might be in the game three, five years from now, why we're investing in them.

So, I know, people say you always need to know your why, but I think we've seen at least in the broader investor group, people have diluted that too. I'm investing now because I'm a head of institutional and I'll get the rerate. And we'll be great.

And I think there's just so much more to it. You touched on it. But yes, it could be Illinois, state-by-state saying that we bet on limited license. It could be that the next Senate Majority Leader four years from now, it's from California, and they say, California has got it figured out. I mean, we want to export that to the whole country. That's the regulatory environment there. We know how that works.

So, I think, I do tend to focus on the month-by-month Washington churn, because that's what's currently interesting, but I think we all need to do a much better job of getting to that five-year picture.

RS: Julian, what would you say in response to that? I have something to say, but I'm curious about what you have to say?

JL: Oh, I mean, I would just hope for some more foundation. I was wondering, what do you think in your opinion, if we don't look at that the near-term developments, what do you how do you see it playing out? What do you see as that five-year tenure political developments happening?

JP: Yeah, I'm happy to get into it Rena. But do you have your response?

RS: No, no, no, go ahead. No, no, no. Get into it.

JP: Yeah. You got to pick up the bigger crystal ball for the five, 10-year picture. So, this is - it's not a bear response. But here's where I think we're going. First off, I think if I had to put money, well I do put the money on it. Right. So, if I had to take an approach of predictions, I think we are really in that early sort of getting Netflix in the stage of the legislation. It's incredible, really, truly incredible to see how broad and how many different voices have come into the conversation, everything from things like the more accurate expungement and executive order conversations to I mean, the Senate Majority Leader putting together a comprehensive bill.

What I'd like people to understand there is as exciting as that is and as much movement as there is there, keep in mind that public health insurance like the concept of Medicare for all, or something along those lines, we started in this country in the early 50s actually, but we all know about HillaryCare in the early 90s and yet it took another 20 years until Barack Obama was able to move basically 75% of that vision.

So, we still don't even have that full vision that was dreamed of three generations ago. And so, I'm not saying it's going to take three generations. But when you start to think about the players and the immediate sort of pieces on the board, you get lost in what I think is the bigger picture.

And the bigger picture of this capital market society unlike the Canadian society, I think, protection of the big players, and I think the larger industry interests of pharmaceuticals and big, big CPG companies has an incredibly powerful arm. And it's not just money. I mean, it is certainly money and funding politicians. But it isn't as cynical as that. It really is just, when you have the infrastructure, when you have decades and decades of doing this work, you're often seen rightfully or wrongfully by those that regulate as the most capable parts of the industry.

And so, when I think of things like the craft brew industry sort of being sucked up into buy and large two different groups, the Tier 1s which are the big boys who own a lot of them, and then these extremely hyper local ones. I think that sort of landscape seems more likely than these regional player mid-level players growing into the two or three biggest.

I think that's largely because again, even though I agree with you, Julian, that there's really an incredible breadth of what can be possible with this plant and with this particular product, I think it will probably be most easily understood by most Americans, by most people as a product in line with alcohol and tobacco and then pharmaceutical versions. And I do think there's an incredibly important component to the pharmaceuticals that need to be very different.

So, if you're walking into a retail store and buying something for muscle relaxant or for sleep therapy, candidly, and someone who uses the product for some of these things myself, and I do appreciate all the work and research that's gone into it, I am kind of excited for my doctor to be able to prescribe something that is being developed by a renowned pharmaceutical company that has incredible capacity well beyond what we see in this very amateur version right now.

And so, I think it's almost inevitable that these very large industries will take pieces of that pie. And this idea that one or two or 12 middle sized companies will end up being extraordinarily well valued, because they just have all of these different things playing, I might get in trouble for this. But at the end of the day, I think that it's less likely that a Green Thumb is going to be providing products that I get at a CVS, at a grocery store, and also at the local liquor store from all three different tranches.

So, zoomed out thinking that way, thinking about the fact that there is not just a Schumer bill in 2022, but there will be a Senator X bill in '23 and Senator Y bill in '25 and new presidents and new people running the show, I think there's a lot more regulatory environment in front of us that we can't even begin to really see. That's kind of where I'm - my 10-year picture is right now, which is why I'm a trader of this industry at this particular moment and not an investor.

RS: Julian as an investor, do you have a response to that?

JL: Yeah, I mean, I appreciate the thoughts. I definitely also appreciate on the commentary regarding the Universal health care. I think that's a good example of how long we should expect any kind of federal wide-reaching reform for cannabis to take. I think that's a really good example of, I don't think history has changed in regards to being able to act quickly on the politics. I guess, perhaps just the way I would invest in the sector myself, might differ a little bit.

I guess I approached it more as I would invest, in spite of the lack of reform. So, my thesis would not count on for example, SAFE or up listing passing in the next five to 10 years. It's more on the assumption that it will eventually pass. How much value is being created every year? So, to me, it's more of a, if not when kind of deal. Yeah, so I guess, I could definitely see how kind of trading it based on the near-term political developments I mean, it's clearly been very profitable over the past few years.

RS: But I think also maybe saying that there's going to be different companies that are going to be benefiting from it long-term and not necessarily the top operators now, would you say that that's all putting it correctly, Jason?

JP: Yeah, I think, again crystal ball. 10 years looking back, I think - well, I think we can do this probably if you look backwards three or five years ago, or even less, right. There are a lot of names and a lot of leaders that are no longer in some in business and several are no longer the leaders or they've been absorbed by companies that were maybe behind in some metrics or some sort of ways of thinking of things at the time when they were operating more strongly.

I think that this industry, in many ways, I love the tech comparison. I like to think of it more in the space sort of consumer space, hospitality sort of industry, which is 30, 40 years from now, I think we're all excited to see what that will look like. But today, you can invest in SpaceX (SPACE), right, you can invest in it.

And if you or you can trade it, I guess, and if you think of a company that can provide very wealthy people with five minutes and limited outer space as something to invest in, I think you probably five years from now will be disappointed. And I think that's probably because the technology will change, the players will change.

And the winners five years from now, it's sort of like the MySpace Facebook thing. It isn't so much that MySpace wasn't a good product. It's that at the end of the day, the product that had the right tools at the right time and sort of struck a chord with the right consumers would win. And so, you can have the incredible companies like Trulieve that maybe are really well positioned, if you sort of set the landscape the way that Kim has.

Alternatively, if three or four things change in the regulatory environment, she might be in last place of the big ones. And so, because of that, it's the sifting sands underneath investors that I somehow am agreeing and disagreeing with Julian at the same time, because he's exactly right that there's incredible horizon of breadth of opportunity. Like I mentioned, with the space hospitality.

It's just harder to plant money in some of these, no pun intended, with a long-term growth strategy in my opinion, because so-so much of this is based on regulation. Whereas just to finish it, the space race concept is its technology, right. It's economy. I mean, if God forbid, COVID-19 had been much, much worse, we certainly would not be thinking about outer space as much as we'd be thinking about survival. So, there's a lot of things in that industry that I think you need to you want to pay attention to.

In our industry, cannabis, I think we really need to get even more voices well beyond mine. I'd love to - I'd welcome anyone who's involved, who has political experience or to really get involved with the long-term conversation because too many people are shouting about something happening six days from now. Mark your calendar, and then it doesn't, we really need to do a better job of teaching and informing our investor community around how this is going to shape the next generation of this product.

RS: I agree with that. I just want to ask you really quickly about that point in terms of like focusing on things like six days from now as opposed to like long-term. Do you feel like that's done - Do you feel like people are learning their lesson? Or do you feel like it's more like people are chasing headlines or chasing like, look out for this when they kind of know that it might or do you think people are learning lesson and now are more wary of those short term I guess, promises, catalysts, what have you?

JP: Sure. So, we sort of have a little data on this, which is if you look at last November, when Representative Mace put out her bill, we saw this almost just sort of parabolic increase right. 30%, I think over three trading days. And I was watching it and that's when I put on some puts. And watching a couple of weeks ago, when we heard that the COMPETES Act of the Amendment, there was still a response, but it was muted.

Volume is a trickier thing to really figure out. But so, I would say I do think there's whether people are learning their lessons or they just have less to invest or they're just more soured, whatever the reason is, this moment has definitely been a much more thoughtful approach slower than one year ago is good news of the Georgia elections and the blue wave all the way to 50, which I think people I mean I realize we all get excited about that.

But it is fairly funny that that it took such a beating in the market for people to realize that 50 votes plus a tiebreaker vice president is not really a majority. And so, I do think that's happened but I won't name names, but I have a lot of people that reach out to me and ask for support or questions and such and people I really enjoy talking with who I sadly have to watch getting excited again about things that I weeks or months earlier have mentioned is not something to be excited about.

I think it's natural in the average investor to be excited in these things. That's why most of us pay other people to invest our money. It's smarter that way. But the last thing I'll say is, and this is about responsibility with power, if you are someone who has a voice in this world and if someone who was listened to, it's not enough just to say I'm going to put out my thoughts and then end my thoughts with but you do you.

It's really important that we put out opinion separately from not facts, but sort of informed predictions and formed sort of ideas around what's happening. So, when I'm talking about, when Senator Schumer puts out that CAOA will be coming out in April, that's his guidepost at this moment, we know that the COMPETES Act amendment is done, it's done. I can't say it hard enough, because there's no reason why bad amendment would get any kind of a positive boost in the Senate.

If Senator Schumer has finally said, I'm going to take my bow first. Similarly, you've got Representative Perlmutter, certainly ruffling feathers, because now Mitch McConnell has made, he's mocked the Democrats in the cannabis bush. And I've got to say, if you want to work across aisles, or you want to work across chambers in Washington, the last thing you want to do is make it more difficult for your own party to move legislation. So, while I appreciate Perlmutter's aggressive stance and assertion that this is critical, he may have kind of hurt himself by adding it to the COMPETES Act.

And I would wonder if I was in the staff room with him and others, and they would just be saying that. Now I share that, because I've been in a staff room where we have done things political with our policy, and I've seen good and bad responses from them. So, I'm speaking from experience. And I think there are some people who are very good, like leaders in the space who have a lot to offer, who need to really, I think, defer and slow down the conversation around the political side, because there really are very few people who get that.

And I think until they do that, there's going to be a group of investors who are going to go month by month, day by day, instead of listening to Julian and thinking about the big picture, which he's exactly - his approach is exactly the right approach to asking questions around an industry that has so many question marks.

RS: Yeah. Julian, do you have any further points to make about kind of the long-term investing picture vis-à-vis what Jason was saying in terms of questioning what regulation is going to do to those thesis is?

JL: Yeah, I mean, I definitely agree that. There's definitely seem to be a lot of people, a lot of investors who are definitely focusing way too much on kind of what could potentially happen in the near-term in like a perfect scenario, when in reality, it's maybe not so realistic to be counting on like any of these pills to immediately lead to any big reform. I think it definitely makes a lot more sense to invest on the basis on the assumption that nothing will happen very quickly.

I think, in regards to also the commentary about not knowing who the winners will be tomorrow, kind of like maybe it will be dominated by some operator that we didn't know, or maybe some of the losers of today will be the winners tomorrow, the winners of today will be the losers of tomorrow. I think it's definitely important to make sure we're investing in the management teams with the strongest execution and kind of try thinking about it long term.

I mean, maybe just because a company is generating very high profit margins may not mean that they will always have the top share profit margins in the future. Just for example, I think you really want to focus on the companies that are positioning their footprints for the long-term. I know Trulieve has the highest profit margins, but I really like how they position themselves in Florida.

Like for example, I mean, when you just kind of do a Google Maps look at all of their dispensaries I mean, they're everywhere in Florida, even in the places with very low population density Trulieve is there. And when you think about that long-term, that's actually a really, really interesting strategy. Right. So, I mean, if you're already located in the city with kind of a sparse population and a sparse population around it, I mean, oftentimes these dispensaries there isn't a competitor like a non-Trulieve location within 60 miles. This is in Florida.

And but then you got to ask, is a competitor going to enter that area when the populations not that high like, and there'll be competing with Trulieve. And then the moment they compete there, there's not going to be that much profit. So, you're potentially looking at a situation where Trulieve is able to exert and maintain its market share for so long just because competitors don't want to compete with them in the non-populated areas.

And when I see a strategy like that, I mean, you could tell that this is a company that has obviously thought about the long-term future about what happens when competition comes and where they want to maintain their profit margins. So, I think of course, it's impossible to know which companies will be the biggest winners later. But I think even now, you could definitely see, you could judge to see which companies are just growing for the sake of growing versus kind of like buying revenues.

I mean, a good example is like, a lot of Canadian companies, I think a lot of the revenues are not even from cannabis anymore. You look at Canopy Growth or Tilray (TLRY). And then you could kind of judge which companies are clearly positioning themselves for a mature market? I think those are going to be the ones that will have less of a shock, less of a shock later on, I mean when bargains compress and their revenues decline. Those are definitely the ones to focus on.

JP: Julian, what are the majority of their revenues coming from them? Could you speak to that a little bit?

JL: Okay. Yeah, so I think Tilray is the easiest one. Tilray, yeah I think it's like 60% of their revenues comes from their, they call it a distribution business in Europe where they're, it's like a pharmacy business. And it's not like a good diversification, because not only is it not cannabis revenues, but the gross margins on that business is lower than the cannabis. So, it kind of makes them look cheaper on our price to sales multiple and usually, we are valuing these on prices, sales, just because there's no profits. But in reality, you're like, half of the revenues are more than half their revenue isn't cannabis, and it's actually low-quality revenues. So, that could be really deceptive.

JP: Well, let me ask you this, if I can. You're talking about Trulieve and I was recently in Florida, and yes, it's a really incredible company. It's really incredible to see the breadth and or the depth rather, I guess, both really of their exposure. In a world where, because when we think about wine and liquor and beer, while some people swear by their medical properties, obviously it's very different.

Something it's very different than you consume from a medical standpoint than what is potential with the cannabinoids sort of molecules. I am not an expert in this, but my understanding is really that there's a whole basket of things that can be explored. I guess what I'm thinking is I mentioned it earlier, my future prognostication is that the medical side is truly going to be medical. Pharmacology it'll be Eli Lilly (LLY), Pfizer (PFE), you name it.

That will be truly doing research and developing pills that your doctor prescribes. Maybe some they probably wouldn't be over the counter so it'd be prescriptions, which then leads the recreational side to our band of Tier 1s. If also regulatory environment were to allow for the sale of these things in whatever the state determined so maybe it's restricted through their liquor stores, their liquor agencies. Here in Ohio, we have liquor licenses for very specific distribution. Where does a Trulieve make its revenue 10 years from now in that world?

JL: And just to clarify, do you mean in a world where most of the medical sales are not through their stores, but instead like through a doctor or something else, is that what you're asking?

JP: Yes. And to be even more like just not nightmarish scenario, but let's go further with this. Let's say it's a commodity. So, it's being grown by growers which could include yes, Curaleaf growers, Trulieve growers, et cetera but also now new fields literally and figuratively of growers. Those products are being bought in mass by pharmaceutical companies that then use it for their research and development and then producing pills. And then maybe some other companies are using it to create products. So, drinks and things you can take in different ways. Where in that future do these companies Green Thumb, Curaleaf, Trulieve, where do they fit?

JL: Okay, great. Yeah, absolutely. If the big pharmaceutical companies eventually produce cannabis-backed cannabis related medications, I think that'd be great. Oh, my I do think those kinds of medications will probably be more for the serious, more serious conditions. I think there's always going to be that valley to self-medication. I think there's a certain culture, a human tendency to want to self-medicate.

So, I think even if the pharmaceutical companies sell cannabis, there's the average consumer, you're still going to have a lot of people still going to the recreational stores self-medicate. I mean, that's what I'm doing. But in regards to, when cannabis becomes sold like as an average form will ever be in a liquor store, I mean, we got to remember that's for about to happen, like for cannabis to be sold as a beverage any like, your seminal 11, or something like that I mean, the views on cannabis are going to have to progress so rapidly and by so much before that happens, right.

It's going to have to be pure normalization, where for the average person is totally for cannabis, before you get the politicians being willing to open it up completely like that. I mean, at least I would think especially, I mean, let alone in some of the more conservative states. I mean, it's just going to, it will take decades upon decades before that happens. And I would think, because it will take so long for that to happen.

By that time, a lot of these MSOs, especially Trulieve, they're going to have exerted such dominance, they're going to have so much market share so much name brand, that I mean, they might be the wholesale suppliers to those, so perhaps the margins will be down a little bit. But I mean, there'll be so much more than it wouldn't it wouldn't matter, I think.

RS: Jason, is that good enough for you?

JP: That's great. No, I'm just thinking that this is one of those conversations where if you're a listener, I hope you felt the ups and downs of the whole thing. And also, are leaving with I mean, I'm leaving with it's not leaving yet. But it feels like you're talking about Apple or Google (GOOG) or Netflix in the 2090s, which I think is very something that we all need to remind ourselves again, because I think that's true.

When I was introduced into this field, that's how it was talked to me. And I think in the last 18 months, we've compressed what is a 20-year future to invest in and discuss into tomorrow, tomorrow, tomorrow. And so, I think that is it's a great reminder that whether you're putting $500 aside today, or $50,000 aside today, this is early days still.

RS: Yeah, I couldn't agree more. It's funny that you said that because when - I mean throughout this conversation, but pointedly as we're coming to the end I was thinking to myself, like it's such a privilege to have this podcast because I get to talk to so many thoughtful, smart, articulate people. And sometimes even just putting them together is a great thing.

And that's pretty much I feel like what I've done today, and I feel like very happy to be a part of this, or just kind of presenting this conversation. I think you both are bringing up really salient points. And Jason, I think like for myself between you and I feel like we're coming to the fruition of a long conversation, at least this phase of the fruition. I want to ask each of you in closing, kind of a two-part or one.

Is there something specific that you feel like for either one of you sets you off course in some way or makes you question the course? Do you feel like something happening may do that? And within that, Julian, I would ask you kind of I mean, you said how you describe how you look for the top players in the space. I guess I would ask you if you think there's any players that, investors aren't paying enough attention to? Well, let's start there. Julian, I'll start with you and that question.

JL: Sure. I mean, in regards to the first question, just because I'm very, very bullish for the long term. And the main thing that would concern me would be if any developments happen such that we wouldn't be able to reach out long-term. I mean, just an example would be what if suddenly on a federal level, cannabis was deemed like super illegal or all the cannabis stocks are required to delist from even the TSX from the CSE?

Right. They're not, still you're not allowed to own cannabis stocks at all. I think if that something has - something terrible like that were to happen, that would definitely make me very concerned. Because even if the long-term picture is optimistic, I mean, it would just the journey would end short. In regards to that second question, could you remind me what that second question was again?

RS: Sure. Happily. Kind of what companies you're looking at? I mean, you talked about it at length and a little bit briefly for like Verano (OTCQX:VRNOF), let's say, but kind of what you're looking at or if you fit and or if you think that there's a stock or a group of stocks or a way of describing some players that investors aren't paying enough attention to that, that also look like they're promising?

JL: Absolutely, yeah. So, I think, especially and this is also important to discuss in regards to sentiment, when the stocks were really high, like just 12 months ago, it's really easy to get really optimistic think legalization is going to happen really quickly. I mean I certainly was quite guilty of that. But then the stocks have come this much down during a year where the stocks have, the companies have grown so much.

Sentiment is really low. So, you start - like, the investors start questioning their thesis, they started viewing the draconian scenarios of like, complete margin compression of interstate commerce. They started thinking that's going to happen really soon and that is why the stocks have come down. They start trying to explain why the stocks have done poorly, and trying to talk themselves out of it. I mean, it's very, it's human nature to try to talk yourselves into selling some stocks that have done very poorly. You want to you want to be able to explain why there was a mistake.

So, in regards to answer your question, I think you don't have to look so far to find value. Like, I've written extensively on Verano and I think a lot of investors are very, very bullish on Verano. And I think it's for good reason. But even so, I think they're still under appreciated. You're looking at a company that's positioned themselves across all the best limited license states.

They recently entered New York, which means they will have New Jersey, New York, and they're going to have Minnesota, they're going to have so many states that would provide huge catalyst real revenue growth over the next one year, two year, five years. It's all set there, because of how they're positioned. And this is not just isolated to Verano, of course, a lot of those Chairman operators.

What I mean is like they've already positioned themselves so that you're going to get large growth in the near term, large growth in the medium term, and sustained growth over the long term. That's very impressive. And Verano just happens to be a really highly profitable and cheap investment there.

RS: Yeah. Well said. Jason, I'm curious, are you all trading in the industry, is there any kind of investing sentiment from you or is it all trading?

JP: Yeah. I guess in the end, it just depends on your exact definition of timeline. So, I have some that I've kept long term. And so, that would be an investment, I suppose. But I'm willing, if I see movements that are exacerbated one way or another to pull out into readjust. So, it's an active portfolio in that sense, but it's sort of a slower active portfolio than some investors who really almost every other day or moving around, at least the cannabis one is. And to answer the broader question around where's my - not so much negative side, but what am I concerned about what am I thinking with regard to that?

This conversation has really helped me rethink of how I want to present my information around the political standpoint, which is, again, I've been feeding into the conversation around quarter by quarter, month by month, press release by press release of people in the House and the Senate.

I do want to do a little more of a zoomed-out approach to the political landscape, talk about the parties in the next six years, look at the last maybe 10 years. Because I do think that as I mentioned earlier, just the breadth of commentary that is coming from both sides of the aisle, that is coming from all of the players is showing that this is something I mean, just like with healthcare, we did see Republican bills in the 90s and 2000s, in small measure with limited support to do things like expand Medicare coverage.

And so, it's the same DNA of a big, big change. But I've been doing this all this conversation, I've been looking up some of the big names and I figured Netflix was appropriate considering we talked about it. For almost a decade, Netflix was under $10. And so, you could have bought it at a buck 20 and sold it at 7 and made an incredible trade there.

But what it became as a not only mature company and some would argue it's maybe just becoming truly mature, and what investors or analysts might have thought it would become, maybe people thought there'd be a Netflix box that you'd have at your house in 2005, et cetera. Just like that future was unknown. And you really had to just kind of take some faith about the big picture.

That's where we are here. And I guess my biggest concern there would be both for the average investor, do they understand that and appreciate that truly? Does anyone know what it's like to hold something for five years? And certainly, if you're on Twitter getting your information, that can't be true of you, because you're on it every day saying good or bad things. You wouldn't care if it was a five-year treasury bond.

And so, I worry that the appetite, I worry about the people that will lose money, and then I worry about the market dynamics. So, here's a concern. If we have this huge, if retail base is still so related to the float and so related to the price action, then how much of a diversion between the sentiment of the average investor, the small-scale investor and the company's vitality, just so you're saying, Julian, at some point, the debt markets are increasingly attractive to these people or to these companies.

At some point, you could see privatization. Just I guess what I'm trying to get at is there's an additional exacerbation because unlike investing in a tech stock in 2003, and saying, I'm going to hold it for 20 years, you could do that in a mutual fund or an ETF, you could do that in a portfolio, and truly not pay attention to Netflix for 10 years.

This is such a retail focus, what's my money doing tomorrow kind of industry right now, at least these conversations are that I worry about how accurate the barometer is, if clearly is inaccurate. If it's so far flung, and for such a long time, then are investors going to bail? And how low can it go for those of us that want to invest for longer term to keep our appetites in? And then macro all that volatility makes it even less attractive for institutional investors?

So, in a world where an institutional investor could pre SAFE banking, find a legal back way to invest in the stocks, perhaps something like the swaps at MSOS. They might - they're clearly not interested right now. And so, or they might be interested, but they're clearly not doing it.

So how can we shore up this industry, if it takes five more years? There's a lot of questions there. So that would keep me up at night if I was more deeply invested. But for now, I think it's just a very interesting thing to deeply follow.

RS: I couldn't agree more, there's something nagging at me leaving it with those questions. Julian, are there any small points you want to make to some of those, like, nagging questions that Jason just posed?

JL: I mean, it's always hard to say without my shiniest crystal ball. But I definitely think that I mean, even though, Jason, you've described yourself as a trader, I think your analysis and the way you look at it, I think it's valuable, very crucial for anyone thinking about it long term and definitely a warning to the people trading it short term on a - with a bullish, like heavily bullish type thing. I think it's indispensable information.

RS: Yeah, I think that's a really good point. I think something that I try and focus on this podcast and which leads me to bring together two thoughtful analysts like yourselves, analyzing from slightly different vantage points. Is that - we shouldn't be afraid to ask questions even when we are bullish, even when we are investing longer than a year, maybe we're invested five years, maybe we think longer term.

It's always worth asking questions and questioning ourselves; never live in an echo chamber. And I hope this has fueled many more questions. And until next time, Jason and Julian, I so appreciate this thoughtful and articulate conversation. Thank you both very much.

JP: Thank you so much.

JL: Thank you, Rena.

Thanks so much for listening to The Cannabis Investing Podcast. Subscribe or follow us on Seeking Alpha, Libsyn, Apple podcast, Spotify, Google Play or Stitcher. And we'd really appreciate it, if you would leave us a review on Apple podcast. It helps other investors find our show and makes us feel fantastic. If you have feedback or questions, we'd love to hear from you at Thanks so much for listening and see you next time. Nothing on this podcast should be taken as investment advice of any sort. I'm long Trulieve, Khiron, Isracann BioSciences, The Parent Company, Ayr Wellness, and the ETF MSOS. You can subscribe to us on Libsyn, Apple podcast, Spotify and Stitcher.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

On The Cannabis Investing Podcast, host Rena Sherbill provides actionable investment insight and the context with which to understand the burgeoning cannabis industry. Interviews with C-level executives, analysts and sector experts give you investment ideas to consider, help you think through your investing approach and provide you a new lens with which to understand this ever-growing sector.

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