Last week we looked at recent developments in the state-legal marijuana markets. Among the observations we made there, these three stand out:
- Marijuana is becoming an essential business and a permanent feature of the landscape, surviving crises and helping the portfolios of investors do the same;
- The major players are often listed on the Canadian Securities Exchange, the alternative stock exchange operated by CNSX Markets; and
- The structure of Marijuana Industry 1.0–which in its early days rewarded rapid revenue growth far more than fiscal discipline and strategic focus–has now nearly collapsed upon itself, forcing the industry into a more structurally sophisticated equilibrium, yielding a 2.0 ecosystem that will prove more sustainably scalable over the long term.
We looked at this situation from the perspective of a California firm, ManifestSeven Holdings Corporation (CSE: MSVN). ManifestSeven’s name is partially inspired by the concept of “manifest destiny,” the inevitable expansion of foundational American values–innovation, individual liberty, and self-determination–toward the aspirational horizons of new and unexplored frontiers, both literal and metaphorical.
Today, especially for a nascent industry springing up amongst the coastal and desert sands of the world’s single largest cannabis market, that term remains imbued with a powerful symbolic currency for the emerging legal marijuana landscape. Since becoming the first state to permit medical use under Proposition 215 in 1996, California has found itself at the very edge of a brand new frontier yet again–this time a dynamic commercial one with global ambitions and dimensions–attracting its own generation of entrepreneurial pioneers forging it into a sustainable, scalable, and regulated industry across the continent and, ultimately, around the world.
Diversification and the Feds
Other firms are trying to keep a footprint in several different states. Given the fact that cannabis remains on the DEA’s Schedule 1, there aren’t many opportunities for synergy among the operations in different states, but the firms maintaining this multiple presence are making the strategic bet that the legalization process will reach the US Congress in the near future, the awkward hindrances of today’s market will be lifted—at that point the synergies may well arise and prove of great importance.
ManifestSeven has adopted a different view. California is by far the largest market in the US, if not the world, and ManifestSeven has focused its efforts almost exclusively there as a result. Its first step was to build a robust physical infrastructure across the state to unlock an end-to-end suite of distribution and commercial services currently offered to more than 200 legal dispensaries, as well as a host of other stakeholders across the rest of the supply chain, including cultivators, extractors, and product manufacturers. In addition to this statewide B2B network, the company also operates a growing portfolio of B2C operations across the full spectrum of available retail channels.
For most of what remains, we will focus on those firms that have gone for geographical diversification, the multi-state operators (MSO). Canaccord Genuity, the Vancouver, Canada-based investment bank, hosted its annual symposium (virtual) focused on US cannabis on Sept. 30.
There were 60 presenters, including ManifestSeven and many of the biggest MSOs: Curaleaf, Green Thumb Industries, Trulieve, and others. One of the big subjects for discussion was the upcoming US election: not merely the US presidential race (of which, more below), but the individual ballot initiatives as well.
Arizona and New Jersey have ballot initiatives regarding adult recreational sales. Those two states plus Pennsylvania are the three that seem closest to a breakthrough to adult sales—in Pennsylvania it seems likely to happen without a ballot initiative. Within Canaccord’s coverage universe, which are the companies most likely to gain from a breakthrough in some combination of those three states? It is safe to say that Curaleaf, Harvest Health & Recreation, Green Thumb Industries, and Columbia Care all provide bullish exposure to those markets.
Looking to the federal election, whatever happens with the Presidency it does now appear likely that there will be a change in control of the US Senate. If both the House and the Senate are in the hands of the Democratic Party in January, there may well be progress as to the SAFE Banking Act (allowing federally chartered banks to work with MJ firms in the safe disposition of their cash), the STATES Act (amending the Controlled Substances Act of 1970 to exempt state legal businesses from federal enforcement), and the MORE Act (the end of federal prohibition and the expungement of existing criminal records).
In terms of geographical markets, some of the MSOs have so far only dipped their toes into the water of diversification. For example, Trulieve has an impressive number of operational dispensaries (60—only Curaleaf has more). But Trulieve is almost entirely a Florida operation, based in Tallahassee, and 58 of those 60 dispensaries are found there. It has one in Connecticut and another in California.
Curaleaf itself has 94 dispensaries. Again, a lot of those (roughly one third) are in Florida—which has a good climate for cultivation and which repealed a ban on smokable medical marijuana in March 2019. In some states (such as Oklahoma and Oregon) Curaleaf only has a single toe-hold dispensary. In others it has a substantial presence: eight in Arizona, for example, and nine in California.
So desirable is the Florida market that MedMen paid $53 million for the Treadwell Simpson Partnership two years ago, in anticipation of the then-pending bill on smokables. This acquisition netted MedMen a five-acre cultivation facility and the right to open up to 25 dispensaries around the state. It now has 10 in operation. MedMen’s heart remains in California, though. It is headquartered in Culver City and has 17 operational dispensaries there, which is nearly half its national number (36).
We mentioned in the first section that there may be opportunities for “political arbitrage” in cannabis. There is often an expectation that headline/political developments will impact the industry in obvious ways, and those expectations are commonly disappointed.
When the Trump administration was incoming, these expectations were bearish, and they went unfulfilled. Now, there are expectations that, first, there will be a Biden administration and that, second, its existence will be good news for the industry. Those, too, may be unfulfilled, which in turn could create opportunities for arbitrageurs.
For an experiment, let us look at the performance of several firms named above, all listed on the CSE (most may also be traded OTC), during the period from Oct. 2 (As trading in MSVN began) and continuing through Oct. 9.
ManifestSeven (CSE: MSVN)
Curaleaf (CSE: CURA)
Greenthumb (CSE: GTII)
Trulieve (CSE: TRUL)
Columbia Care (CSE: CCHWF)
MedMen (CSE: MMEN).
What happened? Five of those six issuers rose in value during the period in question. The outlier was MedMen, which took the hardest hit in the shake-out last year, saw the departure of founder Adam Bierman earlier this year and has not found a bottom.
That outlier aside, the other five had strikingly good weeks, with MSVN up 11%, TRUL up 13% GTII up 16.7%, and CURA up 18%. Some part of these increases may be due to political news: the increasing likelihood of a win for the party more friendly to legalization in the United States, both in the Senate and the White House, and statements by its Vice Presidential candidate that a Biden administration will push to de-schedule cannabis.
If that is the reason, it may be a case of optimism running ahead of the facts, since the history of the industry shows that what happens in the political sphere can stay in the political sphere. There may be room for a bearish speculative play.
If the industry has in fact found its way to a sustainable model, there will be a lot of bearish and a lot of bullish plays going forward, in the usual manner of a “normal” industry.
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