Deep in the Weeds of the Cannabis Industry
Hey everyone! Yb has been quiet for a while, but hey life happens and I’m super excited to share this piece that I’ve been cooking up for a while.

Pot stocks are at all-time lows and truly define “fallen out of favor” in this current market. In my view, now is the time to buy.

Before I could decide what companies to buy within the space, I started doing some research and decided to turn it into a whole ~6,100 word piece on the industry…and that’s just Part 1!

Take a peek below, but more importantly, stay tuned. Next Wednesday, I’ll drop Part 2 which will include my picks along with price targets and a lot more.

Enjoy and let me know what you think!

Paul Cerro's avatar
What's the catalyst for the US market? Everything that drove the market higher over the last 2 years is dead
Markets Aurelius's avatar
For risk of killing the golden goose, I won’t go too in depth right now as I will detail sector-wide and idiosyncratic catalysts in Pt. 2, but…

I think you’re right that there are essentially 0 sector-wide catalysts in the short-term. Long term is a different story. To touch on a few:

  1. Continued & smarter consolidation: cannabis companies will continue moving towards state-by-state scale maximization up to the point of licensing limits. This will result in fewer players holding more of the market, increasing earnings and cash flows

  1. SAFE Act: MORE isn’t gonna pass until we have Dem controlled everything…if even then. But that’s bc of Repub. opposition to social justice ideas involved. If / when SAFE passes, the WACC for these companies will plummet. Lower discount rate obv = higher share price

  1. Macro: pot stocks trade like speculative assets, which have been hammered the lost by macro forces. Further, cannabis is much more of a discretionary purchase than macro. As macro picture cleans up, cannabis will ride that wave as well

That’s all I’ll give for now, but happy to keep discussing! This is as much of a “stock picker’s market” as they come IMHO.

Again though, let me know where I’m wrong and maybe let’s smoke a bowl together sometime 😂
Markets Aurelius's avatar
@markets.aurelius lmao apologies, meant to say “much more of a discretionary purchase than staple”. Lost in the sauce for a minute
Paul Cerro's avatar

Point #1 doesn't matter because US MSOs have been doing nothing but growing very well given their financial handcuffs but the market doesn't reward that because they can't.

Point #2 Doesn't matter because Dems won't control everything for the next few years at a minimum and will most definitely lose in the midterms

Point #3 Isn't a speculative asset. It's being hampered by sellers realizing that there's no upside right now combined with no uplisting so institutional investors can't invest in it and drive liquidity and volume.

Cannabis is dead money until actual reform can come around which is wishful thinking. This isn't to knock on your post, it's in-depth and well laid out but what you have to know is that this industry is definitely disconnected from reality. I know cause I cover it.

Markets Aurelius's avatar
@paulcerro please! this is exactly the kind of smart-debate we love at DYD. disagreements make markets and I appreciate your expertise. thanks for linking in your piece as well, excited to read it.

  1. absolutely does matter because there will be winners in the space over time even if regulations don't change in the short term. as consumers preferences solidify, brands either strengthen or die, and a potential recession separates the wheat from the chaff, winners will be rewarded in share price over the long-term
  1. agree with your premise but not your conclusion. neither of the bills mentioned will pass in the next several quarters at least, but SAFE very well could pass without complete dem control. it might not be the probable outcome right now, but is certainly possible and the odds only increase with time
  1. how is cannabis not speculative? would love more clarification as a relatively new industry that sells an illegal product and can't get national banking services definitely seems speculative to me. maybe we disagree on the def of "speculative asset" but as far as equities go, they are definitely in the very high-risk camp

I would tend to disagree that cannabis is dead money solely until major regulatory changes. Maybe the industry as a whole will suffer, but there will be winners under the current regulatory environment. Certainly depends on your risk-profile and time horizon (and I would NOT recommend anyone put $ into the space without DYOR), but based on my investment profile, it's a great opportunity for me.

thanks for the kind words about my piece as well. you clearly have more expertise on the industry so i appreciate the chance to learn from you through this discussion. reading your piece now!
Paul Cerro's avatar
@markets.aurelius Happy to chat more but this chart should sum everything up. Dead money. I've been covering cannabis since 2018 when they first started hitting the public markets.

Without a catalyst, it's not going anywhere but down for the foreseeable future. LT a winner, but what's your IRR at that point? Money could be deployed elsewhere with more favorable returns

Even look at cannabis ancillary players that do trade on main markets without limitations. They've been getting annihilated just like traditional cannabis