TLRY - Is It Really Time To Be Bullish On Cannabis Stocks?

2023-09-20 15:00:00 ET

Summary

• Jesse Redmond discusses the current state of the cannabis industry and the opportunities it presents for investors.
• He emphasizes the importance of focusing on quality companies and having a long-term investment horizon.
• TerrAscend's execution, Green Thumb's dominance and lack of transparency, AYR's debt strategy, Trulieve's tough period and California players.

Listen here or on the go via Apple Podcasts or Spotify .

Jesse Redmond returns to discuss why it's ok to be bullish on the cannabis industry (4:30) political catalysts, 280E and excise taxes (12:15) picking companies based on your investing horizon (15:00) Green Thumb's dominance and lack of transparency (20:55) AYR's debt strategy (23:10) Trulieve's tough period (21:00) California players (38:00) and TerrAscend's innovation and execution (44:55).

Transcript

Rena Sherbill: Jesse Redmond, always great to talk to you. Always great to have you on the Cannabis Investing Podcast and on Seeking Alpha. So thanks for coming on the show.

Jesse Redmond: Well, Rena, I am excited to be back . When I ran a dispensary, I found we could put anything on the menu once, but it actually had to be good to come back twice. So I'm hoping the same thing applies here.

RS : You know it's true. You know, it's true. And I gave Jesse some flowers, but I should give them publicly that Jesse's episode in November was one of our highest rated, most engaged with, the most well received. So check that out if you haven't already. And I'm excited to get into it here and also hopefully more frequently as the months progress.

You've written for Seeking Alpha in the past. You've done a number of things in the cannabis industry. You want to just catch listeners up briefly where you're at these days and what you're focused on?

JR : Yeah. So last time we talked Rena, I was running a cannabis investment consulting firm called Higher Calling. And before that, just real quick, I spent 20 years on the investment management side and then I spent three years running a dispensary. And I think that context really helped when I tried to transition into the cannabis investing space. I ran a cannabis investment consulting business for about three years.

And then in the spring of this year, I got an opportunity to join Water Tower Research. Water Tower Research is a boutique research firm. We have 14 analysts. We cover 12 different sectors. And I joined to build out the cannabis sector.

RS : Let me ask you, just in terms of when you joined Water Tower and where we were at in the industry, what was the sense joining a team like that to cover cannabis?

JR : The sense in which way?

RS : I guess just sentiment wise, like what was the feeling around covering? Are the other analysts engaged in the sector? How did you feel -- he's shaking his head no.

JR : Yeah.

RS : How did you feel about getting into it? And how do you talk about it? I'm just curious because there's -- I'm at Seeking Alpha, you're at Water Tower, similar types of finance, investing and cannabis. And there's just been so much negativity.

And I'm just curious how that conversation is with your colleagues because I know how it is with mine.

JR : Yeah. So the leadership in our firm just couldn't be more supportive. They had been looking for a cannabis analyst for about nine months before we talked and I met them in kind of an interesting way. One of the founders of Water Tower Research, just a gentleman named Stuart Linde. And Stuart ran Global Equity Research at Barclays and then at Lehman Brothers. So one of the top builders of cannabis research departments on Wall Street and he was a big believer in the cannabis space.

And like I said, they had been searching for an analyst for a while, and it was a really hard time then, Rena. And I was kind of surprised they were looking for a cannabis analyst just because sentiment was so low and it felt like this drawdown was never going to end, but they're interested in higher growth type spaces.

So we have an awesome climate tech analyst. We cover psychedelics , we cover tech. We also cover some traditional things like consumer and metals and those types of sectors. But yeah, in my case, I'm super lucky that the firm just couldn't be more supportive and they see a real long-term opportunity there. So, I'm super excited to be here to build it with them.

RS : Awesome. Yeah, I would say the same thing about Seeking Alpha and I feel like we're both, I would imagine, very grateful to be at places that understand the long-term picture in what's going on in cannabis because, as the months go on and news gets more negative, it's hard to keep that line.

So how are you looking at the cannabis industry, September 12th, 2023? What are you thinking about? How would you share that with investors?

JR : Yeah. So I was talking to my friend Morgan Paxhia from Poseidon yesterday.

RS : I just talked to Emily Paxhia yesterday. That’s hilarious.

JR : Did you? Yeah. We do a podcast called The Water Tower Hour . And Morgan was a guest on that. So, yeah, some of the better voices in the space and great long-term perspective that they offer.

And Morgan this summer started saying, when we were talking, it's now okay to be bullish. And this was even before the catalyst, more better, more thinking about the fundamental data, the fact that analyst estimates had come down, the fact that earnings were starting to improve and the fact that sentiment was so low and there was potential to get some catalyst ahead. We didn't know if those were coming in 30 days or in three years at that point. And we could talk about how that landscape has changed, but I think it's okay to be bullish right now.

And I think it's okay to also just be cautiously optimistic. We've been through a lot of pain. Rena, I started my investment career right around 1997, and I was at Fisher Investments during the NASDAQ bear market, and that bear market felt like it never was going to end and it was 929 days. Guess what? The ( MSOS ) drawdown lasted 931 days.

And so there's some quote about history doesn't repeat itself, but it often rhymes. And so even having gone through that NASDAQ experience in that painful bear market, I was also managing a hedge fund during the great financial crisis in 2008. So I've been through some pain before, but the duration -- the 931 days and the magnitude of the drawdown, 92% was a really tough thing to deal with. But on the other side of that, there's typically a lot of opportunity.

Meb Faber put out a stat about how stocks that are down 90% perform over the next three years. And the average return for sectors, I'm sorry, sectors not stocks, after a 90% drawdown over the next two years is 270%. So, I bring that up just to say that typically when things have gone down a lot, there is a lot of opportunity on the other side.

And I think that could be especially true here because things are actually -- I shouldn't say that, there's evidence that things may be significantly changing. Like before we were getting excited about SAFE Banking , which I still think is important. But this move to Schedule III is by far and away the single biggest thing that could happen to the cannabis industry because we get rid of 280E. And I think if you combine, we think about cannabis being a state led growth story with a series of hard to time political catalysts , that's always been our thesis on it. And I think we're starting to see those two pieces come together.

But I think the fundamentals are improving, there's some opportunity for new states to open. And if you pair that with the potential for one, possibly even two political catalysts, I think there could be a lot of opportunity in the space moving forward.

RS : So what's your strategy, I guess around, I mean, I know you just mentioned timing political catalysts which, good luck to anybody timing the market. It's impossible to do. So I guess the lead quest, I guess I'm sort of leading the question, but feel free to pick it apart.

Do you feel that you have to be in the market as you see the clues coming in because it's so hard to time the market? So once you have your long-term thesis, you kind of have to pounce whenever you possibly can. Is that how you would put it? And also let's say, we're talking about this rescheduling of cannabis that the HHS has promised, or has speculated that they will do. What do you think about the timeline of that? What if it doesn't come to fruition? What if that isn't enacted? And then just your general kind of theorizing around timing those catalysts?

JR: Yes. So I think the nature of a catalyst is that they are unknown things and they are unexpected. So really, the idea of being able to time a catalyst, if you could time it, it probably actually isn't a catalyst if that makes sense. By nature, they're unexpected. And if you think about this one, who expected this kind of announcement, the last week of August when a lot of traders were out of town, the space could not have been more dead. I remember that week, I put out a tweet that said to the 37 of you that are still paying attention, here's some information on valuations for the top five companies.

And you've probably seen it Rena, engagement just got super low. The volume was super low and then out of nowhere when nobody expected it, we get this huge announcement that the HHS was recommending Schedule III. And so I think that's just further evidence that the space is really hard to time.

Maybe there's a perspective which I had last year that you could increase exposure during these more politically active periods. So we don't know if the DEA is going to respond within 30 days, or if it's over 90 days, or if it's going to be some time closer to the primaries early next year, it could be the conventions over the summer. It could be waiting until the actual election in the fall of next year.

So I would say these things are pretty hard to time, but maybe there's a strategy where you could increase exposure around these events. But for someone like myself, that doesn't have an edge in market timing, and I think that's true of most people, I think most people are better off being long-term investors and not market timing unless you do have a demonstrative edge in that space. And so my thoughts for most of this year have been to focus on quality.

I often reference this conversation I had with Abner Kurtin, who's the Executive Chairman of Ascend ( AAWH ). And he said in this type of environment, it's not about finding the things that will go up 200% rather than 150%. It's about avoiding the ones that will go to zero. And that's changing a little bit, as we do get into what could be a new bull run here. If people want to invest in more speculative names, we can talk about the kind of stuff that has been going up the most.

But I think there's enough opportunity in cannabis that I would tend to focus on quality and have a longer term time horizon. My thought have been give this 3 years to 5 years, give this 4 years to 6 years, maybe even longer to play out because we do have this series of political catalysts that we have SAFE Banking. We have the potential for rescheduling. We have ultimately decriminalization, or legalization and somewhere along that path, we're likely to pick up uplisting as well.

So that's three or four big events along the way. And I think you need to give yourself time as an investor to let those things play out. And I think you have to be invested not to miss those. It would have been super easy not to have that invested in late August, and missed this first 80% of the move. And at the same time, thinking about that timeframe, you need to give yourself time for new states to open. We have 23 adult-use states. So that's about half of the U.S. and we have some big ones on the horizon.

Maryland just opened. We have the potential for Ohio and Pennsylvania, which are both big states, 10, 11 million people. And then we also have Florida, which is a huge state, 22 million people and 120 million tourists a year. And so again, going back to that core thesis about a state-led growth story with a series of hard to time political catalyst, I think the best way to harvest that opportunity is to own quality, be a longer term investor, give yourself three, five years plus to let that state led growth story play out and catch those series of political catalysts.

RS : So I want to ask one question before getting into kind of specific metrics and names. You mentioned 280E, that that's one of the things that would be taken off if cannabis gets rescheduled. And this is a question I've been asking almost everyone because Jerry Derevyanny , who I know you know, was on a few months ago talking about if they get rid of 280E, they're just going to replace it with something else and they're going to get their money.

If it's not the exact money from 280E, maybe something similar. What's your opinion on that? Do you see something else coming in its place, or how are you thinking about that specifically?

JR : Yeah, I think long-term a federal excise tax is probably a reasonable expectation, but I think there's a couple of things to consider around that. Rena, can you put an excise tax on something that's federally illegal?

RS : No, I don't believe you can.

JR : I don't think you can either. And I've asked attorneys this as well and I haven't got a definitive answer, but I haven't seen anyone pounding the table saying yes, you can do that, or I would expect that to happen.

RS : It's crazy that there's not a definitive answer on that. My God.

JR : I don't. Well, I think we're in new territory.

RS : Such a gray area. Yeah.

JR : Yeah. Well, I think we're in new territory with a lot of this stuff too. Like, what else is federally illegal that they would like to slap a tax on? It's a real -- cannabis is at a real weird spot.

RS : Yeah.

JR : And so I think in a best case scenario -- let's say in an emphasized best case scenario, let's say 280E were to get removed sometime next year or even in 2025. I think that there's a couple of reasons that it may take time to get an excise tax. One is, can you do it when it's federally illegal? So do we see the decriminalization or legalization before that tax even becomes a big conversation.

And two is, how long does it take them to agree on what that tax should be? Are they going to be arguing? Are the Democrats going to be arguing that it should be 15%? And the Republicans want 10%. And how long would it take them to reach an agreement?

We’ve seen how long SAFE Banking has taken. And that's something that my opinion is relatively simple. We just want access to banks and safe harbor languages to protect them. And that's taken -- what has it been, seven years. It could be rounding it to seven years or so.

And so I think that an excise tax is reasonable long-term, but I think we may have a bit of a Goldilocks period here where 280E goes away and they either can't put the tax on, or it's going to take them what could be several years to agree on how that tax should be structured, who collects it, and all the details around it.

RS : So, finally using the regulatory bodies for us and not against us.

JR : Exactly. Finally we won't hate the word soon , right.

RS : Right. Right. Using the ineptitude in our favor for God's sake.

JR : Yeah.

RS : Okay. So, what companies -- you mentioned kind of the broad strokes of what you're focused on or what investors should be focused on. What exactly does that look like? And I'm also interested in what metrics you're using.

JR : So, I think the kind of companies you want to own probably depends on your risk appetite, number one. Your timeframe , number two. And number three is how quickly do you think these political catalysts are going to happen?

So if you look off of the bottom Rena, or since August 30th. So, if you look at MSOS and this is on September 12th, so this could change -- will change by the time the episode comes out. You have MSOS up about 70%, you have Ayr ( AYRWF ) which was having a really tough year, up 230%. You have Columbia Care ( CCHWF ) up 190%, and then you have Canopy Growth ( CGC ) up 300%.

So if you are a more speculative trader, I would focus on those things that have gone down the most, those things that have a lot of short interests and those things that will benefit most from removing 280E. So businesses that really need that additional cash flow, businesses that might have a higher debt load that are looking to do some refinancing. And again, Columbia Care was really heavily shorted into this rally. And I think that's the reason it's gone up a lot.

I built something, Rena, called the cannabis cash flow portfolio. And what that does is, it takes the eight operators that in 2022 had tax adjusted operational cash flow. And so that means cash flow from operations than accounting for if they were paying their taxes, and I built that as kind of a proxy for quality to see how that was doing this year against MSOS.

We lack proper benchmarks in the cannabis industry. So MSOS is an ETF, but it's also often used as a proxy or a benchmark. And so coming into this event, coming into August 30th, the cannabis cash flow portfolio was outperforming MSOS by 20%.

And so these were generally a little bit smaller companies, but you had GTI there, you had MariMed ( MRMD ), you also had smaller companies like Grown Rogue ( GRUSF ), C21 ( CXXIF ). There were eight different names there, but this higher quality cash flow portfolio was out-performing during the downturn. And that's fairly common. Stocks perceived as higher quality tend to do better and hold up better in a bear market.

However, this has completely shifted since the bounce, and over this last two weeks now it has underperformed by 32%. And so this is common, not just within cannabis, but across different sectors and even looking at that NASDAQ bear market that ended in the early 2000s. It was a smaller, more beat up names that bounced most off of the bottom.

So here we are in the year where what worked for most of the year reversed and the factors that mattered are completely different. And so I think what I would be inclined to do, Rena, is still focus on the higher quality names. Examples of those are someone like Green Thumb Industries ( GTBIF ), I think continues to be the class of the cannabis sector. MariMed, which is a name we cover, I think is excellent as well, strong balance sheet, excellent revenue growth, seasoned management team.

And so I think long-term, I would focus on those higher quality names that aren't as reliant on debt markets that have leverage into new states that are opening. However, if you are a more speculative trader, there still could be opportunities in the names like your Ayrs and your Columbia Cares which were down so much coming into this.

One thing I would caution investors about is, owning Canadian stocks, and that's not to say there aren't quality Canadian names, there absolutely are. But if you think about what 280E removal means that applies to U.S. plant touching operators.

So while you may see these other businesses benefit, and ancillary companies fall a bit into that category as well, I think it's the ones on the OTC, the ones that are plant touching, the ones that could potentially uplist down the road as well, that have the most leverage to this type of move.

And so we've -- ancillaries haven't participated as much in this rally. And I think that makes sense. They're not subject to this 280E, they could benefit because the people that generally use their services are these plant touching operators and as their businesses get healthier, they will have more money to spend on these ancillary services.

So I'm not bearish on ancillaries. I'm not even bearish on Canada, and I'm not against diversifying a portion of your portfolio into those types of things. But I would put the emphasis on high quality U.S. plant touching operators.

RS : In terms of Canada, I'm curious and I don't know if you know this. I don't know if it's known. But if cannabis does, let's say the HHS does reschedule cannabis, can Canadian names then use their U.S. optionality and get straight into the U.S. market?

JR : Yeah, I heard various opinions on that, and I think the consensus is, it would take federal legalization more likely for those types of events to happen. But it is certainly a step closer in that regard and maybe there could be some creative structuring to get around it. But I think that ultimately, legalization is the real catalyst there.

RS : And for U.S. companies, they get this huge boon with the removal of 280E?

JR : Yes. You'll see a drastic change in the cash flow profiles of these businesses. The strong will get stronger and the weak ones will go from having a hard time to survive to all of a sudden being businesses that have a higher probability of success. So people that were burning cash quarter-over-quarter, that will reverse a lot of cases.

And for the bigger companies, GTIs of the world, they're talking about even doing things like buying back stock. They could also have the option to pay down debt. And so it benefits really all of these companies, just in slightly different ways.

RS : So speaking of GTI for a second, they just announced a share repurchase program . Do you feel like a) there's any company that might be able to repeat that or close to it? And b) I believe that we were on last time talking about GTI’s kind of management issues and Board issues and high amount of turnover there.

At the time, you said it wasn't quite enough to worry you, but I think it's in the back of anyone following the industry's minds. How are you thinking about that as well?

JR : Yeah, so I’ll take the second piece too. In my opinion, GTI is the most consistent and one of the strongest operators, but maybe the least transparent as well. So, when you get on their earnings calls , you get minimal information, you get minimal information in their presentations in terms of the cultivation that they have in each state, they're just not real transparent, but they get away with that because they've from an operational perspective have done fantastic, and they continue to churn out really consistent returns.

And so I think the issues around the Board and the turnover there, I think that is rightfully in the back of people's minds. But on the flipside, they've also had an another strong year from an operational perspective. So I think that does alleviate some of those concerns.

On that stock buyback, yeah, I think that's a really bullish sign in a couple of ways. One is, I think it's fantastic for GTI and I think they are in a unique place to do this because of their cash flow profile and the strength of their balance sheet.

I can't think off the top of my head of another big name that could do that, and I might actually expect to see the opposite. Whereas instead of buying back stock, I think you might actually see more shares come on the market through equity raises, especially at these higher prices.

And so I know there's been a lot of conversations going on. I know the Canadian banks have been calling the MSOs saying let us know if you want to do a raise. I haven't heard anything that's that close to happening, but there is the potential that you'll have operators that have debt, that's in the mid-teens or even 20s, and they do equity raises to pay down some of that debt. And so I think GTI is in a unique spot in terms of buying back. I don't see a ton of that, but I think dilution in the flip side is one risk to think about.

RS : Yeah. So speaking of debt, Ayr is a company that you mentioned. We've talked about it, a bunch on the show. We had their newish CEO on talking about how they're strategizing their debt kind of issues. What would you say to Ayr investors these days?

JR : I would say congratulations. If you held, your stock has doubled over the past couple of weeks. So that's fantastic.

RS : They’re like doubled from what, Jesse doubled from what?

JR : Yeah, it’s – I understand a lot of these stocks are still down a lot and that's why it's way too early to be in celebration mode. But I think the higher share price from Ayr reflects a couple of things. One is the low float. And so I think that's another factor you could look for in stocks is the ones that have fewer shares generally will be going up more.

But I also think it's the market telling you a couple of things that one is that this could -- this along with the operational improvements they've made, which I think David's done a really nice job there. I think that removing 280E would drastically improve their cash flow profile, which means that lenders would find them more attractive and that big slug of debt that they have coming up due in 2024 may be easier to refinance. And if they do so, maybe the rate won't be as terrible as some people were speculating. So I think that's real positive for Ayr.

And I think the other thing is that, one potential benefit of Schedule III especially if it's paired with SAFE Banking, and it's proven we can't count on SAFE Banking. But there is some possibility that Schedule III happens, and there is some possibility that SAFE also happens. We could get both of those things and either one, but especially both together would increase access to financial services.

So if you are Ayr and you are looking to refinance debt, the things that could help you are, improving your operations, improving your cash flow, and having more sources available for that financing, and it looks like on the margin all three of those things are improving. And so I think Ayr was way oversold and I think part of this balance is certainly justified.

I wouldn't be surprised at a lot of these names. If we have a pullback, we've pretty much gone straight up day after day. But I think that Ayr having a higher share price given these events, I think does make a fair amount of sense.

RS : Because you mentioned it and I'm curious, thoughts about the Cresco ( CRLBF ), Columbia Care deal falling through . I can't imagine you were that surprised by the time it did fall through. But any thoughts there?

JR : Yeah. So I have been monitoring that spread and publishing that regularly on Twitter. And those numbers were telling you basically in March that that deal likely was not going to happen. And that spread just kept going up, kept going up. I think it peaked around 120% or 130%. And that's telling you absolutely that deal is not going to happen.

So the big issue there was being able to divest some overlapping assets and this was obviously before this big run that we had. But there just weren't a lot of buyers for some of the overlapping assets they had, just like there weren’t a lot of buyers this year for cannabis stocks. And so certainly not surprised to see that deal ultimately not go through.

And I am excited about the opportunity for both going forward. I think each business needs to focus more on the core and what's working, and we're seeing that by closing down some operations in less profitable states. I think they've done a nice job continuing to get leaner, which is another thing, is bringing down that OpEx, bringing down those expenses, and so they can get closer to profitability. And so I think I'm pretty excited about both of those opportunities. I think they have challenges moving forward.

But talking to both management teams, I know it was a big overhang not knowing what was going to happen because they couldn't take some of the steps that they wanted to take if it wasn't going to go through. So I sense they're both relieved to an extent that the deal is not going through, not that it's not going through, but it should say that they have concrete news so they can take some action, and I think both of them have pretty solid plans moving forward.

RS : Do you feel like M&A is going to keep -- not keep, is going to pick up, a) with this news maybe if some catalysts develop, what are your thoughts on M&A kind of going into this new year?

JR : Yeah, I think we will see more M&A, I think maybe some smaller operators getting acquired by larger operators. When you look at the larger operators, the challenge is the overlapping assets. And so most states have a cap on the number of stores that one operator can own. So New Jersey, that's just three. In Maryland, it's four. In Illinois, it's 10, which gives you a little more flexibility.

But let's say you have two operators that both have three stores in New Jersey and they want to merge or do an acquisition, they need to figure out who they're going to sell those other three stores to. Now in New Jersey, that may not be as hard of a market to sell assets just because it's been so profitable. But there are real challenges in divesting those overlapping assets.

And so I've always thought that Trulieve ( TCNNF ) and Ascend are pretty complementary businesses. There's not a ton of overlapping assets there. Ascend is not in Florida or Arizona. And Trulieve doesn't have New Jersey, which is big for Ascend. And so I think that those types of businesses, I think there are some opportunities to fit those puzzle pieces together. But I think in order to do so, you kind of need to look at the map of the States and figure out which ones could fit together. And then also say what happens with the management teams.

For example, if you were to have Ascend and Trulieve merge, I don't think Kim is looking to retire. I think she's probably looking to lead the business. So you would need a structure where those two management teams could fit together. So I think that with the bigger operators, there's more challenges on a couple of levels to getting those sorts of things done.

But I wouldn't be surprised to see smaller businesses get acquired by larger ones. It’s not a great example, but last week we did see the acquisition of VidaCann by Planet 13 ( PLNH ) to build out their Florida footprint. And so it won’t be a surprise to see more of those things.

RS : Do you still feel like it's a possibility, Trulieve acquiring Ascend? I mean, I guess maybe you do. It sounds like. Because I was asking Ascend's Interim-CEO a few months ago about it. It's been -- you've been talking about it for a while. It's been talked about for a while and I wonder with the acquisition of Harvest, which, you know, who knows how to judge that exactly at this point, but certainly not an easy process. Do you think that that's still a possibility?

JR : I think it's a possibility. I wouldn't really assign a high probability to it.

RS : Okay.

JR : And I don't have any unique information around that. I just think in terms of when you think about those couple of factors about little overlapping assets and the potential for one management team to lead and the other one to be integrated. I think those fit together. Potentially a bit more to Ascend, although they just did -- they just -- especially when they didn't have a CEO, right?

When Abner moved to Executive Chairman, they were in a CEO search for around nine months maybe? And they do have a great new CEO. So maybe the probability of that has gone down even further. So I'm not pounding the table bullish on that. I just think if you look at the top 10, those are a couple of pieces that do fit together, but I wouldn't give that a real high probability.

Ascend is -- that stock is one of the ones that’s more than doubled over this past couple of weeks. It was way oversold for a while there. So that's a name that I've been forever too bullish on. I've liked that name for a long time. It doesn't get a lot of love. It doesn't get a lot of attention. But I think with the footprint they have and some of the changes they're making, I do like that name.

RS : And what about Trulieve ? People are talking about its reliance on Florida and it's going to come to bite them, and what's happening with Harvest, and what are your thoughts on Trulieve?

JR : So I think they're in a tougher period where if you just look at their footprint, competition is fierce in Florida. Florida is, I'm sure most of our listeners know, is a medical-only market. It requires being vertically integrated.

There are a limited number of operators there, but there are a lot of stores and so your Ayrs, your Trulieves, your Veranos ( VRNOF ), et cetera, have 50, 60,70, 80 stores in Florida. So there are a lot of stores and what that leads to is a lot of price competition.

And we've seen that, we've seen that in terms of basket sizes going down, constant promotions in Florida, lower - margins coming down in a lot of cases. And so, I think Florida is still a good market and as long as it's medical, but I think the real massive opportunity is one that potentially flips rec.

Arizona is a different state. Similar challenges in terms of price compression, but for different reasons. I don't know if you know this Rena, but Arizona doesn't have seed to sale tracking. And so that means you can grow a bunch of weed in Oklahoma and bring it to Arizona and find creative ways to fit that into the system. And so that's led to a massive oversupply in Arizona and prices dropped about 50% over 12 months. And so, I think that acquisition of Harvest, you know in a hindsight's 2020. But I think in hindsight, that probably wasn't great timing and they overpaid for that.

So I think Trulieve is in the core markets today and those will change a little bit as new states turn on. But I think that the core markets today with Florida and Arizona are in a bit of transition periods. But no one is more levered to the potential shift to adult-use in Florida than Trulieve. I mentioned that Florida has about 22 million people and that's one of the states that's been growing in terms of the population, but it also gets 120 million tourists every year, with the medical system those tourists can't buy cannabis.

But if they flip to adult-use anyone over 21, that's a snowbird coming down from where we're from Rena in the Midwest. I know lots of people from Minnesota that go down there, but also the spring breakers. If you're over 21, they could buy cannabis. And the cruise ships is another interesting one. Sunburn has a great location. I think they acquired it from MedMen ( MMNFF ) in Key West. And when you walk off with the cruise ships docked there, one of the first things you see is that store.

And so I think Arizona -- I think rather Florida is a super exciting market. The question is, when does that potentially turn to adult-use? And is that - possibly we see that on the ballot in 2024 and if that were to get on the ballot and ultimately pass, that would be a massive catalyst for Trulieve. And Trulieve has been one of the more beat up names coming into this that had gotten fairly cheap.

And so I think to have a perspective - if you're thinking about taking a hard look at Trulieve, I would look at what the valuation is there, and then I would look at what's your perspective on those core markets and particularly what do you think are the probabilities that adult-use gets on the ballot in 2024 in Florida, and ultimately passes.

RS : I'm curious, you mentioned MSOS as an ETF and as proxy index. What are your thoughts about the ETF space ? There's a lot of negativity around MSOS and how they're set up, and how they're set up to continue. And in general, the surrounding ETFs, a lot of complaints around their very existence, some not in existence anymore. What are your thoughts about the ETF space in cannabis ?

JR : Yeah, I feel like that's a lot of that angst and complaining is really misguided. MSOS is a great proxy for U.S. cannabis. And if you can't buy the individual names and you need something that's NYSE listed, which is true for a lot of investors, if you can't access things that are on the OTC, you may not be able to get them in your brokerage firm.

You may have custody issues with those types of names and you want exposure to U.S. cannabis, I think MSOS is a perfectly fine way to do that. It's going to be more expensive because they do use swaps and swaps have financing costs. And so it's a more expensive way to get access. It does have a management fee. I think it's right around 75 basis points all in.

So if there is an additional cost there in terms of doing that versus owning the underlying, but in my opinion, it gives you fairly good exposure to U.S. cannabis. I don't think it's super clever. You don't see real active management moving around - it is actively managed, but you don't see short term trading there, you don't see market timing.

Here they definitely have made a few mistakes. Along the way, there's names that they've owned too much of, there's names maybe in hindsight they shouldn't have owned period. The Parent Company ( GRAM ) is one that stands out there. But we've all made mistakes along the way.

RS : Not me.

JR : Yeah, I know Rena.

RS : Just kidding.

JR : You would never own The Parent Company.

RS : I would never own The Parent Company. No.

JR : No. Yeah. And so, yeah. Yeah. Exactly. And there's names that they don't own. Like, it's super interestingly they don't own Ascend. That’s the only, I think, top-20-ish name that they don't own and certainly the only top 10 they don't own. So I think we could have different opinions on how we might go about running an ETF like MSOS. But if you want exposure to U.S. cannabis, I don't think that's a terrible way to go and I don't fully understand all the complaining around that.

There are other options. Our friends at Poseidon did close down PSDN and that was my favorite cannabis ETF. So that's not available anymore. You do have Tim Seymour who I think is a bright player in the space with ( CNBS ). If you want global exposure through AdvisorShares, you have ( YOLO ). There’s the – ( WEED ) has good exposure to the top five names. So that's another credible option. So there's a bunch of different ones out there.

I would probably start by deciding, do you want exposure to global, or do you want exposure to U.S.-only. If you want exposure to U.S.-only, then MSOS, or the ticker WEED are probably good ways to do that. If you want to get some Canadian exposure, some more global names in that kind of portfolio, then maybe a CNBS or YOLO would be a better fit.

But I think part of the complaining, Rena, is that when a space is down 90% who's going to get super excited about the ETFs in the space? And so I feel like there may be a little bit of collateral damage for what's going on more broadly.

RS : Yeah. Couple - continued negativity with couple of mistakes. Super bearish sentiment. No, I appreciate that kind of synthesizing of the ETF space. Just because I like to pick a scab. I don't really. I don't like to pick a scab. But we're picking a scab. What are your thoughts on the Gold Flora, Parent Company deal? And if you want to share your thoughts on California or Glass House ( GLASF ), I know you write and talk about them as well?

JR : Yeah. So, I'm in California. I've been in Santa Barbara for most of my adult life. And Santa Barbara County is only second to Humboldt in terms of cannabis production. And so it's a real hotbed of activity here. I'm not too far away from the two smaller Glass House greenhouses in Carpinteria. And then I'm about an hour away from the big one in Camarillo. I regularly go to the pharmacy which is the Glass House Brand store in Santa Barbara and I've been to most of their other retail locations as well. So, Glass House is a name that I know really well.

I wrote a report earlier this year called The State of California Cannabis. And you can find that on our website Water Tower Research , just click on the cannabis sector and scroll down. And I talked about there, Rena, the good, the bad and the ugly. And the good has been rising flow flower prices. The bad has been limited access to retail, not enough stores, and the ugly has been the high taxation in California. And broadly, I think California is still a challenging market, but I think it's one that on the margin is improving, especially depending on where you are in that supply chain.

And so Glass House, I think, has been one of the biggest beneficiaries. They're really levered to higher flower prices. They have a very low cost of production and as others have not been able to survive this downturn in California, shut down operations and reduced the canopy substantially, Glass House has been able to step in and fill some of that capacity.

So, I think they had one of the stronger Q2 reports, and I think Q3 and Q4 will continue that trend. And then early next year, they're going to just about double their capacity by turning on an additional greenhouse in Camarillo. They have 5.5 million square feet there. But they're not using all of it. It's still sublet to grow vegetables. So I think it's peppers and tomatoes. And so as California gets healthier, they can continue to turn to phase out the vegetables and bring in more cannabis and they'll be doing that. So, just about doubling their capacity next year.

Glass House also owns retail stores and the retail in California is lot harder right now than the cultivation is. And so not all parts of the business are firing on all cylinders. But I think in terms of a play on rising flower prices in California, I think that Glass House is a great way to participate there.

The Parent Company, Gold Flora I'd say is more challenging . Whereas Glass House focused on getting scale and low cost production in California, The Parent Company took a different approach. They had to join the relationship with JAY-Z, they tried to go for the higher end of the market. And I think they have had a harder time with that. I do like the Gold Flora opportunity . I think those two businesses are probably better together than apart. I would view that maybe as a little bit more speculative than Glass House at this point.

But certainly if you are optimistic about California, which I would say, I am cautiously optimistic. I don't think there's cause to go all in. But I think in some of these original kind of legacy markets, your Colorados, your Washingtons, your Oregons or Colorados, and even in now Michigan, you're starting to see the end of that cycle where prices have come down and they start going up like we've seen in California.

And so I think there is a reasonable thesis to diversify, and not just own those new states, which can be great up front to typically fade. Prices come down, margins get lower. I think it's good to own some of those markets. Like good exposure to New Jersey, good exposure to Maryland, and these newer states that are turning on, but also complement that selectively with some operators in states like Oregon, Washington, Colorado and California that may be going through the end of that tough cycle and entering a new, I wouldn't call a growth cycle, but at least healthier prices that lead to sustainable businesses.

RS : I really appreciate this conversation. I think that I'm going to end it on asking you about two companies that are not similar. But one of them is High Tide ( HITI ), which we haven't really spent a lot of time on the podcast on, but we get questions on it from time to time. So I'm curious if you have thoughts on them.

And the other one is TerrAscend ( TSNDF ) and what they're trying to do with the listing on the TSX and kind of what you see from them?

Oh, actually I had a third one. Just curious your thoughts also on Verano because that's a company I've personally gone back and forth on and I've seen different theses over the months and years. I'm curious how you're thinking about them right now?

JR : Yeah. So, High Tide is the one that I spent the least amount of time on. They appear to be one of the more viable opportunities in Canada with that big retail footprint that they have. All signs point to that being a well-run business. Potentially something that's undervalued as well. But I would just say honestly, I am not the expert on High Tide, so I'd probably defer to other people to get into the details about that business.

But if you were to look at – if I were to look at and say, what are three companies that I would be willing to take a hard look at in Canada, I would say that High Tide would be towards the top of that list. So I like everything that I see going on from them. I like the expansion...

RS : What are the other two? Sorry, I was just curious.

JR : Yeah, probably, maybe Rubicon, maybe Organigram ( OGI ). I'd say, I’m less bullish on some of the names like Tilray ( TLRY ), or Canopy, or those types of names.

RS : Yeah. Sorry, just wanted to catch that.

JR : Oh yeah. No, it's a great question. So in terms of the U.S. names that you mentioned, yeah TerrAscend…

RS : Wait, I didn't want to take you away because you were about to list some good things about High Tide and I don't want to take that away from you if you were about to.

JR : Oh no, I just say that, I think I like their financial profile. I think they have one of the stronger balance sheets and I think they’ve done a really good job building out that retail footprint. It sounds like they're slowing their emphasis there and slowing some of their growth.

And we've seen that in a lot of cases with CapEx slowing down a bit, and focusing more on cash flow. And so I think there's a bit of a pivot going out in that regard. Maybe that'll change a little bit for some of the U.S. companies. There was such a need to have cash flow and one of the ways to get cash flow is to cut CapEx.

But what's the other side of cutting CapEx is that that may lead to slower growth in the future because they're not investing as much in new markets. And so I think that one of the reasons that High Tide has had some success is because they've been so aggressive with that retail expansion in Canada. But I see them slowing that a bit and looking to get more cash flow positive to even improve the balance sheet more. And so I think those are positive steps for High Tide.

In terms of TerrAscend, yeah, I think that's been a fascinating story. I had Jason and Ziad on the Water Tower Hour in July and we talked a lot about those changes that they've been making. And starting in early 2022 they started to make a lot of moves to improve their balance sheet.

Coming into 2023, they were very aggressive in getting to four stores in Maryland and got four fantastic stores. In that episode, Ziad talks about why he thinks they probably have the best four stores in Maryland, and expect to be the leader in that state which just flipped to adult-use sales on July 1st. And then the third piece is all the work that it took to get that uplisting to the TSX.

And so I think if you look across cannabis period, but especially in U.S. cannabis, TerrAscend, Jason, Ziad, Keith, the whole crew there have really been leaders in two areas. One is just innovation and big picture thinking, but that only matters if you nail the execution as well. Like it's one thing to have the idea, it's another thing to actually implement that. And I think they've done a fantastic job of getting the big picture right and then nailing the details on execution.

And we see that on the financing side, we see that on the state side with Maryland, we see that on the listing side of the TSX, but also fantastic operational improvements in Michigan as well. So taking a hard state for most operators and getting tremendous scale there in terms of the numbers of stores they have.

We talk about places like Maryland having a four store cap. Michigan doesn't have a cap like that. And so in states that are in open license environments, it makes sense to try to get as much scale as possible. And I think they've done a fantastic job getting that scale and then also improving margins by bringing more things in house.

Vertical integration in our industry typically leads to two things, one is greater control of the supply chain and two is higher prices. And so I think TerrAscend and if you were to give an operator of the year award, they would be very close if not at the top of my list there. So I think they've done a fantastic job and that's been reflected in the share price.

They were, of the larger U.S. cannabis companies, by far the top performer. Coming into August 30th, they haven't bounced as much as some of the others. But if you look at the data, the stuff that's gone up the most was generally the stuff that was going down the most coming into the events. And TerrAscend wasn't relying, Jason was very clear, they're not relying on SAFE Banking, they're not relying on 280E being removed. They view those as bonuses. And so it makes sense given they weren't as desperate for some help as some other businesses that they haven't got up as much, but still one of the top performers this year.

And the one thing I would say, a downside of TerrAscend, which is not the management's fault at all, is it is one of the more expensive names and it has been for a while. And so, depending on your investment philosophy, you may look at the valuation there and question whether you want to pay that much for a premium operator. But I think overall they've done a fantastic job. I would just contrast that with the fact that market has recognized that a bit and given them a higher valuation.

RS : Do you think the TSX thing is – sorry, do you think the TSX thing is pushing regulators' feet to the fire? Do you think it's really affecting change?

JR : I haven't seen any evidence of that. I think that with SAFE and/or the rescheduling, that could pave the way to the NASDAQ. Yeah, the TSX is great, but the NASDAQ is just so much better. And I think that it's really that political progress that's probably going to open up the NASDAQ. I wouldn't be surprised that I've heard other operators talking about trying to get to the TSX just because the NASDAQ, the timeframe around that is an uncertainty.

So I wouldn't be surprised to see more businesses go to the TSX. But I don't know if I would say that it's necessarily applied pressure. There is a revenue opportunity for the exchanges to bring in cannabis. But I would expect again that it's really the political progress that would probably open up those exchanges more.

RS : So do you think this is more like optics in terms of how companies are received and kind of what it looks like more than, I guess, like real deep change? It's kind of like – I’m not thinking of the word that I'm wanting to use, but kind of just more optically based. I would – I guess that is the question.

JR : I think it’s a big deal from TerrAscend. And Jason has said that they've seen more institutional interest from buyers that weren't able to access the OTC, or the CSE. And that's a lot of the market. In cannabis, we get used to talking about small cap and microcap type stocks which may be more commonly on those exchanges. But the big funds, the index funds, the real institutional investors out there, they want to invest in things that are listed on the big boards in the U.S, or on the TSX. And Jason has said that getting to the TSX opened up a lot of those conversations.

Some people were pointing to the fact that the stock underperformed initially when it got to the TSX or that trading volume didn't increase as much as people may have expected. But I think that TerrAscend sees this as a longer term opportunity and with Jason's relationships and with the strong operations there, I think they are probably one of the stocks that is the most institutionally investable. I think the TSX is an important compliment that will get them more of those institutional tickets down the road. And I think that will accelerate with a couple of things. One is more fundamental improvements like we're seeing right now. And also if you pair that with political progress and the TSX listing, then I think that'll be real impactful for TerrAscend.

RS : Very good. Thoughts on Verano unless you were going to say something else, when I interrupted...

JR : No, we're good. Yeah, so Verano, I think Verano has been another fantastic story this year. They were getting kicked around a lot. Let's step back a couple of years ago, they were seen as a real darling because they had high margins, they had premium products. They were in limited licensed states, a great footprint in the states that were going from medical to recreational, which is what I call the cannabis investing sweet spot. And so going back couple of years Verano was seen as a real darling and traded as a premium.

Last year, that shifted for a couple of reasons. One is restating some financials concerned people. That was around transitioning to GAAP, which can be difficult. It was a little bit clunky for them. And two is that they decided to defer taxes as a financing tool and that's fairly common in other industries. Some people view it as a little bit riskier because the Federal government is probably going to be less flexible on negotiation and terms if things don't go well and you can't pay them back on the right schedule. But people were concerned about seeing the taxes payable balance increase so much. That shifted this year and it shifted for a couple of reasons.

I think having a few solid quarters with no restatements and no issues on the accounting side has made investors more confident. I would say that the cash flow profile has changed drastically with Verano, as new states have turned on and as expenses have come down. And they haven't been accruing more taxes and are starting to pay those down. And so I think Verano is a fantastic story. I think they have one of the more solid management teams not to keep plopping our podcast.

But since it's relevant, Aaron Miles, the CIO of Verano was on a few weeks ago when we talked about a lot of these things as well. So I think Verano is in great shape for the rest of the year. And they're one of the names that I really like.

RS : Very good, Jesse. Very good. I think we got through so much informative and edifying, contextualizing in the industry. So I really appreciate you diving deep with us. And I'll leave you the last word if there's anything, if you want to share where to find you, and Water Tower, or just kind of share any final thoughts with listeners, but really appreciate you coming back on and hope to talk to you again soon.

JR : Yeah, Rena, well, first of all, thank you for having me back. If you want to find my work, it's at Water Tower Research. You can go to the cannabis sector. One thing I really like about our business, Rena, is that our research is free and available to all investors. So, for a lot of the sell-side research to receive it, you have to be a big client or do trading with them. In our case, it's available to all the high net worth investors, institutions, family offices, just go to Water Tower Research and click on the cannabis sector. You have to register once and that is it.

If you want to connect with me, I'm on LinkedIn under my name Jesse Redmond and I'm also more active on Twitter than LinkedIn and that is @jesseredmond . If you want to get our cannabis research emailed to you, just send me a DM on either of those platforms and happy to add you to our cannabis distribution list.

And I guess my closing thoughts, Rena would be just going back to where we started, where cannabis is a state-led growth story with a series of hard to time political catalysts. And we went through a really hard period and I think for valid reasons, we went through a hard period. Prices were coming down. We didn't have a lot of new states opening and we were seeing zero political progress. And that led to 931 days of pain and a 92% drawdown.

And I think there's reasons to be cautiously optimistic. It feels like things are starting to improve. Going back to the beginning with Morgan Paxhia saying, it's okay to be bullish. I agree with his sentiments and I'm excited to see what takes place in the second half of the year.

RS : Absolutely. Amen. Here's to better news. And anybody wanting to know more about cannabis investing, definitely search Jesse out either on Water Tower Research, or on Twitter. You won't regret it. He's got some great analysis. Really appreciate you, Jesse. Thanks for coming on and talk to you soon.

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Is It Really Time To Be Bullish On Cannabis Stocks?