VLNS - Markets Don't Move In Straight Lines

Summary

• The most consistent progress in cannabis is coming from states continuing to roll out legalization programs.
• For cannabis companies wanting to make a profit in these legal markets, there is both opportunity and a need to navigate growing pains.
• A reminder from Tim Seymour on how to think about Canadian and US stocks.

While much is (quite rightly) made of US federal cannabis legalization, the most consistent progress is coming from states continuing to roll out legalization programs. That should come as no surprise to US history buffs - states have typically shown the federal government which way to go in matters of social and political change.

Roy Bingham said as much on the podcast last year. As CEO of BDSA, a data analytics company that tracks the cannabis industry, he noted:

We stopped anticipating federal legalization having an impact. It was also easier to assume that there was not going to be significant federal change, because the states were making change happen anyway. And that change was driving growth, one state at a time.

For cannabis companies wanting to make a profit in these legal markets, progress comes with both opportunity and a need to navigate growing pains:

I mean, there used to be value attached to just having a license in Colorado, for example, but since there are thousands of such licenses, their value is limited. And so we're essentially saying, I need to go to the next state that is going to have licenses on a limited basis, and I need to be one of the active applicants for licenses in those states or I need to purchase licenses in those states.

And of course, the growth comes from those states initially. As you said, we've got now California contracting, Colorado contracting, Nevada has been contracting for some time. Most of Oregon, most of the western states are not growing at the present time, largely because of price contraction. So volume is stable. But prices are coming down across the board in those states. Then we've got middle states that are -- have been adult use legal for two or three or four years like Illinois and Massachusetts that continue to grow as penetration grows, and as more licenses are granted.

But then you've got the explosive opportunities, like New Jersey and New York, for example. Now of course, anybody who's running -- a major player in this industry wants to be in those states where you're going to see multibillion dollar markets created over the next few years.

Last week we discussed the imperfect, but still exciting roll out in New York with Allan Gandelman and Kaelan Castetter. This past week we discussed the more mature Colorado market with Chris Chiari and saw how even (especially?) in more mature markets, regulators must still continue to iterate along the way.

This week we read more about how Minnesota is trying to curb the problems that we've seen crop up in states such as New York, California, and most other states that have come before it.

A new bill in the Minnesota Legislature to legalize adult-use cannabis features a few provisions that indicate state lawmakers are learning which policies work and which don't when it comes to replacing underground marijuana markets with regulated ones.

In particular, according to an analysis by MinnPost , the author of the bill wrote in deliberately low state cannabis tax rates and wants to prevent cities and counties from enacting bans on cannabis companies, all to ideally replace illegal cannabis businesses with licensed taxpaying companies.

That referenced MinnPost article is a great primer on what they're trying to do in the Gopher State.

They want a system where people of different levels of wealth or investment can take part, and they want prices to starve the illegal market as much as possible. One of the new agency's mandates is to "eliminate the illicit market for cannabis flower and cannabinoid products." That's a tall order, not accomplished in the other recreational states, but it is a goal that explains the low taxation.

There's also been a lot of discussion around supply and demand and who can get to the top of the value chain and stay there. As states go online on the adult-use side, we'll see a lot more proliferation. What does this mean for the growing industry?

??The new law would sunset the existing medical program and incorporate it in the new Office of Cannabis Management. The current law governing the medical program is mostly contained in the bill, but it would not continue the system where two companies - LeafLine and Green Goods - are contracted to grow marijuana, produce tinctures, vapes and flower containing THC and sell them to patients approved for the program. Their contracts would expire July 1, 2024.

Losing a two-company monopoly was fine with the patients who testified at a hearing last week. Patrick McClellan, who lives with muscular dystrophy and was an early advocate for medical marijuana, said the lack of competition has kept prices high. Even the legalization of flower that can be smoked - a move he said the two companies promised would lower costs because of the reduced processing needed - has not had a pricing effect.

Only more supply and more entrants in the market would do that, he said...

There is concern, however, that there would be a gap between when the two companies are shut down and when the same products can be found elsewhere.

Another state to watch is Missouri, set to go online next month with adult-use cannabis.

Not to ignore US' neighbors to the North, Canadian stocks have also been in the news with [[SNDL]] recently completing its acquisition of The Valens Company ( VLNS ) which it states 'generates over a billion dollars in annualized revenue.' On the heels of Tilray's ( TLRY ) recent disappointing earnings, I also received a thoughtful message from a listener asking for renewed discussion around what makes US operators more advantaged in the industry. Look for that to be more a part of the conversation in the coming weeks (also happy to hear Bullish or Bearish thoughts in the comments about US/Canadian cannabis companies).

In thinking about Canada v US, I was reminded of something the always astute Tim Seymour said back in April 2021 on the podcast:

Investors are right to have questions.

The fundamentals that look great to me - it doesn't mean the market goes in a straight line. You can tell me what the news is and I couldn't necessarily tell you what the market's going to do.

Canadian stocks had a better March than US stocks when the news flow in the US was tremendous. Why is that? It's a combination of either investors view Canadian stocks as a proxy play in getting access to the US, investors think Canadian LPs now will have access to the biggest market in the world… or just suddenly Pension Fund X believes that they want to own the sector and they can still only own a couple companies that have any liquidity and that trade on the NYSE.

I don't think that there's some huge opportunity North of the Border. I think there's been a real shakeout. That's been interesting and I think there are companies that are going to be taking advantage of that. I think there's definitely a different type of profitability approach but the numbers are obvious in terms of the size of the Canadian market.

Specifically, I like Canopy Growth ( CGC ). I think they're well positioned. I like the US assets that they're going to be ready to roll with when the time comes… do I believe that Irwin Simon [CEO of Tilray ( TLRY )] has proven that he knows how to build especially a lifestyle/wellness brand? Of course. So there are going to be companies to own that I think are going to be part of the story… I want to invest in what I think is going to move higher.

I'm aware of how emotional of an issue this is - that how can these Canadian companies be getting a bid? Look, sometimes CNBC will be talking about the US market and they'll put up Canadian tickers. I mean it's crazy and I think for a lot of people it's infuriating.

I choose to understand that there's a lot of people focused on this sector, there's different ways to play it. Some people can access the markets… it's why the capital markets allowances - that's a really big moment for the sector. But right now, I'm going to trade the market I have.

Do note that Tim's actively managed ETF, [[CNBS]], still owns Tilray ( TLRY ), in fact it's currently their 3rd largest position. Some other Canadian stocks CNBS owns: Canopy Growth, Organigram ( OGI ), Village Farms ( VFF ), and SNDL. VFF and SNDL are also held by another ETF we've profiled on the show [[PSDN]].

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