NNI - Mindset Value Fund Q3 2022 Investor Letter

Summary

• Mindset Value Fund's Aaron Edelheit is passionate about introducing interesting money managers, executives and startups that no one has heard of. His background includes investing professionally for over 25 years and starting and running the American Home.
• Mindset Value Fund finished the third quarter down approximately 11.3% and are now down 42.3% for the year.
• The short-term negative performance conceals the attractiveness of our portfolio - we are no longer dependent just on stock prices to move in our favor.
• This has been a difficult year, but our fund has seen net inflows despite our short-term underperformance.

Shifting to Yield Plus Upside

We finished the third quarter down approximately 11.3% and are now down 42.3% for the year.

Exceptionally Undervalued Focused Portfolio with 4.5% Yield

Our performance to date has been rough. We own a portfolio of small and microcap stocks, with a large percentage of our portfolio in cannabis, which are extreme versions of illiquid microcaps. Higher interest rates, inflation and liquidity being sucked out of the markets have been hard on our portfolio.

However, the short-term negative performance conceals not only the attractiveness of our portfolio, but also some of the changes that we have made to the portfolio. We haven’t sat still during this tough time. We have focused our portfolio to make sure we only own the strongest companies that have the business models and cost structures to not only survive tough economic times but thrive in them. And we have focused on investments that are either paying us dividends, interest or buying back shares. We are no longer dependent just on stock prices to move in our favor.

Consider Consorcio Ara ( CNRFF ; Mexico: ARA), which not only trades at an incredible 30% of book value and six times trailing earnings but is also paying us a 7% dividend, despite effectively having no debt. Or Nelnet ( NNI ), which trades at book value, despite compounding book value at over 17% a year since 2004. Nelnet is on track to buy back 1% of its stock every quarter thanks to the runoff from its student loan book that is seeing an incredible amount of cash pour onto its balance sheet.

Also, this quarter we made a significant investment in Glass House Brand’s ( GLASF ) most recent preferred offering, which I think is the best investment on a risk/reward basis that I’ve made as an investor since standing on the courthouse steps in Atlanta in 2011 buying foreclosed homes. The preferred pays 20% interest and comes with warrants that convert into the stock at $5 per share.

Glass House is now the largest investment in our fund. I believe that investors do not understand the inflection the company is currently undergoing after turning on the largest and most state-of-the-art cannabis greenhouse in the world. But with no analysts covering the company and mostly retail investors in cannabis, few if any have run the numbers as to what the near-term future holds. The asymmetric upside in Glass House is one of the best I’ve ever seen.

Our overall portfolio now has close to a 4.5% yield thanks to the Glass House preferred offering, our senior secured investment in a private cannabis company and Consorcio Ara’s dividend. So, our portfolio now has significant equity upside and ongoing dividends and interest as well. This is all with no leverage being employed at all.

October Performance Strong Thanks to Biden’s Announcement on Cannabis

The tide may be turning with our portfolio. We have already recovered Q3’s losses and more and are seeing very strong performance in October. While you never you know if this will continue, the October performance is being driven by President Biden’s surprise announcement that he is not only pardoning people in jail for cannabis possession, but he also initiated a review of whether cannabis should be rescheduled from its schedule 1 classification or de-scheduled completely.

I believe President Biden will move aggressively on reform and that something material will happen by the end of 2023. His actions should lead to the investment world opening to cannabis, the removal of punitive 280e taxation and frenzy of activity in the space. I wrote a long post about it.

I think his action will also move forward interstate commerce and that is why most major MSOs (Multi-State Operators) have not significantly rallied on the news and remain stuck in the mud. If my analysis is correct, Glass House is not only poised to see its cost of capital plunge from its expensive 20% preferred interest rate but would also allow the company to sell into state markets where pricing can be 10 times higher than what Glass House is earning in California.

Besides Glass House, we are positioned in our cannabis portfolio in smaller, scrappy, low-cost operators, who should excel in a changing and shifting regulatory landscape, especially one in which the economic backdrop is weakening.

Post-midterm elections should be a very busy time for cannabis, as the lame duck session, plus news of progress on the Administration’s review of cannabis should shine a spotlight on the sector and should continue to provide a significant tailwind for our cannabis stocks which have been under pressure for the last year.

Our cannabis investment thesis is that it is matter of when not if cannabis becomes Federally legal and when it becomes obvious this is going to happen, you simply won’t be able to buy our stocks in size at anywhere near current valuations. Many of these stocks are lucky if they trade $1 million worth of stock a day. It is very easy for these things to go up or down 20% or more in a month.

Our strategy continues to be to invest in companies that we think have the best strategies, are run by good and ethical management and that sell at extremely low valuations. Nothing has changed. In my humble opinion, the opportunity has only become more compelling since the beginning of the year.

Summary

I want to thank each and every investor in the fund. This has been a difficult year, but our fund has seen net inflows despite our short-term underperformance. The emails and calls of support have been awesome and I’m grateful to have such investors.

I cannot wait until our portfolio companies report earnings and start to distinguish themselves from other companies struggling in the current environment.

Thank you so much for your support and if you have any questions or want to discuss any part of the portfolio with me, please let me know.

Aaron M. Edelheit

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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