Best Month
The Mindset Value Wellness Fund Q1 2024 Investor Letter
Today was an epic day and it capped what was the best month I’ve ever experienced as a professional money manager. I will have a lot more to say about the continued opportunity in cannabis, but in the meantime wanted to share the Q1 letter for the Mindset Value Wellness Fund that I wrote two weeks ago.
Disclaimer: The below post is my Q1 2024 Investor Letter that I sent two weeks ago to investors in the Mindset Value Wellness Fund. This post is NOT a solicitation. I talk about stocks that I own and my view of the future. It is imperative that you do your own due diligence and not rely on anything written below. I’m posting this in order to show how my writing translates to actual performance. With that, I hope you enjoy and gain insights.
The Mindset Value Wellness Fund finished the first quarter up 36.2% on a net basis.
Every Single Cannabis Investment Takes Flight Especially AYR Bonds
Our cannabis stocks soared in the first quarter. Glass House Brands (OTC: GLASF) and Goodness Growth (OTC: GDNSF) both jumped more than 70% and Grown Rogue went up by 50%. These companies have been under owned and ignored by cannabis investors for too long. And their demonstrated operational performance has been outpacing the industry and investors are finally paying attention.
It’s also no coincidence that these three companies are also disclosing the most granular data on their operations and are actively trying to help investors understand their businesses.
But the investment I want to highlight shows just how much alpha is available in cannabis, where there continues to be few if any institutional investors.
As we wrote in our last letter, we bought senior secured notes in AYR Wellness in Q3 and Q4 of last year. There were few if any buyers of the publicly traded bonds, and we were able to buy first at 53 cents on the dollar, then 60 cents, then up to 72 cents on the dollar.
AYR was one of our big mistakes in 2022, but just because we made a mistake on the company doesn’t mean that we couldn’t make money from it again.
The company finalized a deal with senior secured note holders that for a two-year extension, senior note holders would get equity in AYR Wellness. Turns out that those shares ended up equaling at least 50 cents on the dollar of the senior debt. Which basically means that the debt we acquired at 53 cents was almost free. We sold the AYR shares we were given and now the fund owns this debt paying 13% a year and are at the top of the food chain of the capital stack.
These kinds of opportunities don’t happen in other industries. This only happens in an industry that has very few institutional investors and very little due diligence going on. This is why there is so much opportunity in cannabis. All we must do is wait around the rim for the right chance to score.
While we aren’t waiting with bated breath for another AYR opportunity, the lack of real research going on from institutions means there is still plenty of alpha to be had.
And this is exactly why we continue to grow our position in Grown Rogue.
Our Big Bet on Grown Rogue and Why We Haven’t Sold a Share
As I’ve written before, Grown Rogue is one of the most unique opportunities I’ve ever come across. The company has figured out how to cultivate craft quality cannabis indoor flower in Oregon and Michigan for less than $600 a pound. They are the #1 flower in Oregon and top 5 indoor producer in Michigan. Now, the company is headed to New Jersey and Illinois, which has a shortage of quality cannabis and due to the limited license nature of those markets flower prices that are 3-4 times what Grown Rogue is used to selling flower for.
Grown Rogue has some of the highest margins, fastest growth rate and was the best performing cannabis stock the last two years. I think Grown Rogue is an investor’s dream. It is a company with demonstrated operational and cost advantages that has a long reinvestment runway with extremely high returns on invested capital. And until March, the company had zero analysts.
Finally, this month in April, one analyst picked up coverage, Howard Penny with Hedgeye, and the stock jumped on the sudden exposure.
But we believe that despite the stock’s impressive rise since we first started buying it (at around $0.10 per share in December of 2022), the stock remains substantially undervalued based upon the coming surge in growth, and due to the fact, the company is almost criminally under owned by investors in cannabis.
We think the company should be growing at triple digits as it gets to a $40 million run rate in EBITDA in 2025, and at the same time should be reporting the highest margins in cannabis while possessing one of the cleanest balance sheets in the industry. What is that worth? I would argue at least 10 times and that would mean a stock above $1.50 a share, 130% higher than its current share price.
Here is another way to think about it, how does one value a company growing at triple digits with a clean balance sheet with EBITDA margins of 40% with a long reinvestment runway? Frankly, it could be 20 times or more, that’s over $3 per share, 360% higher than its current share price. These calculations are utilizing a 262 million fully diluted share count with all converts, options and warrants converted.
Unless there are new states beyond Illinois and New Jersey, the company is fully funded and doesn’t need capital. And once both new states are turned on, the company will become a cash machine, with what I’m expecting should be 60% EBITDA to free cash flow conversion.
And this is why we converted our warrants and did not sell a share. In March, Mindset Capital filed its first ever 13G declaring that three funds that Mindset Capital manages owns 14.43% (note we own less as a percent of the company when using the fully diluted 262 million share count).
The stock market like everything in life is driven by power laws. Grown Rogue was the best performing publicly traded cannabis stock in 2022 and 2023. And so far, this year, Grown Rogue is again the best performing cannabis stock this year. Power laws tell us that most of the time the winners keep winning. And at some point, if one is a cannabis investor how does one not own a material position in best performing cannabis stock?
Glass House Turns on More Capacity as Stock Soars
For the past four years in cannabis, major building projects have generally taken too long, cost too much, struggled to operationalize and disappointed investors with the results. The complexity of cannabis, the different regulatory hoops to jump through and the relative inexperience of the industry are all reasons why so many capital projects have gone south.
And then you have Glass House, which not only turned on its Ventura County, California state-of-the-art greenhouse on-time and under budget but has showed the country how it is possible to produce quality California greenhouse cannabis flower at a fraction of the cost of others. This past quarter, they announced that they again opened the new expansion greenhouse under budget and ahead of time again.
I had the opportunity to tour the new greenhouse and see the rows and rows of flower that will hit the market in Q2. It was an impressive sight to see and a testament to the team for the quality of the flower now being produced by Glass House.
The market has rewarded Glass House for its demonstrated competence and proven operational ability to do something special. And the market also loves companies that deliver not only growth, but growth in cash flow and free cash flow. Glass House is poised to do both in Q2 and Q3 of this year.
Summary
We are surfing on a wave of cannabis adoption that should continue to grow for another 10 to 20 years. The game has not really begun in our opinion and won’t begin until we see true Federal Reform. In the meantime, we will remain focused on investing in the best, most transparent companies while also taking advantage of special opportunities.
And buttressing our portfolio are our convertible and preferred investments which continue to bring cash into the fund every quarter.
Thank you for your trust and support.
Sincerely,
Aaron M. Edelheit