Fishing Where the Fish Are
The Mindset Value Wellness Fund 2023 Year End Letter
Disclaimer: The below post is my 2023 Year End 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.
Mindset Value Wellness Fund 2023 Year End Letter
“I have a friend who says the first rule of fishing is to fish where the fish are. The second rule of fishing is to never forget the first rule.” Charlie Munger
The Mindset Value Wellness Fund finished the fourth quarter up 6.4% and finished up over 70% for the year.
Fishing Where the Fish Are
Our fund’s top position was Grown Rogue (OTC: GRUSF), which was the best performing publicly traded cannabis stock last year. Our second largest position was Glass House (OTC: GLASF), which was the second-best performing cannabis stock. Our third and fourth largest positions were Goodness Growth (OTC: GDNSF) and AYR Wellness (OTC: AYRWF), which tied for third place as the best performing cannabis stocks for the year. Most cannabis stocks were either flat or down for the year.
I mention this not to brag, but instead to point to how rich the waters are in the cannabis markets. I see very few institutional investors and very little fundamental research happening. What I do see is a lot of day trading and focus on government policy but not company-level fundamental analysis. I’ve rarely seen a sector be so target rich and yet have so few curious investors willing to do deep dive research.
The best example of this is simply our best performing cannabis stock, Grown Rogue.
Grown Rogue, Creating the First National Craft Cannabis Brand
Grown Rogue’s sole focus is craft cannabis cultivation, and they have the #1 flower brand in the ultra-competitive Oregon market, and the top 5 indoor brand in the Michigan market.
Grown Rogue is using growth capital from Mindset Capital and other affiliated investors to enter New Jersey, a market that has limited licenses, limited supplies and mediocre-quality legal cannabis flower. The opportunity could not be greater. Grown Rogue has learned how to compete and generate free cash flow at $800-$900 a pound indoor flower and is now entering a market where wholesale flower can command more than $3000 a pound.
By the end of this year, I expect Grown Rogue could hit an annual cash flow run rate of $25 million and get to $40 million in 2025, up dramatically from $7-$8 million in 2023. What is remarkable about this is the company’s fully diluted enterprise value for all convertibles, options and warrants puts the company’s value at approximately $60 million. And that’s at the current share price, which is 200% higher than when we first invested. When we first invested in December of 2022, it is possible we did so at a valuation that ends up being less than 1 times 2025 EBITDA! That’s right one times. And even now, it potentially trades at less than 2 times 2025 EBITDA.
Grown Rogue has some of the highest margins, fastest growth rate and was the best performing cannabis stock last year. And not one analyst covers the company. 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.
Grown Rogue was up almost 200% last year, Mindset funds now own approximately 9.9% of the shares outstanding, and if the company executes, the stock could do even better in 2024 than it did last year.
I recently interviewed the CEO and I hope you will enjoy the interview as much as I did:
https://mindsetvalue.substack.com/p/grown-rogue-goes-retail
Glass House Is About to Turn on Another Million Square Feet of Cultivation
Glass House is in the process of activating another 1 million square feet of cultivation at their state-of-the-art cultivation facility in Ventura County, CA.
This sounds like a lot, and it is, but in the context of how much capacity has come off the market, it isn’t. Almost 25 million square feet of cultivation has left the market in California since prices collapsed in the summer of 2021.
Glass House retains one of the best cost advantages in a commodity market I have ever seen. The best example was watching how Lowell Farms posted negative gross margins in cultivation, while Glass House’s gross margins topped 60%.
I believe the new expansion could bring in another $30-$40 million in annual EBITDA and further entrench the company’s competitive position. What is remarkable is watching the company put up 60% cultivation margins while only using 20% of its operational capacity at its Ventura County greenhouse.
With firm pricing and a much-reduced competitive situation, this should be another strong financial and operational year for the company.
Rescheduling Is Coming
As you may have heard the HHS, which includes the FDA, recommended that cannabis be rescheduled to Schedule 3 from Schedule 1. They released a detailed 252-page report that admitted much of what most Americans already know, which is that cannabis has medicinal value and that the toxic profile is not only much less than very toxic drugs like fentanyl or heroin, but also much better for you than alcohol.
This has sparked a rally and improved sentiment in the industry. Stay tuned, we may be finally getting Federal reform that will bring in more investors and much higher valuations.
To read more, here is a good summary:
New Opportunity in Beverages
Since October, I have been thunderstruck. And it all started with learning that 10% of liquor store sales in Minnesota were hemp-based THC drinks. I thought to myself, that can’t be right, annual alcohol sales are $260 billion a year. There is no way that data point is accurate.
Well, after months of research and due diligence, not only is it correct, but it is rapidly spreading to other states as well.
I think there is an opportunity to invest in hemp-based beverages and that the category could eventually generate more than $50 billion a year in annual revenue and could create more than $250 billion of market value.
What is incredibly remarkable is that it is all federally legal, and you can order these THC drinks online with credit cards and have them shipped directly to your home. Even more remarkable is that there is confusion around Federal hemp laws and the emergence of state-based rules around distribution that gives us a 12-month (maybe a bit longer) window to invest with few competitors and at very attractive valuations in companies growing at triple digit rates.
Beverages are some of the best investments of all time in the history of investing (See Monster Energy’s performance the last 30 years). And we have wasted no time in attacking the opportunity. The Mindset Value Fund and the Mindset Value Wellness Fund have already made three investments into leading private beverage companies. And we plan to do two more by the end of January.
We plan to have about 7-10% of our existing funds in these private beverage investments. Despite my enthusiasm, I do not think it is prudent to have more exposure than 10%. These companies are earlier in their life cycle and possess more risk than our more established investments with much greater revenue, cash flows and assets.
It is for that reason that Mindset Capital is launching a dedicated beverage venture fund in early February to invest in several brands and infrastructure plays around this thesis to go even bigger. And we have negotiated exclusive investment opportunities that will only be available to our new fund.
Beverages are yet another example of how much alpha there is in cannabis and how few investors are paying attention to the seismic changes happening in and around cannabis.
Buying AYR Senior Bonds and Selling MariMed
In other changes to the portfolio, we were able to buy AYR Wellness’ senior secured notes at 53 and 60 cents on the dollar last year. The yield on these bonds at these prices was 25%+ and offered incredible security by being the senior in the capital structure. Fortuitously, the company soon announced a restructuring, and these bonds will also receive common stock shares as well for pushing out the maturity date. Just hanging around the hoop when no one is paying attention is yet another example of how few professional investors invest in the sector. These kinds of opportunities are simply not available elsewhere.
On a down note, we sold our shares in MariMed (OTC: MRMD). The company has been beset by numerous regulatory delays and operational delays. And worse, the company erroneously sent $700k to a fraudulent account and the CFO resigned.
The stock is cheap, and the company has potential, but this was the last straw for me believing in the multi-state operator (MSO) business model. I think the idea of being a farmer, a manufacturer, a distributor, a business that needs to run a professional kitchen, while at the same time developing brands and running retail in what are effectively different countries (it’s really states) with wildly different regulatory rules where products and supplies can’t cross state lines seems like an impossible task and probably is.
In my mind, you are either a focused company like Grown Rogue or are focused on one state like Glass House or you are restructuring and paring down like Goodness Growth and AYR Wellness. Everything else is set up for disappointment or is meant to be a stock to be traded, not to be owned for the long term.
Summary
Our investments have started to break out and at the same time, we own a focused portfolio of fast-growing companies while remaining invested in preferred equity, senior secured notes and convertible debt that throws off a 5% portfolio yield that we are able to reinvest every quarter.
Thank you so much for your support and trust. I plan to keep following my curiosity and I can tell you that I am having more fun now than I have had in a long time.
Sincerely,
Aaron M. Edelheit