Let’s Give Them Something to TOKE About
Mindset’s New Role as Research Consultant to ETF TOKE
I’m excited to announce that Mindset Capital is now a research consultant for TOKE, Cambria Investment Management’s cannabis Exchange Traded Fund (ETF). Cambria manages over $2 billion in multiple ETFs and TOKE is one of their smallest.
Over the last five weeks, Cambria has slowly changed its portfolio based upon Mindset’s research. TOKE’s updated mission is to invest in the best run publicly traded cannabis companies. TOKE will be open and transparent in the way it communicates Mindset’s research, reasoning and decision-making so every investor knows exactly why and how the portfolio was constructed. And the best part is that below $50 million in assets (currently approximately $10 million), there will be no fees.
How Will TOKE Determine Which Companies Are the Best?
Mindset has graded publicly traded cannabis stocks on the following five criteria:
1. Operational Excellence
2. Growth Prospects
3. Balance Sheet Strength
4. Disclosures
5. Special Situation
How do we define operational excellence? We define it by measuring gross and operating margins, but also considering if the company operates in competitive markets or limited license markets.
We measure growth as not only the growth the company has achieved, but also the growth the company is likely to achieve in the next 12 months and whether it is sustainable.
We also value those companies that disclose as much as possible to investors, so that we can understand the underlying unit level economics, each market the company operates in and what risks the company might encounter.
Finally, the ETF is open to those companies that are special situations, which could be a turnaround in the making, or one in which a new market is about to open, or it could be that the company is just sitting on a pile of cash and represents an option for what they may do with that cash.
Grown Rogue Scores the Best of Any Publicly Traded Cannabis Stock
Here is how we grade Grown Rogue (OTC: GRUSF):
Operational Excellence: A
Future Growth Prospects: A
Balance Sheet: A
Special Situation: A
Disclosure: A
For operational excellence, the company has the some of the highest margins in the cannabis industry despite being in one of the most competitive state markets. Consider for example that Terrascend (OTC: TSNDF) recently reported 40% gross margins in Michigan, while Grown Rogue reported above 40% EBITDA margins in the state.
The future growth prospects for Grown Rogue are simply the best in cannabis, as the company is about to turn on facilities in New Jersey and Illinois where competition is more limited, and prices are much higher.
The balance sheet is clean, and the company has limited debt and no sale/leasebacks and due to the limited analyst coverage, the company should be considered a special situation as it has some of the highest margins, will be experiencing the fastest growth rate, yet trades at an unlevered cash flow multiple of 5 times my 2025 estimate.
Finally, the best part of Grown Rogue is that the company discloses a detailed breakdown of its business in each state, which allows an analyst to understand the company’s underlying unit level economics.
The goal of TOKE is to regularly analyze publicly traded cannabis stocks and score every single company to make sure the makeup of the portfolio represents the best stocks for the long run.
Construction of the Portfolio Right Now:
TOKE is a diversified ETF, meaning no more than 50% of the portfolio can be in the top 5 stocks and no position should be greater than 15%. This is different than other cannabis ETFs, which are non-diversified and can hold much greater positions than 15% of the portfolio.
Here is the rough current makeup of the portfolio
50% US cannabis stocks
20% Tobacco and Other
16% Canadian cannabis
6% Other
8% cash
Click on this link for a full list of holdings.
Why Does the Portfolio Have Tobacco Stocks in There?
Another distinguishing part of the TOKE ETF is the decision by both Mindset and Cambria to hold up to 20% of the portfolio in tobacco stocks.
The first reason to hold tobacco stocks is that the tobacco industry is one of the closest adjacent industries to cannabis, in fact a few tobacco companies have cannabis related investments. I believe when they are allowed to fully participate in cannabis, they will.
The second reason is that they are very liquid stocks that are stable and not very volatile. Cannabis stocks, especially US cannabis stocks are anything but stable or liquid. Managing liquidity is very important for any ETF. The last thing you want is for a downdraft to happen and suddenly you must sell illiquid stocks. If there ever was a large downdraft in cannabis stocks, instead of being forced to sell illiquid companies, you could use that downdraft to sell a portion of your tobacco stocks and buy more of the undervalued cannabis stocks and take advantage of the downturn.
The final reason is for yield. Thanks to the tobacco holdings, investors in TOKE earn close to a 4% yield. Getting paid while you wait for reform and for broader institutional involvement is a definite plus.
Wait, Why Is TOKE Invested in Canadian Cannabis Stocks?
I have often railed about how terrible Canadian cannabis companies are. But thanks to cannabis being Federally legal in Canada, those Canadian companies have listed on US exchanges. This has led some of them to raise a lot of capital. And some are still sitting on a lot of that capital. One example is Cronos (NYSE: CRON), which is currently sitting on $855 million in cash. It is my belief that these are almost like free options for what they will do with the cash once they are allowed to enter the US markets. These qualify into the ETF under the special situation side of the equation.
How Does TOKE Differ From the Mindset Value Wellness Fund?
The Mindset Value Wellness Fund is a private fund managed by Mindset Capital for qualified investors that takes a sharpshooter approach with sometimes extremely concentrated positions, and it also has a few private investments as well.
TOKE’s portfolio will be diversified across many more companies and will aim to be much more liquid, stable and less volatile than the Mindset Value Wellness Fund and cannot invest in private companies.
There have been many people who are not qualified and international investors who have not been able to invest in Mindset’s private fund and the hope is that they can and will invest in TOKE.
Why Does Mindset’s Research Have Any Value?
We at Mindset believe that few if any investors are doing actual due diligence and asking tough questions of cannabis companies due to the lack of institutional involvement in the space. Most investors focus on the top five cannabis stocks and Federal Reform and not much else. This has led to tremendous amount of alpha to be captured.
One example of this is that few if any investors were paying attention to the collapse in California licensed cultivation licenses in 2022-2023 or the bounce in wholesale pricing in early 2023. This research led Mindset to make Glass House (OTC: GLASF) a large position by early 2023. In the past 18 months, Glass House’s stock has risen by more than four times.
On the other hand, the lack of disclosures, massive dilution and poor economics of some companies have caused us to stay far away from the worst performers in the industry while other investors have kept investing in stocks that kept going down and diluting their shareholders.
This does not mean that we don’t make mistakes, on the contrary, when we are wrong, we try to rub our nose in it and then move on. This has led to the Mindset Value Wellness Fund outperforming. The Fund was up 70% in 2023 when most cannabis were flat or slightly down and so far in 2024 the Fund is up over 90% for the year, far outpacing the average cannabis stock’s performance.
No Fees Below $50 Million in Assets
Cambria has waived all fees on any ETF below $50 million in assets. Either this ETF makes sense to investors and starts outperforming, or there are no fees.
Further, Mindset has also been a buyer of TOKE in its private funds as well. At Mindset, we like to eat what we cook, or we wouldn’t cook it.
Open and Transparent
TOKE will regularly provide the reasoning, research and decision making behind why it is buying or selling certain stocks and why the portfolio is constructed the way it is. We plan to post about our research and share it broadly.
We will also be honest when we get something wrong or have made a mistake.
Help Me Make TOKE the Best ETF, Send in Your Ideas
And we need and want input. The reason I write this newsletter is not only to clarify my thoughts, but to get feedback and to network with other smart investors. We would love to hear back on a regular basis what your favorite stocks in the sector are and why? What positions would you have in the portfolio and what positions would you not?
There are smart cannabis investors out there who have uncovered valuable insights and data, and we want to hear from you!
This portfolio is not by any stretch finished or done. I consider it a work in progress and the plan is to never stop obsessing over the quality of the makeup of the portfolio.
That is why we want to hear from you. Please email us to Toke@mindsetcapital.com. Our goal is to have the best portfolio and not to miss anything and you can help.
So give yourself a TOKE and let’s bring capital to the best run cannabis companies!