Mindset Value Cannabis Fund Q1 2022 Letter
NJ Adult Sales, MariMed and a Private Restructuring Opportunity
Disclaimer: The below post is my Q1 2022 Investor Letter that I sent to investors in the Mindset Value Cannabis 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.
Dear Mindset Value Cannabis Fund Investors,
The fund fell 7.7% in the first quarter of 2022. While this performance was better than the overall cannabis sector, losing money never feels good. For comparison the main cannabis ETF MSOS fell over 18% during the quarter.
While investors get frustrated with the lack of any real movement on the Federal front, the bigger story is how cannabis stocks in general continue to trade in lockstep with other much more aggressive growth stocks like Shopify (NASDAQ: SHOP), Carvana (NASDAQ: CVNA) and Netflix (NASDAQ: NFLX). Consider that the MSOS ETF and the ARKK index (a proxy for all the crazy growth speculative names) are down almost 60% in the past twelve months and their charts match each other almost step for step.
If there has been a mistake on my part, it has been not realizing who the other shareholders were in cannabis, they were clearly the more aggressive investors who are currently getting pulverized in speculative growth stocks.
I continue to think that this is an incredible time to invest in cannabis. At some point, the fundamentals and the extremely low valuations will matter. And it might just start with the launch of adult use sales in New Jersey.
New Jersey Adult Use Sales Start to Crazy Long Lines
Imagine you were an investor in a private company, and that company just opened a new store, and this was the picture of the demand, a line that wrapped around the block:
Then imagine if you realized that in the next twelve months that this same scene was going to repeat in Connecticut, New York, Maryland, Pennsylvania, and Virginia. And due to capital scarcity and the lack of cultivation capacity that these markets were going to be undersupplied for years. You would be telling everyone how smart you were, how awesome this investment was and how rich you were going to be in the future.
Now consider this exact scenario is playing out, but your private company is publicly traded. And instead of your company’s stock price going up, the stock price went down instead. This is what just happened in cannabis and is a marker for how stock prices are not tracking fundamentals.
New Jersey finally allowed adult use sales on April 21st and the scenes were quite something. It is the first step in the start of the entire Northeast turning on. I wrote about this in a post called the Cannabis Nor’Easter.
New Jersey should be the first northeast state to move on adult use. And the state has been a drag on the entire cannabis sector because investors were hoping that sales would start in Q3 of 2021. While New Jersey’s delays cast a pall over the sector in Q4, once sales start, the financial impact for those who are ready should be stunning.
Just consider what New Jersey could mean for Verano (OTC: VRNOF). A smart analyst who I regularly speak with thinks Verano could earn around $100 million in EBITDA from New Jersey alone.
After New Jersey, Connecticut should follow in Q3 of this year. Then in 2023, New York and Virginia are to follow. If on top of those states, Pennsylvania, Maryland, and Ohio (I know, not technically the northeast) legislatures approve full adult use sales, we will have the makings of a monster cannabis storm.
And here is the conundrum, due to structural barriers blocking investment capital from entering the space, the stock prices are trading with other more speculative stocks. But fundamentals matter and cash flows matter. I can’t predict when investors will care, but eventually they will.
So, while no one seems to care, there are some amazing individual opportunities out there.
MariMed: Undervalued, Under-owned and Uniquely Positioned to Benefit in Maryland
MariMed (OTC: MRMD) is just one great example of how much opportunity there is for anyone interested in doing independent research in the space. Despite doubling revenue in the last two years and being the only cannabis company to beat guidance last year, MariMed trades at six times trailing EBITDA, five times this year’s estimate and 3 times next year’s estimate and has no net leverage on its balance sheet.
I wrote up a research report on MariMed and here is a snippet:
MariMed might be the best kept secret of any cannabis multi-state operator (MSO) with more than $100 million in revenue, but it probably won’t remain that way. The company trades at 7 times trailing 2021 EBITDA, 5 times this year’s estimate and approximately 3 times my estimate for 2023 and this is all with no leverage.
Besides being one of the most undervalued, MariMed is the only major MSO that beat estimates last year, and that was off guidance that the company had previously raised. And the company’s numbers are likely too low again, especially for 2023, as analysts may not be considering what will happen when MariMed consolidates its Maryland operations, nearly doubles its cultivation footprint in the state and opens a new dispensary right in front of the state approving full adult use in November of this year.
Private Restructuring Opportunity at 18% Interest with Warrants
One of the best parts of diving deep into the emerging cannabis industry is meeting and learning from other investors, entrepreneurs and executives who are trying to grow as part of the cannabis industry. And occasionally a company or group is trying to raise capital and I get a peak into what they are trying to do and at what valuation.
One such opportunity has presented itself and I’m now advising and helping a scrappy California consumer packaged goods (CPG) company that was growing quite fast until the California market plunged last summer. They were then forced to take out extremely high-cost debt to survive and they now currently need help restructuring their 36% a year interest costs.
I’m advising them on a convertible note for $2.5 million that comes with an 18% interest rate and warrants for 20% of the company that allows the company to cut interest rates in half, give them breathing room with working capital and enables the company to expand again when competitors are going out of business.
The fund and I will be making a small investment into this opportunity as well a few publicly traded cannabis executives. As a Mindset Value investor, if you have interest in participating on your own as well, please let me know and I’m happy to schedule a time to discuss the opportunity. This opportunity will only be available to investors in a Mindset Value fund.
I expect this financing to close by the end of May, so please let me know if you have any interest in participating.
New Part-Time Analyst
I’m excited to announce that we have a new part-time research analyst. Fateh Mann has been an amazing asset researching the cannabis world. After 8 years operating in tech, he has followed his passion into the investment world. He's an insatiably curious individual who reads everything he can get his hand on, from annual reports to history books to fiction. And his level of diligence has been excellent. He is helping research new ideas, helping with new write-ups, and following existing positions so we can make sure we are casting a wide net in cannabis.
It’s been a long cold winter that has extended into spring for cannabis investors. We always knew it was possible for our investments to go down and to struggle to get investor capital. But the long-term fundamentals as evidenced by New Jersey adult use sales shows the real game in cannabis hasn’t begun. To use a baseball metaphor, I believe we are in spring training, which can be messy. The real game hasn’t even started, and that is what is so exciting.
I’m grateful for your support and to have great long-term investors as partners. Please let me know if you would like to put more capital to work, as opportunities abound.
All the best,
CEO Mindset Capital