Mindset Value Cannabis Fund Year End Letter

Feeling Goodness for Verano

Disclaimer: The below post is my 2021 Year End 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,

I hate to say this, but I’m not sure the cannabis fund could have gotten off to a worse start performance-wise since our launch in mid-November.

The fund fell 15% in less than two months, and then instead of a January bounce, it fell another 7%. And to think that I believed the timing could not have been better to start a fund!

Volatility is the rule in cannabis, so I was not surprised at the decline as investors are overly focused on legislative headlines and not on business fundamentals. And while stock prices were going down, I kept buying, doing research, and focusing on what was important: research and due diligence into individual businesses and inefficiencies in the cannabis market.

On February 1st, things changed for the better. Our portfolio increased 9% in one day. The big driver was that one of our holdings, Goodness Growth (OTC: GDNSF) was acquired. We were expecting this announcement, as my research (with an assist from another money manager) had turned up a peculiar filing last October that showed that terms of a sale/leaseback transaction were redacted for “commercial purposes.” Further due diligence led us to believe that Goodness was negotiating with two companies, one of which was Verano (OTC: VRNOF), which ended up buying Goodness.

Goodness increased by 42% on the announcement, and this was goodness for us as 10% of our portfolio was invested in Goodness before the news hit.

Goodness is particularly valuable for its licenses. Not only is its New York license valuable due to it being a limited license state, but so is its Minnesota license, which remarkably only has two licensed operators for a state of over 5 million people.

While we experienced a short-term pop, the deal is even better for Verano. Goodness was a company with little access to capital but some very valuable licenses. I think when all is said and done that by 2024, Verano might be paying just 2 times EBITDA for Goodness’s licenses and in a very optimistic scenario, 1 times EBITDA.

This acquisition crowns Verano as having the best footprint in the cannabis industry. I think Verano could hit a $1 billion EBITDA run-rate by the end of 2024, up from $500 million this year. And the most amazing part is that its entire enterprise value is slightly more than $4 billion.

That’s right, we own and are about to own even more of (thanks to the Goodness Growth merger) the best run company in the sector with the best footprint and with a valuation of a little more than four times what they could be earning in 2024 EBITDA.

For comparison, alcohol companies regularly trade at 20 times or more with 5-10% revenue growth. Verano has and continues to grow at 40% a year with a long tailwind behind it.

While most investors are focused on legislative headlines, I’m more interested in the incredible advantages that a company like Verano possesses. Within the capital starved cannabis sector, there are few companies that have access to capital. And instead of competing with Big Tobacco, Alcohol, CPG behemoths, or Private Equity firms, Verano and its peers can establish their footprints and build their moats free of traditional competition.

In other words, the longer that legalization takes, the stronger Verano becomes and the more impenetrable its moat gets. That’s why it is so absurd to see it and other leading multi-state operators trade down when their competitive advantages, strategic positions and cash flows continue to grow.

And it’s not just Verano we own, but other companies not in any index or that are misunderstood or not followed. I’m like a kid in a candy store and if we can be patient and focus on fundamentals, this partnership, volatility notwithstanding, will do just fine.

One last note, I have personally invested more of my own personal capital into the fund every single month as I monetize some long held real estate investments. And in the main Mindset Value Fund, I increased exposure to the cannabis sector to 50% of the portfolio. The last time I was this personally exposed to an industry or sector was 2011, when I went all in on housing.

Thank you for your support,

Aaron Edelheit

CEO Mindset Capital