Disclaimer: The below post is my 2024 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.
The Mindset Value Wellness Fund lost 4.9% during Q4 and finished the year up 65.6% on a net basis.
Reflection on Three Years Since the Fund Launch
It is our firm belief that cannabis remains a fertile ground for opportunity and market inefficiency. How can we tell if this belief is right?
As of year-end, we are up approximately 14% on a net basis since the beginning of 2022. While we would have hoped to be up more in three years, it is worthwhile to compare our performance to the main cannabis benchmark, the ETF MSOS. Over the same period the MSOS index was down 85%.
We do not believe there are many people doing deep dive research, conducting due diligence, running earnings models and trying to understand unit level economics in the cannabis industry. Instead, we see a lot of focus on Federal Reform efforts and trading in and out of cannabis stocks. We not only believe in the long-term growth opportunity, but we continue to be amazed at how little fundamental research is happening.
The reason that there are so few investors doing basic research in cannabis is that because it is Federally illegal, but legal on a state basis, there are very few institutional investors. And in the last three years, due to the dramatic price declines in most large publicly traded cannabis companies, that list of institutional investors investing in cannabis continues to fall.
A fellow cannabis institutional investor runs a friendly stock picking contest. You pick one long and one short and the winner gets $1000 to the charity of his choice. There were 12 participants last year. This year there are only 7. (We won the contest last year and picked the Weldon Project, which is working on cannabis reform and is run by the very impressive Weldon Angelos.)
With less institutional investor interest and participation, there should be more inefficiency and more opportunity for outsized investment gains. We remain as bullish as ever on the opportunities and the lack of investment competition in cannabis.
A Flight of Cannabis Beverages
One area where there is tremendous opportunity for alpha is following how cannabis is taking share from the $250 billion alcohol industry.
I wrote a post about the trend for zebra striping, where you alternate between alcohol and non-alcoholic drink options. I wrote:
The problem for alcohol companies is that while zebra striping means that people still consume alcohol, they consume significantly lower amounts, as much as 50-60% lower.
Another post I wrote recently was about how women are not content or Happi (one of our beverage companies) to just drink wine. This is some of what I wrote:
Let’s assume that the wine industry is a $100 billion market and that 60% of consumers are women. That means women spend $60 billion a year on wine. Now let’s assume that the average female consumer replaces her glass of wine three days a week with a Happi beverage or another cannabis beverage. If this female normally consumes 6 glasses of wine a week, that is 50% replacement, if she consumes 9 drinks, it is 33% replacement. Let’s be uber conservative and assume that it is just 20% replacement.
That may mean that the consumption patterns may change by 12%, or $12 billion. Just by focusing on women that wants to unwind at the end of the day, Happi is attacking a niche that could be worth $12 billion in annual revenue!
Private cannabis beverages now represent 11% of the Fund, led by our investment in one of the top brands in cannabis beverages, Uncle Arnie’s, with a 4.5% position. These beverage companies are on average growing at over 100% a year.
We think that cannabis beverages may one day be a $50 billion annual revenue category, capturing 20% market share of current alcohol sales. Beverage companies when they reach scale are some of the best businesses to ever invest in and we are very excited to see the tremendous growth from our portfolio companies. Stay tuned on this sector, this year should be very busy.
Grown Rogue
Our largest position remains Grown Rogue (OTC: GRUSF), and we are excited for 2025, as we are expecting a breakout year for the company.
By Q3 of this year, Grown Rogue should be growing its cash flow by triple digits year over year and yet it trades at 5 times my cash flow estimate.
We should start to see the embers of the fire that Grown Rogue is going to show in Q1 and then it ramps up from there.
The stock may move in fits and starts with macro news about cannabis and investor interest, but its financial performance this year should be hard to ignore.
There is a shortage of operational excellence in cannabis and the separation between Grown Rogue and most of the other publicly traded cannabis companies should be very clear by this summer. I cannot predict when Grown Rogue’s stock will run again, but when it does, it should go materially higher.
Vireo Bullish on Cannabis
I’ve never seen a stock announce an equity offering at a 149% premium to the last quoted stock price. And then the stock announce that the offering was oversubscribed and then the stock to trade significantly below the $0.6250 per share offering price. This is what happened in December to Vireo Growth (OTC: VREOF), which used to be called Goodness Growth.
Welcome to the wild world of cannabis, where the trading price of the OTC listed stock is completely disconnected from large pools of capital that are interested in long-term bets on cannabis.
I wrote a whole post about how I’m still Vireo bullish on Vireo and cannabis.
The amount of inefficiency and alpha available investing in cannabis is like nothing I’ve ever seen. And the number of institutional investors in cannabis continues to fall. We think this bodes well for future returns.
Glass House Preferreds Just Keep Chugging Along
In the summer of 2022, we made an outsized investment into the preferred offering in Glass House Brands (we also bought a bunch of stock between $2-$3 per share). Our thesis was that with an irreplaceable asset in their Ferrari of a greenhouse and a big cost advantage over their competitors that especially the preferred was a safe investment because they sat right below a modest amount of senior debt. Further, we not only would earn a 20% interest rate (half in cash interest and half in payment-in-kind), but we would get warrants at $5 per share as well.
Fast forward two and half years and the interest rate has kicked up and now our return is more than 22% a year and the stock is above $6 per share. This investment remains a material position in our portfolio and is an example of the type of flexible investment our fund can make.
The reason I mention this particular investment now is twofold. First, that while we wait for reform, there are numerous ways to invest in solid companies and earn fantastic returns on a risk adjusted basis. And to highlight that, until Glass House pays us back, the Mindset Value Wellness Fund doesn’t have to do a damn thing and 8% of our portfolio goes up by more than 22%.
Summary
We have no idea about what Trump will do regarding cannabis. I think he may surprise people on the issue, but after so many disappointments on Federal Reform, I’m not holding my breath. Instead, we continue to focus on fundamentals, unit level economics and making sure we are tracking which companies are breaking out. And while our companies are breaking out, cannabis adoption continues to climb.
We think this is a wonderful time to invest in cannabis.
If you have any questions or comments, please feel free to reach out to me.
Sincerely,
Aaron M. Edelheit