Disclaimer: The below is an interim update I sent investors in Mindset funds yesterday. 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 track my views and refine my thoughts and hopefully show how my writing translates to actual performance. With that, I hope you enjoy and gain insights.
Dear Mindset Investors,
Today, the HHS (Department of Health and Human Services) sent a recommendation to the DEA (Drug Enforcement Administration) that cannabis should be rescheduled to Schedule 3 from a Schedule 1 illegal drug.
The main takeaway from this news is the following: the Federal government is signaling to the entire world that the US government considers cannabis to be significantly less dangerous than it has in the past and is downgrading its view of its negative impact to society.
This is the biggest potential reform in cannabis history. Rescheduling to Schedule 3 is a big first step for the Federal government in righting a wrong put in place when cannabis was placed on the Controlled Substances Act by the Nixon administration, purely for political reasons.
When this rescheduling process is completed, 280e taxation (the excessive taxation plaguing this industry) will go away. But this is much bigger than just taxation. I believe this is a giant bat signal to the world and most importantly the financial industry that it will soon be safe to enter the cannabis waters.
I think that this is akin to the national anthem playing before the first pitch of the first baseball game of the season. The warmup pitches haven’t even happened, and the players have not taken the field.
We have been waiting for this moment for almost a year, when Biden asked HHS to initiate a review last October. Remaining patient has been challenging to say the least. Wild volatility and illiquidity have been the norm. However, we have used the pain and suffering to be able to invest in some fabulous companies with distinct competitive advantages.
Consider our largest investment, Grown Rogue (Canada: GRIN). They are the number one flower brand in Oregon, which has the lowest cannabis pricing in the country. Even more remarkable, is that they are able to be free cash flow positive at an all-in cost of $550 a pound. So, at $800 flower prices, they are free cash flow positive.
Grown Rogue then went to Michigan and despite prices there falling to $1000 a pound, they produced free cash flow there and are now a top 5 indoor flower brand. They now have a formula and a repeatable process and ability to do the same thing in many more markets.
I believe they are working on entering several new limited license markets with Oregon quality cannabis at Oregon costs, while competitors struggle with costs that are easily over $1000 a pound. Simply put, they have a durable competitive advantage.
Next year, I estimate the company could exit the year with an EBITDA run rate of at least $20 million and a growth rate of over 100%. With a fully diluted share count inclusive of all converts and warrants, Grown Rogue trades at less than 3 times that estimate of unlevered EBITDA and 5 times estimated free cash flow. I’ve never heard of a company with a durable competitive advantage growing at triple digits with a long reinvestment runway trading at less than 3 times unlevered cash flow and 5 times free cash flow, have you?
So, what comes next?
I’m expecting a Merrick Garland memo with updated Department of Justice guidance that should have positive implications for state legal businesses. The cherry on top would be that despite the political theater of SAFE Banking, there is still a chance it could happen by year end as well.
More than anything, I wanted to let you know how much I appreciate you. This letter is really a thank you to all of you have entrusted your capital with me. Without your steadfast support and emails of encouragement, the last 11 months would have been a lot tougher. Thank you from the bottom of my heart.
Let me know if you would like to discuss this anymore.
Sincerely,
Aaron M. Edelheit