Where’s the Beef?

With the Defeat of Florida Amendment 3, Where is the Growth in Cannabis?

The Florida constitutional amendment (Amendment #3) to legalize adult use in Florida failed to pass the needed 60% threshold on Tuesday. The reaction from investors has been swift and brutal, especially to Florida focused cannabis companies. Some stocks fell as much over 56% in just one day.

Why did some stocks fall so much? Because without Florida adult use as a catalyst, there is no growth and potentially little equity value in some highly levered companies. Also, a few of the larger companies in the state have been ramping up capacity in anticipation of adult use sales and the end result may be too much capacity coming online with little uptick in the number of medical customers. In other words, pricing pressure may be on the horizon in Florida. Without growth prospects, investors are now expecting very little or even negative growth, or simply very little or no “beef.”

But a bigger issue is that many of these companies are built to exploit “limited license” markets. These are markets that limit the number of licenses and limit competition. There is no business model that can be replicated. What I mean by that is there is no model where if you build a cannabis facility, it costs X much to build and it will pump out weed at Y price per pound and you can sell it for Z price per pound, even if Z falls to competitively challenging levels.

The problem for most large incumbent cannabis companies is that their model has been to acquire a license in a limited license state and then hope that the competition doesn’t increase too much and hope that a state goes from medical to adult use, where sales double or triple.

These limited licenses have given rise to some companies that aren’t really that great at growing cannabis, or making great, affordable consumer products or retailing these products in a way that resonates with consumers. But these companies have been able to generate cash flow and gain investor attention because the level of competition is low. But what has happened is that over time, competition slowly increases, prices fall, and these “excess profits” dissipate, leaving investors holding on to companies with no growth, falling cash flows and stranded assets that may not have any real long-term value. The earnings reports from major cannabis companies for Q3 so far has not been pretty, with the exception of Green Thumb (OTC: GTBIF), which is the only company that seems to be holding its own.

I continue to believe that what is in short supply is not limited licenses, but instead operational excellence. And what is great long-term for consumers is quality products at low prices. This is why I have been so vocal about Grown Rogue (OTC: GRUSF) and Glass House (OTC: GLASF).

They are two companies that have been duking it out in the most competitive markets (Oregon and California) with some of the lowest prices in the country. They have been forced to figure out a business model that is based on tough competition and low prices and not on artificially low competition. Consider that since Grown Rogue entered Michigan, pricing collapsed nearly 70%, and yet annual cash flow is around $6 million a year on a $6 million capital investment. Now that is the kind of business model investors should get excited about.

I believe the problem for most large publicly traded cannabis companies is that they don’t have a Grown Rogue model for growth, they just have the old playbook of limited licenses. Until that changes there may be little or even negative growth. In a stock market that prizes growth and penalizes value this could lead to continued painful stock prices.

Back to the election results, what is remarkable about the defeat is just how popular cannabis is in Florida when you consider the facts: 55.9% of Florida voted in favor of Amendment #3, a double-digit win and almost the same percentage that voted for Trump. The Amendment received 55.9% of the vote despite a vigorous effort by the popular Governor Ron DeSantis, who fought the initiative tooth and nail.

The most surprising angle of the Governor’s and his supporters’ attack was that this amendment only helped one company, Trulieve (OTC: TCNNF), who bankrolled over $100 million into trying to get the Amendment passed. Ironically, the more money that Trulieve poured into the campaign for Amendment 3, the more it highlighted the Governor’s main critique.

And this gets to one of the big points of what isn’t popular in cannabis: limited licenses. Cannabis continues to be quite popular, but limited licenses are not, especially ones that limit supply and create artificially high prices for consumers. Not only are they not popular on the right, but they also really aren’t popular on the left either. And politicians, regulators, social equity activists have been fighting about limited licenses with various levels of success for years.

So, not only do limited license markets not have a reproducible model, but almost every stakeholder doesn’t like them either. When you are at odds with every stakeholder, you might have a problem.

Despite the negative outlook for limited license business models, cannabis is still quite popular in the US, and cannabis usage continues to climb. I believe we are riding a wave of cannabis adoption that should go on for another 20 years. My favorite data point of the election was from Kentucky. The state gave every local municipality a chance to approve or deny medical cannabis local sales. EVERY SINGLE COUNTY, all 106 counties approved medical cannabis. EVERY SINGLE ONE.

My final thoughts on the election are about the implications of the new Trump Presidency and cannabis reform. Donald Trump has already come out in support of rescheduling and cannabis and was even for Amendment #3. Also, just as important is that almost every advisor or person key to his election this year is pro-cannabis. The list includes Elon Musk, RFK Jr., and Joe Rogan. Don’t forget that advisor Roger Stone is very pro-cannabis and recently went to prison for Trump. And the leading candidate for attorney general is not an old fashioned conservative like Jeff Sessions, but instead is Utah Senator Mike Lee, who in the past has been pro-cannabis and for SAFE banking.

Compare this group to the giant nothingburger that Democrats put up during their four years in power despite promises of reform. Yes, there has been a rescheduling review, but it has been painfully slow, and many are quite right to ask, “Where’s the Beef?”

In the end, who knows what a new Trump Presidency will bring, I certainly don’t know. But it could surprise people and based upon his new entourage, the biggest surprise may be the moves he makes on cannabis.