Marijuana Article: A note of Confusion 

I have become very confused about the future of Marijuana as of late. 

The confusion is from the following reasons. I stole most of these bullet points from this article(Link).

• 280E tax code makes most cannabis businesses not Profitable. And legalization is taking way longer than expected. And even if legal an excise tax may be put in place which would negate the effects of 280E tax code being undone(Link).

• Industry saturation between the legal and illicit markets to where wholesale and retail prices are dropping like a stone, forcing small brands and businesses to close shop. 

• The “race to the bottom” theory that cannabis is a commodity, like kale, broccoli, and tomatoes, and commodity prices leave little room for high-end brands and services. California is the prime example of too much competition (Link)

• Federal legalization will lead to a massive lowering of the moats to enter a state market, shipping cannabis legally through the mail and UPS, hence the “Amazon’s of Weed” will spring up online.

• With full legalization, low-cost providers of cannabis like Colombia, Brazil, Mexico, whose’ climate, electrical costs, water costs, and labor costs will demolish more expensive grow countries like the US and Canada.

• All consumer surveys to date say consumers are only concerned with 3 factors in a cannabis buying decision, price, effect, and distance or time to get to said cannabis product.  Branding, packaging, colors, celebrity endorsement all don’t even rank with consumers at this stage of cannabis legalization.

With this clouded future, I think it’s time I sold. The two companies I invested in are Marimed(MRMD) and Trulieve(TRUL).

In hindsight, I overpaid for Trulieve buying it for 6 times sales. Even now at 1.5 times sales it still seems expensive at around 18 times operating income. At the current price I’m paying for growth and for 280e to go away. However, every legalization act I have read introduces some sort of excise tax on top of the federal and state taxes that a cannabis company pays. The excise tax would be 25% for larger cannabis companies. This would negate the positive effects of the elimination of 280e.

Also with legalization, interstate commerce will be possible and the cheapest places to produce are California and Oregon which could hurt Trulieve’s business in Florida. 

Also, I’m doubting the usefulness of the dispensary.  If you look at tobacco and alcohol most purchases are in a grocery or convenience store. If this happens to Marijuana then the hundreds of millions of dollars all the MSO’s have spent on dispensarys would be worthless. Including the two I invested in Marimed and Trulieve. However, even if legalization happens states may continue only to issue a limited amount of licenses which should restrict marijuana retailing to the dispensaries at least in the short term. Also, Marijuana does have a strong odor so grocery stores may not want that in their store. However, it looks like marijuana is coming to gas stations quicker than I thought with Green Thumb announcing a partnership with Circle K in Florida(Link)

Even though I have doubts I still see an immense opportunity. Marijuana sales in the US are still below $30B compared to Tobacco which is over $100B and Alcohol which is over $300B. So the industry is poised for growth but it’s unclear who will benefit as I’m not sure if retail or wholesale will really make any profit. Brands should make money but it seems too early to tell what brands will come out on top.

The brands with the highest engagement at least according to Instagram are Cresco and Green Thumb. And Green Thumb does seem to be pretty well managed, Trulieve also seemed well managed as management is one of the only marijuana companies that has done insider purchases and no insider selling. But their Harvest acquisition, at least to me, has been terrible. They paid 4 or 5 times sales initially and the company purchased was extremely unprofitable. Not to mention they diluted the hell out of shareholders with the deal and took on tons of debt.

Marimed was a company I liked being very small with high growth opportunities. However, management is diluting the hell out of shareholders and their stock comp is only half the size of Trulieve even though Trulieve is 10 times larger.

Another bad sign for the industry is the declining gross margins and asset turnover. Asset turnover is a problem as that represents return on capital declining. Gross margins declining represents more and more competition. 

To summarize I don’t know what the future holds for Marijuana and the prices for the companies are not cheap enough to take a bet on the uncertain future. So I decided to sell out. But I need to keep an eye out for brands and good management so I can re-enter the space when prices get cheap enough. Probably somewhere below 1 times sales.