The Worst Way to Invest in Cannabis

You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.

Friends,

We saw a press release this week from a fund that invests in cannabis stocks, the Roundhill Cannabis ETF. The exchange-traded fund, which trades as (CBOE BZX: WEED), launched in April (on 4/20), and it has seen the price drop by almost 50% in less than six months. The manager, Roundhill Investments, is based in NYC and offers several non-cannabis ETFs. The total under management exceeds $1 billion, but the cannabis ETF has only about $1.8 million.

What we learned this week is that the manager is marketing the high concentration of leading multi-state cannabis operators in the ETF. In fact, it holds just 6 names, the 5 largest cannabis operators in market cap as well as another that is merging with one of them. These 6 represent over 99% of the ETF, with the remainder as a cash position.

Roundhill has tried to beat the largest American cannabis ETF, AdvisorShares Pure US Cannabis ETF (NYSEARCA: MSOS), with a terrible strategy in our view. We have been warning subscribers at 420 Investor of the relative richness of Tier 1 names. In our model portfolio, we added one of these six names this week, but we are very underweight Tier 1 names in favor of investing significantly in Tier 2.

WEED is even more concentrated than the ETF MSOS, with 95% exposure to the 5 largest multi-state operators, but MSOS is doing the same thing. It has 74% in these same names. Both of these ETFs are making mistakes, in our view, with such heavy concentration. Many investors can look at the holdings and easily copy the ETFs, saving the management fee. Worse, though, we believe that diversification is actually a good thing. Both of these ETFs are way too concentrated in a small number of names that are very similar.

At 420 Investor, we aim to beat the Global Cannabis Stock Index, which has exposure to not only the multi-state operators but also ancillaries, biotech, Canadian LPs, hemp and international companies. We are ahead of the index this year and have consistently beaten it over many years with a diversified portfolio.

While we appreciate what the ETF MSOS did for the industry and for investors after launching and have seen the ETF improve a lot since it began about two years ago, we think that both ETFs MSOS and WEED as they currently stand are dangerous ways to invest. Not only are they overly concentrated in the largest names, they are also missing out on other important parts of the market.

The WEED performance goes back only to mid-April, but MSOS goes back to September 2020. Since it launched, WEED has lagged MSOS by a bit. MSOS doesn’t have a benchmark, but we think it lines up very well with the American Cannabis Operators Index. Here is the performance of MSOS and that index as well as the Global Cannabis Stock Index over different time-frames:

MSOS has consistently lagged the American Cannabis Operators Index, which has outpaced the Global Cannabis Stock Index, especially in 2022. We think that investors looking to capitalize on cannabis would not be served well to bet it all on just American operators, or worse, just the largest ones. Both MSOS and WEED are betting on the biggest being the best, but this notion isn’t necessarily the correct idea. Larger companies can be limited by regulatory issues, such as in Massachusetts, which limits the production size of operators. We won’t argue that the largest operators will never be the best investment, but it’s wrong to make that bet all the time. Investors would be wise, in our view, to choose stocks and not narrowly focused, highly concentrated ETFs.

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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

Exclusives

Lowell Farms is positioning itself to become a leading cannabis packaged goods player. The company’s business is split into four segments: CPG sales, bulk flower sales, farm services and out-of-state licensing. In an exclusive interview, Chairman George Allen says CPG sales represent the largest chunk of the company’s revenue and is the main priority for growth. At the end of last month, Lowell Farms launched its new pre-roll brand, Lowell 35’s, with the intention of catering to consumers who smoke frequently.

Despite tough market conditions, Planet 13 has been able to maintain its consumer traffic, much of which is made up of tourists. However, economic pressures have affected basket size. The company has operations in Nevada, California, Florida and Illinois and is aggressively seeking growth in Florida. In an exclusive interview, Co-CEOs Larry Scheffler and Bob Groesbeck said they remain bullish on the future and shared plans for growth and how they plan to remain debt free.

Michigan cannabis sales rose 2% in September compared to August and increased 31.4% from a year ago to a record $212 million thanks to a big boost in adult-use sales. Medical sales plummeted 54.4% from a year ago to $16.6 million, down 10.0% sequentially, while adult-use sales shot up 56.4% year-over-year to a record $195.3 million, up 3.1% sequentially. Michigan cannabis sales expanded 82.1% in 2021 to $1.79 billion and are up 26.8% so far in 2022 at $1.66 billion.

Deals

TerrAscend closed on a $45.5 million loan with funds from Pelorus Equity Group with a maturity rate of 5 years. Proceeds will be used to fund the company’s growth initiatives. “As more states come online and transition from medical to adult use, we remain excited about new opportunities in expanding markets like Maryland and New Jersey, and we are also closely following emerging markets like Alabama and Mississippi and will continue to look for strong sponsors, great projects and attractive markets,” said Travis Goad, Pelorus Equity Group Managing Partner. In August, TerrAscend announced its Q2 revenue rose 31% sequentially to $65 million.

Verano has canceled plans to buy Goodness Growth. The company said it was exercising its termination rights in accordance with the terms of the arrangement agreement “based upon GGH’s breaches of covenants and representations in the arrangement agreement and the occurrence of other termination events” and that it was in the best interest of shareholders. The purchase agreement for $413 million in stock was announced in February. Goodness Growth said it will file suit to recover damages.

Earnings

Valens Q3 revenue fell 15% sequentially to C$20.3 million from $24.0 million in Q2 2022. During the third quarter, Valens entered into an agreement to be acquired by SNDL to create a leading vertically integrated cannabis platform.

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Use the suite of professionally managed NCV Cannabis Stock Indices to monitor the performance of publicly-traded cannabis companies within the day or over longer time-frames. In addition to the comprehensive Global Cannabis Stock Index, we offer a family of indices to track Canadian licensed producers as well as the American Cannabis Operator Index and the Ancillary Cannabis Index.

View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks.

Stay on top of some of the most important communications from public companies by viewing upcoming cannabis investor earnings conference calls.

Discover upcoming new listings with the curated Cannabis Stock IPOs and New Issues Tracker.

Sincerely,

Alan & Joel

Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email