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The draft Cannabis Administration and Opportunities Act bill threatens MSOs presently state siloed “loading dock” via interstate commerce and threatens the “front door” via complete vertical retail prohibition, the latter being the recent growth engine for MSOs.
That the industry stock prices are only down 20% from the draft’s introduction on July 14, 2021, when 50-80% of existing business is being threatened, is actually pretty good. It could be worse. Like, if they had the votes to pass the bill that would usher in interstate commerce and disgorgement of their retail operations.
That not one c-suite has even mentioned the retail prohibition in the draft is understandable. Don’t bring up a threat unless someone asks you. But the fact that not one sell side investment bank analyst (after a full slate of earnings calls), nor main stream media, has asked the question out loud after over a month is head scratching.
That cannabis media and social media pundits have not surfaced the issue either is a disturbing indictment of cannabis media’s relationship of attracting advertising dollars and revenue from the companies they “report” and “tweet” on.
Don’t want to broadcast bad news about your paying clients or the companies you hold investments in, I guess.
Here is a chart of MSOS, GTII, CL, CURA, TRUL and VRNO form the day before the CAOA announcement and today.
Interestingly, the two of the top five MSOs that have retreated the least also have the least amount of retail stores and retail sales mix. At June 30, 2021:
- GTII has 58 stores and retail is 68% of sales mix
- CL has 33 stores and retail is 48% of sales mix
- CURA has 107 stores and retail is 71% of sales mix
- TRUL has 91 stores and retail is 100% of sales mix (they do have minor wholesale, but it is not disclosed)
- VRNO has 80 stores and retail is 72% of sales mix
There are no doubt other issues pushing the stock price around (eg. TRUL CEO husband guilty verdict and VRNO share unlocks) but it is interesting that those with more retail stores and retail sales mix are leading the trend downward.
To many investors cannabis is an opportunity to invest their savings. As such, investors deserve “adult conversations” around not just the opportunities but also the threats to the current business model.
And there is boundless opportunities around the plant. Cannabis is huge right now. Legal cannabis will be even bigger.
Present business models, if permitted to remain “as is”, would continue to reap great growth and increased profitability. They should, as they are operating in markets protected from open competition where demand vastly outstrips supply. US$ 16 grams in Illinois are flying off the shelves.
These operating models are “bubble wrapped”. These US cannabis pubcos aren’t making “bank” in California, Colorado, Washington or Oregon… largely “open competition” states. These companies might have “presence” in these markets, but the money is being made in Illinois, Pennsylvania, Massachusetts, Florida,… “limited competition” states. With New York, New Jersey and Virginia flipping the switch on adult use the market for cannabis will continue to grow more.
While it is only a Draft bill, and … sure … things change, and it might not have the votes. But given what is IN THE DRAFT, coupled with Biden Administration executive orders looking to improve small and medium sized business competitiveness (INCLUDING IN ALCOHOL, which the Draft CAOA vigorously emulates) … understanding how c-suites choose to strategize for a pretty dramatic POTENTIAL change should be addressed.
Even if the Draft bill retreats to the present alcohol model on retail ownership, the timing of excise tax on “first sale” will render verticality uneconomical. Couple excise tax timing with interstate commerce and many flower based cultivation facilities will become non-competitive and vertical margins will evaporate.
Do you see many Constellation branded liquor retailers? How about Coors, Diageo, Jim Beam branded retailers? There is good reason. It is the intent of the federal government to “ensure retailer independence” through their regulations. Vertical companies have an immense advantage in retail. To NOT anticipate retail curtailment is folly.
When the “as is” business model is as thoroughly threatened from “draft” legislation as the CAOA … it deserves discussion. If +90% of a stock price valuation is from three years and out… this shadow will lurk in valuations until more favourable legislation is tabled.
The TTB (Alcohol and Tobacco Tax and Trade Bureau), who will also administer cannabis when federally regulated, repeatedly espouses “ensure retailer independence” when addressing alcohol supply chains. Yet in cannabis’ present vertical supply chains, in vastly undersupplied markets which limit competition and are the antithesis of “retailer independence”, the notion goes unchallenged, or worse unaddressed, by those reportedly analyzing the risk of the industry.
And for those thinking the cannabis pubcos will just sell off and monetize retail assets… keep in mind the surfeit of retail assets that would become available at one time. Add to that: state retail store caps, social equity targets, lower retail sales via lower per unit retail prices and margin generation as a result of interstate trade, and increased retail competition… and these will be the rapids that these retail disgorgements, and their accompanying valuations, might well face.
Federal regulation following state adoption was always going to be messy. But the amount of toothpaste that will need to be put back in the tube is increasing monthly. Someone will feel the repercussions.
If you are investing in the space the idea to “set and forget for five years” is fraught with risk. The regulatory meteors from interstate trade (destined if federally legal under Article 1 of the US Constitution’s Dormant Commerce Clause, which has had a sum total of two exclusions – in banking and insurance – in 75 years), timing of excise tax, and social equity will leave an impact. This will happen despite the continued quarterly progress in the “as is” model.
Will we have runs in stock price? Oh, most probably. The euphoria has been witnessed quite a few times over the past six years. But the savvy investor will recognize the risk from regulatory meteors and adjust their portfolio to their tolerance. Many will wait to off load shares to exuberant and naive retail investors attracted to cannabis as a moth to a flame.
Be careful not to get burned, there are plenty of carnies out there on the midway promising “generational wealth” for a handful of magic beans and suggesting they are in the know.
Note the date on that tweet. Not only was he wrong with timing but SAFE has been derailed until CAOA has its run and is either moved forward or formally discarded.
The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does have a position in GTII and will not increase nor divest in the next five days. The author has no position in any other company mentioned.
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