A year ago, TheCannalysts called Social Justice one of the ‘trinity of regulatory impacts’. We’ve documented the other two of that ‘trinity’ extensively, both as stand alone subjects (interstate trade and federal tiering) – and also within a larger economic framework as a ‘what if’ scenario.
As to ‘social justice’, we’ve had less to say. But now, NY has actually codified it.
Not that other states haven’t approached the subject mind you. They have, and almost all of them have resulted in litigation and continued delays to market development. There is no reason to assume NY’s policy won’t also be litigated – it is the US after all. But NY’s – with funding earmarked – is among the clearest eyed yet introduced. <nb: yeah, $200MM isn’t much>.
It’s been interesting to me how the fintainment industry and ‘meme-bros’ – who put the #MSOGang into a leg-hold trap – has morphed into a kind of ‘Stockhold Syndrome‘. Since the carnies and WSB inrush blew the sector out – with punters and hucksters fuelling a white-hot pyre of greed and desire – it has settled into a full year of the ‘Gang’ holding dead money. Hey, if it had only stopped at that, well, that would have been nice. One would know their opportunity cost by comparing it to holding the index. Or virtually anything but cannabis.
It didn’t stop at that: it’s been far worse. With overall prices in the sector listlessly drifting downward even while packing significant volatility – most MSO’s are off some 70%+ from those highs, and capital has gotten smoked.
Meanwhile, the meme-bros and carnies are (largely) coming out in support of this social justice initiative in NY. Their followers on the other hand appear confused: some angry, some uncertain, but most adopting whatever theme the latest meme from the carny suggests they should have. Most of those memes centre around the simple tautology that hey – if there’s a hundred retail licences going out – those new retailers are going to need gear. And hey, look who’s already there to take their money? The one’s who have cultivation now. So relax – the line goes – MSOs there will be back to printing money in no time flat. Open away! Social Justice now!
Simplifying a relatively complex issue (regulations) into a relatively simple market outcome (we get rich!) is what carnies do best after all.
Don’t get me wrong: regulatory items can be very simple, and can be contained in one line of legislation. Why I say ‘complex’ is because determining a regulation’s impact upon a market – with subsequent changes/adaptation in behaviour by participants and ultimate profitability – is the complex part.
“We get rich!” is a perfect encapsulation of dumbing down an audience, and simply a bark on a midway.
I can’t say it’s not true either – inasmuch as I can’t tell the future. That’s not being cute, but it’s honest. Perhaps initial (or longer) constraints around supply chain will enhance the throughput of cultivators. I highly doubt it though.
What isn’t mentioned in the meme’s is the margin forgone to the ‘new’ retailers. It also assumes distribution won’t take a slice of margin via trucks speeding around highways delivering a cultivator’s product to retail shelves. As we’ve seen in Canada, cultivation is highly competitive. And if you’ve noticed: it’s also dynamic. Despite initial overbuild, adjustments to crops and supply side adjustment has taken place.
In other words: cultivation is elastic. There is no reason to assume existing cultivation in NY is going to remain fixed in amber – anymore than imports or illicit market adjustments won’t occur.
Most of all – regulatory is dynamic as well. There is no reason to assume incremental regulations won’t be adopted over the next 9 months. Incremental cultivation might be the next adoption – ‘socially justiced’ or not.
The point is, the market is in formation, and claiming a deterministic outcome at this point is folly. At least from an investing perspective.
And that’s what I think about social justice (aside from it being long-overdue). It’s an issue that will likely remove revenues and profits from investors seeking cannabis exposure in public companies. As to how much – initially or over time – that is harder to estimate.
Ultimately, I think an investor should be largely ambivalent about social justice, inasmuch as it represents one facet of a market in formation. As we’ve seen in Canada – and I fully expect it to happen in the US – the sector will segment into cultivation/processing/distribution/retail. Branding may or may not foment at the national scale and wet-dream level fantasies that CPG thinks about when it closes its’ eyes at night. Canada’s experience is that branding has thus far been largely as diffuse as the plant (with some exception to Village Farms ($VFF) and Auxly ($XLY) in this regard).
TheCannalysts work underscores the risk inherent in the cannabis sector around regulatory initiatives in the US. Federal action simply being the largest potential impact, with State level catalysts important in the interim.
I’ve not seen the meme-bros picking up on something GoBlue and I noticed from Curaleaf’s ($CURA) conference call earlier this week. Chairman Boris Jordan said something that should be concerning to anyone looking at regulatory impacts in the cannabis sector, and operating within unconstrained markets (ie: no vertical monopoly/oligopoly):
But one needs to understand, those markets, California, Colorado, Oregon, Michigan, they’re never going to have the 30-plus percent EBITDA margin, at least not in the foreseeable future. I think the best we can do in those marketplaces is going to be somewhere between 20% and 25%.Boris Jordan
I believe the cannabis sector investor will be best served by focusing on competencies and opportunities at the company level in the mid-term. Pick a competency, and pick a operating segment/lane. Regional/State level exposure is important in the near term with respect to regulatory – as it becomes enabled/initiated (NJ) or evolves (NY). Margins haven’t shown much durability over the past couple of quarters, and could see continued pressure. As we’ve seen as well, higher margin markets attract both licit and illicit interest (natch).
Note though – these are all points around trading – not investing. With federal action/inaction ever present, much of these are moot. Until we have a relatively well-defined operating state – the sector will continue to see short-term sentiment driven convulsions.
In my opinion social justice’ impact to the investor is negligible. While it removes earnings from publicly traded companies, the existence of private competition exists almost everywhere in robust marketplaces. And it always will.
I don’t see the risk profile of the cannabis sector changed by social justice at all. Find a public company that does what it does well, evolves and adapts, and generates positive returns. It’s all an investor has ever needed to do.
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 has no position in any of the companies mentioned.