Here’s how to profit from the ‘winds of change’ in US cannabis
Health & Biotech
Health & Biotech
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The “winds of change” are now strong enough for the US cannabis market to move towards federal cannabis legalisation “of some kind”, Mark Bernberg says.
The co-founder of research and investment group The Green Fund, Bernberg usually has plenty of good cannabis insights when he catches up with Stockhead.
Bernberg holds stakes in a number of ASX cannabis companies. But in our latest interview (and the one in December), the conversation shifted to the US.
While Canada was an early pioneer on the regulatory front, the US is where market dynamics and intelligent business models are converging to produce some compelling investment opportunities, he says.
On the home-front, Australia is now a “fertile breeding ground” in the medicinal cannabis space, Bernberg added.
He pointed out that of the larger medicinal cannabis companies globally, around 85 per cent of them are based in Australia.
That’s partly a by-product of the domestic regulatory backdrop, which rules out recreational cannabis.
Within that framework, companies are diligently working to build out CBD distribution models and clinically-proven cannabis biotech solutions.
The trend is “very encouraging”, Bernberg said. But as an investor, he conceded he’s “still not that excited about CBD”.
While the TGA has approved over-the-counter distribution, companies have to apply for registration. Which means it’s more likely to be a 2022 story, not 2021.
And the barriers to entry are low.
“Where’s the opportunity for brand equity? There isn’t one,” Bernberg says. “You look at the biggest CBD company in the world, (Toronto-listed) Charlotte’s Web. Their share price is in the can because they can’t protect their brand in the market.”
Meanwhile, the new Biden administration has made it clear that it’s more cannabis-tolerant than Trump.
Bernberg flagged possible changes to banking laws that will allow cannabis stocks more access to capital markets. Or a situation where cannabis is decriminalised at federal level (as opposed to legalised).
“So the market sentiment has changed, money is flowing and capital raisings are continuing (in the US),” Bernberg said.
“I know that because at the Green Fund we get pinged by all the international brokers who are doing these raisings, and I’ve seen the number of those approaches increase significantly.”
With that in mind, he dug into the detail on three US companies that have cut through the early hype with business models which are now poised to benefit from possible regulatory tailwinds.
For Bernberg, Trulieve laid the template for executing on a cannabis distribution strategy without biting off more than you can chew.
“They raised very little capital early on and were focused entirely on the state of Florida,” he said.
“At that point they were a still a medicinal cannabis play. They set about establishing the dominant network in Florida for medicinal cannabis dispensaries.”
And most importantly, they did it with operational profit efficiency. So when capital drained out of pot stocks (in the 2019 bear market), the company had a buffer, Bernberg said.
“A lot of investors said Trulieve erred because they weren’t expanding into multiple states, but now look who’s top of the food chain,” he said.
“They’re the most profitable company in the US and they’ve raised capital now at good terms. So they’ve got gas in the tank and a proven track record with running a profitable dispensary model.”
And if changes to the regulatory landscape come to fruition, the company is poised to reap the benefits.
“If Florida goes recreational, they have the largest retail footprint across the state. So even if they didn’t expand to any other state I still think there’s 100% upside in that business,” Bernberg said.
“Where Cresco was clever was that they made a strategic acquisition on the west coast which opened up California — the biggest US market to them very quickly,” Bernberg said.
Cresco acquired Origin House in January 2020, which had an established market footprint in California for cultivation and wholesale distribution.
“They (Cresco) are a Chicago based business, so they’re more of an east coast company. And they were able to go multi-state in a way that was very profitable and not too dilutive on the way through,” he said.
“So it was a really smart purchase because they didn’t try and set up vertically integrated operations across different states. They bought a distribution company in California that had a suite of strong consumer brands.”
Like any consumer product sector, one way for cannabis companies to differentiate their product will be strong branding.
“I think the real value (in cannabis) ultimately is going to lie at the consumer end of value chain. I’ve always been a fan of the brand — in beverages the brand is Corona, it’s not who produces the barley.”
“So that acquisition (by Cresco) gave them exclusive distribution arrangements with premium brands. It allowed them to take west coast and that whole suite of brands and drop it into their east coast infrastructure.”
Bernberg said he’s been preaching about the attributes of GTI “to anyone that would listen” since 2019.
“You could have picked up GTII shares at $CA4 when I first spoke about it. Even when I spoke to Stockhead in January they were still at $CA11,” he said.
The stock is now trading above $40, although Bernberg said it still has more upside from here.
“I think they could at least double to $CA60/$CA80 easy, so it’s still a good buy,” he said. Like Cresco, GTII is an east coast business with its headquarters in Chicago.
“Again what I like about GTII is how strategic they were in where they set up.”
“They actually won licenses that allowed them to reduce the capex costs of setting up vertically integrated supply chains.”
“And they were one of the first cannabis companies to sell to lease back their cannabis processing facilities which freed up working capital and allowed them to increase operational efficiencies.”
More broadly, Bernberg said the three companies all shared common traits.
“Unlike the extravagant MSO’s (multi-state operators) in the US which blew hundreds millions, trying to buy up every state took — they took a lot more strategic view,” he said.
“This sector is about gas in the tank (cash ) and operational efficiency. And now the sector has matured they are positioned to reap the benefits.”