WE ARE STILL HERE! The cannabis industry is red hot as we look towards earnings season over the coming weeks. While we have been talking cannabis stocks for months here on The Black List there are many new Investors who finally see the long-term value in weed. Well, the wait is over, the Reddit based Wall Street Bets mob have found the Pot Stonks and we are here for it! Shout out to all my Reddit traders! Shout out to MSO Gang. We are really excited to jump deeper into cannabis stocks as our consumer-based community has strong opinions on cannabis products and brands, while our investor community is focused on financials and growth metrics. Remember we are not licensed financial advisors and you should read our disclaimer at the bottom.
We maintain our belief that in the long-term quality-focused companies will overrun the current low-quality market environment that dominates the United States. This connects directly to some of the biggest players in the space today. I think it will be far more difficult to sell low quality cannabis in a competitive market environment. As the cannabis market matures it will be more difficult to sell subpar products through sheer scale alone. There are already major companies in the space looking to dominate through traditional strategies focused on margin and growth while also looking at ways to improve products. What some still don't realize is you cannot make a good cannabis product without being able to grow and cure good cannabis. Essentially, we have companies trying to create innovative products when they essentially can't even master the basics. The current state of affairs in the cannabis industry is ridiculous but this clear knowledge gap can give many investors an edge.
More Cannabis Stocks Less Cannabis Stonks
I have published two articles on publicly traded cannabis companies and will continue to closely follow the cannabis sector and write more and more. You can find the recent ETF article and the MSOS article. In this piece I want to discuss the current confusion around USA Cannabis Stocks vs. Canadian Cannabis Stocks. I hope I can help our community understand the current situation and welcome the Reddit community to our customer reviews to help educate the investing public before making serious decisions about cannabis stocks. If you don't follow TheBlackList.xyz on Instagram I strongly suggest you check it out, especially if you want to invest in cannabis stocks.
Cannabis investors are looking at the available pot stocks and by first glance on the POS app Robinhood there are a few Canadian firms that are available for purchase. Sorry guys but most of these firms are trash. This has caused many to cry out in fear for the retail community like Jim Cramer from CNBC Mad Money who said there were “no Blue-Chip cannabis stocks”. Well, if you read my MSOS article I break down the top ten holdings of the Pure US Cannabis ETF. Stocks like GTI, TerrAscend, AYR, and many other American companies are head and shoulders stronger than Canadian firms like Tilray and Aurora. There are actually a handful of blue chips and picking the best ones requires diligent research. I am curious to see what Cramer says next week and if he gets any major CEOs on the show. The Canadian firms have crowded the space in terms of popular names on financial news and Reddit but the US business is far superior to Canada.
Canada is roughly the same size as the state of California with a much smaller cannabis consumer base. Essentially the Canadian weed market is insignificant when compared to the US market. The real money in Canadian weed stocks is Europe with major deals in the UK, France, and other major markets. I am near certain in the long term the lion's share of the European market will go to home grown firms based in Europe led by Europeans not Canadians and Americans. This is further explained in my recent articles on the blacklist. I am watching companies focused on the US market with strong financials and a positive mindset for product improvement and a commitment to quality. You do not need to be an industry expert to see that some public companies are doing better than others while most investors on Wall Street are focused on the wrong companies. The cannabis industry is wide open and there is exceptional value if you know how to look. I believe the strongest US cannabis companies could one day become recession-proof given the strong and consistent demand from the core consumer base.
Investors are focused on companies with a strong footprint, a strong balance sheet, and a strong portfolio of brands. Most cannabis investors are ignoring product quality as a key metric of evaluation when looking at publicly traded Multi-State Operators MSOs. While we are not ignorant to the importance of a strong balance sheet and strong foot print there are plenty of firms who can manage their financials, growth, and focus on the long term. Like many other industries, consumers want choices on price and variety but ultimately, quality-driven products will drive consumer taste and preferences and generate significant trends.
Critical Metrics for Quality Cannabis Firms
We are already seeing consumer trends in cannabis and Wall St is asleep at the wheel. I am looking for specific attributes in a company or brand including consistent sell-through, strong customer demand across multiple sales channels, customer travel for the purpose of purchase, and public response from critical consumers. This includes lots of manual sales channel checks and diligent research. Something to keep in mind is customers are far less likely to praise a good product and exceptionally quick to burn down a perceived bad brand. In addition to looking for quality-driven metrics on sales and product demand I also look for negative trends in order to avoid bad long-term cannabis investments and prevent the purchase of bad products for my own consumption. Cannabis companies will continue to grow in the short term but overtime weak and inconsistent cannabis companies will lose market share and eventually fail. Some companies might even find the bottom fall out and sales collapse under the weight of sales pressure. Companies who might currently look like all-star picks in the sector could be in bad shape once more competitors enter the market. In my MSOS article I break down the top ten firms in the US focused cannabis ETF. I am very critical of two big firms and strongly support three big firms. Please read the ETF article for more details. As the industry expands, I plan to look at new companies entering the public space like the Verano IPO coming on February 17th or the upcoming Gage Cannabis IPO that just raise $50 million. Expect both companies to be included in the MSOS ETF when available.
Researching cannabis companies is critical in order to make the right long-term decision. I look for companies that are focused on product improvement and quality-driven results which I regard as more important in the long term than investors realize. As competitors enter the market significant sales pressure will drive prices down and expand consumer choice. Companies that sell through product simply because they are the only legal shop in town will soon find their product sitting on the shelf as new companies with real talent enter the market. Don't forget that most cannabis sales are still illegal and legal sales channels in states like New Jersey have significant shortages. As more companies enter and scale operations, I expect some currently successful firms will collapse under the pressure of poor sales and a massive decline in inventory turnover. No one likes smoking stale weed and this could further dimmish brand value.
Reddit Drives Stock Prices Up and Down
This is where Reddit comes in; we just saw the sheer power of the people with GameStop, AMC, BlackBerry and all the other memes. Now our Reddit warrior friends are looking at weed stocks and we actually saw one of the best signals ever in my opinion. Ok you degenerate gamblers, here is a little shit DD coming at you. Basically, the uproar in price and subsequent crash of the weed stocks identified the strongest and weakest firms in the space. I took screenshots of my cannabis watchlists after market close on 2/11/21 with most of the major cannabis stocks. I made one post for the US stocks and one post for Canadian stocks. Notice high-risk Canadian stocks sold off over 20%. The American cannabis stocks only sold off 6% or 7% and my favorite MSO in the group TerrAscend TRSSF only sold off 2.5%. These are material differences of negative impact; yes 7% is not ideal any day of the week but when you see the 20?clines across the board with Tilray down nearly 50% on the day. Remember this was Thursday 2/11/21 so the changes from Friday 2/12/21 are not included here but I found this information very insightful.
The price changes should not be viewed as a zero-sum analysis, but I did notice that my favorite picks in the US managed to decline less than other US firms. TerrAscend declined by 2.43%, MSOS ETF declined by 6.49%, GTI declined by 6.89%, AYR Strategies declined by 6.95%, and most of the other major MSOs sold off at greater than 7%. This is purely anecdotal and it is possible however unlikely other MSOs will improve their businesses to compete with quality driven companies in the long term. They might also use capital to try and dominate the market with cheap, low-quality products. Investors should look at each company based on long term objectives including the ability to effectively and efficiently sell through inventory.
I am concerned too many investors are disconnected from the consumer base and fail to notice consumer tastes and preferences. Essentially very few cannabis investors are actually getting high on their own supply. If they did, they would realize they are investing in trash. We smoke that good good on this side and we invest in it too. Right now, quality and product management are critical choke points for most firms but there are many companies driving M&A trends to improve quality and long-term sustainability.
Focus on Good and on Bad
We focus our attention on good firms and bad actors as we help clean up the cannabis industry for the good of the consumer. This includes promoting good firms and calling out bad actors when we receive customer-based reports of bad business practices or poor customer experiences. This includes moldy products, bad product quality, poor packaging, bad cannabis practices related to breeding and proper manufacturing, poor hygiene practices in the cultivation area, and so many other wild and disgusting allegations that make me sick thinking about it. A majority of these allegations are supported through material details and images from our close-knit community of consumers and activists. I have spoken to so many different operators, industry experts, and regular customers, describing more or less the same thing about the same handful of bad actors. Don’t get me started on the Florida medical program.
There are plenty of firms in the industry that are delivering for investors as well as providing quality products for customers. It is not only possible but a smart business strategy. While other firms become the symbol of the bad business practices across the nation there are smart and sophisticated investors looking for long term value. There used to be a lot of fast and easy money in this industry but we are learning quickly that those days are over as seen with the collapse of multiple companies including MedMen, Harvest Health, and iAnthus to name a few. While the stocks still exist firms like these are digging out from under a pile of shit.
Companies in all businesses that deliver good products are rewarded in the long term; companies that deliver low quality often fail to attract significant dollar votes. Investors should think of cannabis purchase and consumption as a process and as an experience that can be positive or negative. When the customer buys a product, they are essentially investing money in either an experience or medicine for therapeutic benefits. In either case the negative experience can result in significant bad press like your brand is literally burning down on the Internet. It is so easy to occur when products sit on the shelf for 6 months and they go stale or worse the product is improperly packaged which can result in mold. This kind of content can kill sales in a competitive market. In the case of Florida or New Jersey where we have been extremely critical there are operators who can do basically whatever they want because the market is still exceptionally immature and they control statewide supply. As this changes and more companies enter the legal industry existing market domination could collapse.
This threat becomes more real when you consider most regular customers in the two example states are buying without any real consumer choice. There are fewer than a dozen operators in each state; technically Florida has one or two more but look at the data from OMMU. There are material risks to key markets when you consider brands like Jungle Boys and Cookies are coming to Miami. Look at the chart and you know the vibes. We are seeing the same firms appear over and over on the website and Instagram account. It is clear there are good and bad companies, I think everyone can constantly improve but I am not worried about the roof caving in once new competitors enter the marketplace with my cannabis picks.
Competition Is Good for Customers and Investors
Competitive business in the cannabis industry used to get handled through other means but today you must sell harder and grow better. This means marketing, quality focused production, desired genetics, or any way to differentiate from the pack of brands at the dispensary. This is made obvious in states like California and Colorado where customers can choose from hundreds of brands instead of dozens of brands. This competitive demand helps eliminate bad companies and solidifies the strength from successful business. Bad companies struggle to sell products while good companies struggle to keep it on the shelf. When it comes to the selling weed it can really be that simple. I am looking for firms that generate lines, deliver quality products, and sell out in a competitive market environment. The ability to sell is achieved in the grow room in part through the love of the plant. That might sound ridiculous if it was not so true.
Risks Associated with Investing and Cannabis Stocks
This article is for the purpose of entertainment and information, not investment advice and is based on the opinions of the author as an unlicensed retail investor. Please do your own research and due diligence before making investment decisions. Please speak with a licensed investment advisor. Investing in cannabis involves additional risks associated with a rapidly shifting business environment and pending regulatory changes. The future of cannabis legalization is uncertain. This uncertainty increases risks to investors. Please be aware of all risks when making future decisions. Any conclusions made by the reader of this article are based solely on the reader's conclusions and should not be solely based on the author's opinions. This article and any like it should not be considered financial advice. We cannot give any individual recommendations or investment advice to anyone. Please do not base your investment decisions solely based on our research; you should always do your own research and due diligence. Investors should look at all aspects of a company, especially harsh criticism from customers. We hope more investors and customers will join us in our mission to clean up the cannabis industry.
Additional Disclosures: The author of this article has investments in some of the underlying holdings in this article, including TerrAscend, AYR, GTI, Disney, ViacomCBS, and positions in the MSOS ETF. For more information about investing, please speak to a licensed professional. Please speak with a professional before making life-changing decisions.
I have positions in TerrAscend TRSSF, AYR Strategies AYRWF, MSOS Pure US Cannabis ETF. Green Thumb Industries GTBIF, MedMen MMNFF, ViacomCBS VIAC, Disney DIS.
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