Rarely in my career have I been more excited by the investment possibilities of an entire sector that has not (legally) existed for decades to emerge, grow, mature and disrupt huge markets.
Cannabis strikes me as a combination of alcohol in the late 1920s and the internet in the late 1990s: a highly disruptive consumer product in a huge addressable market, with an agricultural, industrial and consumer supply chain that’s driven by secular shifts in consumer attitudes and a patchwork of regulations.
Ultimately, I believe the industry will normalize to look more like consumer products such as food, alcohol and over-the-counter drugs, but it will not be a straight line.
We are in the early stages of industry development, with many opportunities and risks for investors along the way.
Will there be an early first-mover ultimately supplanted by a superior second-mover, such as Yahoo and Google? Or will there be an Amazon that establishes dominance and never looks back?
Will the cannabis industry consolidate like the beer industry into a few giants amid a constant stream of micro-producers? Or will the marijuana space follow the cable industry and merge a patchwork into a few behemoths who then compete with landline and wireless telcos?
Will large, low-cost cannabis producers face a stream of small upstarts that are constantly raising and losing money, such as large integrated oil versus the U.S. shale producers? Or will capital markets eventually cut off those with no viable business model?
At Investor Intelligence and MJBizDaily, I hope to use my 20 years of experience analyzing traditional businesses to provide you with the analytical frameworks and insights you need to identify actionable opportunities and risks as the cannabis sector evolves.
In my past work, I have applied a fundamental approach to smaller capitalization equities at long/short equity hedge funds across most industries and business models, including consumer goods, retail, industrials, commodities, distribution and chemicals.
With experience going both long and short, I have honed my ability to identify both opportunities and risks – and to extrapolate information from one company into implications for peers and competitors.
I will use these skills to communicate to you:
- The size of the market: What is the opportunity? What increases or reduces that?
- Fundamentals of the business model and position in the supply chain: What is the current and potential margin structure with growth? What should margins be for a given sector? How much capital does this business require?
- Pricing and supply/demand: How does supply compare to demand, and how is competition changing this? Where is the pricing power? Why should this business capture value versus its customers and suppliers?
- Capital structure: Who captures the value? Many cannabis companies have complex capital structures with warrants, options, convertible debt and straight debt, which complicate calculating the true size of a company. Many are also burning cash, meaning they will need to return to the capital markets.
- Incentives and strategies: The benefits and drivers of managers and majority shareholders may not always be aligned with shareholder value or margin expansion.
- Deal implications: Every new offering, sale and acquisition has information that impacts the values of your existing assets and also creates new strategies to contemplate.
- Key metrics that create value and support the narrative of the companies and industries: Data that supports the narrative expands valuation multiples; data that refutes the narrative pressures them.
The entire value chain is considered from agricultural production to the end customers (including processing, packaging, distribution and retail) to identify the total value through the chain and who will capture value under different regulatory regimes.
Like Lego bricks, answers to such questions will form the building blocks of analysis to help you identify opportunities that meet your investment objective and manage the associated risks.
None of us truly knows how the sector will evolve, but I hope to use my experience across many other sectors and cycles to recognize similar patterns as they occur.
And as the cannabis sector evolves, I look forward to hearing your feedback and helping Investor Intelligence evolve so it best serves your needs.
