By Chris Roberts
Look at the C-suite
One way to judge quality is by looking at the top.
“I think the biggest thing we underestimate in this field is the amount of expertise of management at these companies,” Sodowick said. “Not a lot of companies have the traditional free cash flow that we want to see. They have high capital expenditures and a huge amount of regulatory burdens. You need an outstanding management team that has dealt with these complex legal issues.”
It may seem obvious that leadership matters — and it is — but less clear is how to adjudicate whether an executive or a C-suite team is positioned to succeed in marijuana. Sodowick believes the Ben & Jerry’s-like prior experience is a good indicator of the necessary skill set, but not every investor agrees.
“There’s no perfect answer,” said Sanjay Tolia, principal at Bengal Capital, a Southern California-based investor. “I can’t say you would much rather have a tech guy than a wine guy.”
“Just because someone ran a Fortune 500 company,” he added, trying his hand at an analogy, “doesn’t mean that he can run a record label.”
Tolia believes a cannabis company should still be considered “large startups.” He looks for a leadership team eager to adjust and learn from mistakes on the fly, as opposed to a dogmatic executive that insists on shoving cannabis — still an amorphous and developing commodity — into a neat and easy box from another industry.
Still, success is success. “I look for success in other industries,” said Barbara Koz Paley, an investor who sits on the advisory board of New Frontier Data, a cannabis analytics firm. And, especially for a company in an industry that is still figuring out how to attract women and diverse consumers, a diverse management team may be an asset. “Are there women and diversity in the management of the company?” Paley asked. “If there’s none of that, I’m not interested.”
Big marijuana companies seem to be putting this maxim into practice. The new CEO and chairman of Tilray Inc. /zigman2/quotes/209129655/composite TLRY +2.18% , which claims to be the largest cannabis company in the world, is Irwin Simon, who spent decades in the natural-foods sector before joining the green rush. In January, Curaleaf named as its CEO Joseph Bayern , who spent almost eight years at the bottled-water giant VOSS, the last year as group CEO.
Know the location
Let’s say you’re deciding between two cannabis firms. Company A has ten dispensaries and healthy revenue; Company B has two dispensaries and is still in the red. What’s the better buy? That all depends where the dispensaries are located — because geography is a key indicator of future potential.
For this reason, Company B is absolutely the better long-term play — particularly if those two dispensaries are in markets that are in the process of legalizing cannabis like New York or New Jersey, that offer greater upside.
“The whole game of cannabis, on the investing side, is growth,” Tolia said. “A dollar of revenue is not created equal. I would much rather have a dollar of revenue in Virginia [where, currently, only medical cannabis is legal] than a dollar of revenue in Colorado.”
At the same time, where a company’s been — and where it’s going — both matter. Legal cannabis markets fall into one of two tranches: a limited-license state, where state or local governments cap how many retail and cultivation licenses are granted; and open-license states, where government places no such cap and instead lets the free market decide. Examples of the former include Massachusetts and Ohio; examples of the latter include California and Oklahoma.
“These are two massively different skill sets,” said Tolia, who used Green Thumb Industries, or GTI, as an example. “I trust that GTI can get into West Virginia and Virginia, and into these new medical states with restricted numbers, much better than I trust a Washington or an Oregon company doing the same. At the same token, I trust a Washington or an Oregon company coming to California more than I trust a Cresco or a GTI.”
Familiarity with a company’s past, and where that company did business, may also help retail investors gauge whether that firm can expect to be successful in a new market — provided the investor is also familiar with how the new market works. A good example is stock darling-turned-cautionary tale MedMen.
A retail operation in New York, Nevada, and California, MedMen paid $53 million in 2018 for a medical cannabis license in Florida — where, immediately, the company was responsible for cultivation, manufacturing, and distribution as well as retail. While the company’s very public leadership issues played a role, MedMen struggled in Florida , closing most of its stores during the COVID-19 pandemic even as sales—and stock prices—for other publicly traded companies boomed.
“Location, location, location,” Poseidon’s Paxhia said. “At the end of the day, there’s an element of the real-estate game in cannabis if you’re an MSO.”
Pay attention to the news — and ignore the weed cycle
By now, investors should be familiar with the rhythm of cannabis stocks. Joe Biden is elected! Stocks are up. Then he doesn’t legalize cannabis. Stocks go down. New York legalizes cannabis — stocks go up again! Then investors grasp that it will be a year before dispensaries open. And lo: another dip.
“It’s still speculative at this point,” Wilhelms said.
That means some cannabis stocks will reward a diamond-handed player. Investors should recognize this pattern and either ignore it, or look for bargains during the predictable dip cycles.
“If you pick the right company, you will see returns over time,” Wilhelms added.
At the same time, investors should recognize that a sudden change in federal law could wreck their portfolio. Nationwide legalization, for example, will set cannabis companies scrambling to change their business models. A grow facility in the Hudson Valley or Massachusetts may become a burden rather than a value-add.
“If there is federal legalization, you get rid of the ‘island of legality, in a sea of illegality,’” said Shad Ewart, a professor of business at Anne Arundel Community College in Washington, D.C. “The number one thing to break down business models will be cannabis grown and transported across state lines. If that happens, it will impact different firms in different ways.”
Investors should also keep in mind what their preferred companies are doing. A company with revenues that aren’t quite in line with their market capitalization may still be a good long-term buy, particularly if it’s a target for acquisition or already a subsidiary of a larger company.
So far, beverage giant Constellation Brands /zigman2/quotes/207737284/composite STZ -2.37% and global tobacco conglomerate Altria /zigman2/quotes/208895754/composite MO -0.92% have invested billions into Canadian cannabis firms. This may soon happen with an American company, which will instantly become a long-term play—and be absolutely aware that at companies big and small, there are cannabis company executives very interested in cashing out.
“This is a grueling industry, and some people are pretty tired,” Paxhia said. “If you’ve been at it for ten years, it has not been an easy ten years.” That said, all signs are that cannabis in some form is here to stay and will be part of the retail and cultural landscapes going forward — as well as the savvy investors’ portfolio.
Clarification: A previous version of this article had an outdated university affiliation for Bradford Sodowick, it has been updated.