Whitney Tilson’s email to investors discussing the opportunity in cannabis stocks; more Q&A about our advertising.
The Opportunity In Cannabis Stocks
Speaking of Empire Investment Report, one of our best recommendations was cannabis company Green Thumb Industries Inc (OTCMKTS:GTBIF), which was one of eight stocks we recommended on September 16 last year to take advantage of the "blue wave" we correctly predicted in the 2020 election.
When it comes to finding future business champions, Warren Buffett and Charlie Munger have really excelled over the past seven decades. Q3 2021 hedge fund letters, conferences and more One could argue that these two individuals are some of the best growth investors of all time, thanks to their ability to spot companies like Coca-Cola Read More
Since then, these eight have risen an average of 94% versus 32% for the S&P 500 Index – and the second-best performer after discount retailer Citi Trends, Inc. (NASDAQ:CTRN) was Green Thumb, which had soared 112% by the time we recommended selling it on June 16.
I continue to think the cannabis sector is extremely attractive, however, which is why I doubled my position in my personal account two days ago in the AdvisorShares Pure US Cannabis ETF (NYMARKET:MSOS).
Two of the smartest investors I know share my enthusiasm for the sector. First, here's Tom Carroll, who writes the Cannabis Capitalist newsletter for our corporate affiliate Stansberry Research and was the source of our highly profitable Green Thumb pick last year:
Cannabis stocks rocketed through the "Cannabis Election Trade" I aggressively highlighted last fall.
The sector today, however, has sold off and is now almost back to where it was before the election, which makes no sense because the fundamentals are much better.
Most importantly, cannabis companies' earnings and cash flows have been outstanding, making their stocks downright cheap, despite margins that rival software-as-a-service companies. Plus, the legal/regulatory environment continues to improve.
And here's Doug Kass of Seabreeze Partners:
It's Time to Buy Cannabis Stocks... And to 'Stash' Them Away
- Cannabis stocks have high growth prospects and are virtually recession resistant but are trading at value multiples.
- With few institutional owners, the cannabis space may now provide the best upside reward vs. downside risk of almost any market subsector.
- Low industry stock prices are the friend of the rational long-term buyer and the possibility of a 3x to 5x gain over the next five years may now be in sight.
After experiencing a swift rise in share prices from September 2020 to February 2021, cannabis stocks have [given] up most of their gains in the last seven months.
From my perch, this might be creating an unusual intermediate to longer-term opportunity...
In my view the slow roll of the Secure And Fair Enforcement Banking Act of 2019 and the failure to make inroads on federal legalization, coupled with associated custody issues, have contributed to the precipitous share price drops, and forced retail and institutional liquidations in a relatively illiquid setting.
But, time – and low share prices – are now on the bulls' side as there seems to be an inevitability that these three factors will be addressed with a positive outcome in the not so distant future.
Despite the slow roll, budget-broken states, with an immediate need for more revenues, are moving quickly and, as a precursor to further state and federal progress, decriminalization appears the likely next step.
Importantly, as pointed out by Barron's over the weekend, despite the plant's illegality at the federal level and the lack of access to the capital markets, second quarter earnings reports exhibited continued growth and above-expected profitability/prosperity.
Compelling Valuations After The Long Squeeze
Let's now consider the compelling valuation argument:
The leading companies in the largest cannabis ETF [exchange-traded fund] (MSOS) trade at 7x 2023 EBITDA [earnings before interest, taxes, depreciation, and amortization] while offering over 25% compounded earnings growth over the next 3 to 5 years.
The S&P Index, by contrast, trades at over 13x EBITDA while offering only 5%-8% annual EPS growth.
If we grant MSOS the same multiple/growth ratio, the MSOS ETF "should" trade at over 40x – representing, in theory a 5x rerating opportunity.
The individual company market capitalizations are remarkably small (total enterprise value of only about $50 billion) relative to the industry's opportunity in both recreational and medical/health/wellness applications. The largest ETF, MSOS, which consists of U.S. operators, has a market cap of only $900 million. Perhaps, above all, this observation highlights the magnitude of the sector's (under-owned) opportunity.
And, if I am correct in that the long squeeze of legislative activity and forced liquidations (by custodians) are almost over, the industry's upside is immense – both in absolute and relative term. The potential unleashing of surprisingly large cannabis demand for the product and the shares lie ahead.
For more on this, see this post by CB1Cap's Todd Harrison, The Canna FAANG Cometh, in which he discusses the FAANG-ification of the cannabis business – and displays his tiers and preference toward the likely winners.
In my research, I have always been at a loss in determining who the cannabis winners and losers would be, so I have simply been acquiring shares in the two largest ETFs, MSOS, and MJ.
More Q&A About Our Advertising
I received quite a bit of feedback to Friday's e-mail, in which I replied to readers who complained about our marketing e-mails. I wanted to share one of them from Stuart R., who wrote:
Hi Whitney – I think I can shed some light on the frustration you're hearing from readers. I love reading your daily emails. I pay for several research subscriptions and am an active investor. The problem is not providing links to other Empire services. It's the Stansberry spam machine that pumps out unwanted spam to other subscriptions we've never asked for and don't want. Time is my most valuable asset and having to scan and unsubscribe [usually several times] to new pitches is infuriating. Below are just a few I've been bombarded with in the past few weeks. They all include Stansberry references.
World Money Reports
Crypto Profit News
Conservative Daily Journals
Traders Files Undisclosed
Market Updates Now
The Wealth Creator
Weekly Money News
I used to subscribe to other Stansberry publications but had to extricate myself from their spam machine. I understand why you partnered with them but certainly hope there's a way to protect your loyal readers from the barrage.
BTW – hat tip to you for your comments on GameStop (NYSE:GME). I shorted each time you mentioned it and banked $34K while my son's friends [think Reddit guys] were buying. Also loved your book and have recommended to my wife, son, and business partners.
Here was my reply:
Thanks so much for the feedback. I'm glad I helped you make money on GameStink and that you enjoyed my book.
Regarding the eight newsletters you received solicitations from, I've never heard of any of them. I checked with my marketing team and confirmed that we don't sell our subscribers' e-mail addresses to anyone, nor are any of these affiliates we have cross-selling relationships with. So I can assure you that you didn't receive those e-mails because you're a subscriber of ours.
I, too, get a lot of e-mails from scammy newsletter operators and share your irritation. Fortunately, it's usually pretty easy to click "unsubscribe" or block them.
We do, however, advertise aggressively. And we always will. Why? Because we believe we have valuable and important information, ideas, and services that can make you a lot of money, but which (unless you're a Lifetime Partner) you're missing out on.
It is, of course, in the best interest of our business if you sign up for more of our products (and, ideally, become a Lifetime Partner), but we genuinely believe this is in your best interest as well – a wonderful win-win!
That said, we're not right for everyone. If you're not using our advice, we're always happy to part as friends. You can unsubscribe from this e-mail via the link below, and if you wish to cancel a paid subscription, simply call our customer service team at (800) 961-2618, Monday through Friday, 9 a.m. to 5 p.m. Eastern time.
P.S. I welcome your feedback at [email protected].