Are You Telling the Wrong Cannabis Story to Investors? Cannabis firms are touted as big growth plays. This makes sense. There is a big valuation gap between cannabis and comparable industries like alcohol and tobacco even though the weed market is large, growing, and potentially liberalizing. A great investor story, no? Evidently, not. Despite tons of dry powder, institutional capital mostly ignores cannabis. It's time to relook the cannabis investment thesis. The growth narrative is still valid and appealing. However, it can benefit from an upgrade. Namely, that MSOs & LPs can be attractive as defensive, low risk stocks. It's counter-intuitive – and true. I will channel Howard Marks, CEO of Oaktree Capital and a candidate for the value investing Mount Rushmore. He talks a lot about stock risk. To Marks, risk is a two-sided coin: one side is the risk of a stock declining. The other side is the risk of missing out on share price appreciation. By his definition, cannabis investment risk is low. The downside is already baked in (stocks are near the bottom and off ~85% from their highs) while there is a huge upside opportunity (see valuation disconnect). In many cases, low cannabis share prices are not an indication of a company’s poor quality. Rather, it is a function of investors not applying Mark's view on corporate and sector risk. For value-oriented investors, cannabis share prices are less risky than they would appear and potentially more appealing given improving corporate and industry fundamentals. Yes, cannabis equities can be volatile. However, volatility is not a risk in and of itself. While it may signify the presence of risk, it is more likely a function of them being small cap stocks that are mainly traded by retail investors with shorter-term investment horizons. Unlike other investors, Marks understands risk and volatility in industries like cannabis. He says: “Imprecise, qualitative, expert opinion about the probability of loss is far more useful than precise but largely irrelevant numbers concerning volatility” This misdiagnosis may explain why other investor types overstate cannabis pubco risks and discount the growth opportunity. Remember that returns and risk are a function of time and price. The longer your investment horizon the better the reward-to-risk calculus, particularly when a sector like cannabis has improving results and the possibility of major reform in the short term. Shrewd value investors also want to buy cheap. Every pubco is on sale. This is a generational buying opportunity if the investor understands the industry (cannabis is no longer a black box), and can apply good risk controls. To appeal to value investors, add a low-risk, defensive stock ‘reason why’ to your growth story and educational outreach. Call me. I can help you tell a better story to investors and the market. #cannabis #cannabisindustry #valueinvesting #MSOGANG #LPS

Posted by Mitchell Osak at 2024-10-25 00:50:29 UTC