The Cannabis Biz Is Down, But Long Term It’s Smoking

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LAS VEGAS — With the cannabis industry reeling from a series of setbacks over the last six months, the marijuana business conference began in Las Vegas on Monday with an investors’ meet-up marked by existential distress.

“We are undergoing a recalibration in a very painful way” said Scott Greiper, president of Viridian Capital Advisors. “Markets are really depressed right now and we are looking for ways to come out of it.”

The market capitalization for the 33 biggest cannabis stocks has crashed 45% since March 31 — falling from $54 billion to $30 billion. Consensus estimates for project revenue have dropped 17 percent, said Craig Behnke, an equity research analyst for MJBiz Intelligence.

“You know you’re at the bottom when Willie Nelson stops smoking weed,” quipped one equity analyst. Nelson, the 86-year-old country-music legend and marijuana advocate, announced last week he was giving up his daily joints.

Still, most experts who attended the cannabis business intelligence conference at the Cosmopolitan remained guardedly optimistic for the future of the industry and held out hope for a reversal of fortunes. The annual conference, MJBizCon organized by Marijuana Business Daily, is expected to attract some 35,000 industry professionals.

“The ‘macro theme’ is still intact,” said Behnke. “We anticipate a tremendous growth story for years or decades to come, even though stocks are going down now.”

Eleven states have legalized marijuana for adult use. Thirty-three allow patients to have access to medical marijuana.

Danny Moses, whose bet against the U.S. subprime housing market was commemorated in The Big Short, delivered a rapid-fire keynote presentation to the roughly 600 international investors gathered in the casino-hotel ballroom Monday.

Moses remains bullish on cannabis. He acknowledges the potential volatility of the industry but said he’s ”begging” Michael Lewis to write about the weed industry as his next book. He has a ready-made title for it: The Big Long.

Moses said the investing environment could change overnight. Polls show more than 60 percent of voters support legalization. President Donald Trump “likes nothing more than to be popular,” Moses said. “He could issue an executive order [legalizing marijuana]. It’s a possibility.“

Some of the pain caused by the flagging stocks has been triggered by fundamental business realities. Early investors in the sector often viewed themselves as advocates for legalization and were willing to take risks based on ideology, said Behnke. But a new crop of investors wants fundamentals addressed.

“Every company is in the business of producing the same product — cash,” said Behnke. “And companies need to generate cash to ensure their survival. The laws of economics still apply.”

Many companies lack a good business strategy. “But they’ve found really good spending models,” Behnke said.

The industry is also short of people who know how to run a business, several experts said.

During the last year, weed world celebrated a series of extraordinarily large mergers and acquisitions. Many were paid for with stock, not cash. Most of the biggest deals have collapsed with the value of the acquirer’s stock. They’re burning through cash.

The resulting hangover has cooled merger fervor. The number of acquisitions has declined 50% in the last six months, said Viridian’s Greiper.

The vape crisis, which has been attributed to low-quality black-market goods, has also had a chilling effect on legal companies’ ability to sell high-profit THC oils and concentrates.

The cost of capital has soared as companies compete with “traditional” firms for capital, said Behnke.

Federal law has been slow to change. Many investors and cannabis executives expected the SAFE Act to have passed by now. The bill is expected to provide federal guidance to banks that would allow companies to obtain mortgages and financial services available to traditional businesses. As things stand, nearly all marijuana transactions must be handled in cash.

Again, counterintuitively, the stalled pending bill may make investment opportunities more attractive to those who are willing to assume risk.

“If you’re waiting for federal law to change, that’s going to be too late,” said Michael Lavery, a senior research analyst covering packaged food, tobacco, and cannabis at Piper Jaffray investment bank in New York.

Avery also pointed out there are more investment opportunities than most people recognize.

“There are 450 publicly traded companies” related to cannabis, Lavery said. “It’s incredibly fragmented.”

He expects the industry to consolidate.

“Once there were 250 e-cigarette companies,” Lavery said. “Now the top five in the industry have 97% of the market. Cannabis is likely to go in that same direction.”

Limited state medical marijuana markets, which allow a handful of companies to obtain “regulatory capture,” are creating special investment opportunities. “They have a market share that is more protectable,” he said, singling out Cresco Labs and Green Thumb Industries as examples. Both companies operate grows and dispensaries in Pennsylvania, among other states.

Greiper said a handful of changes could reverse the decline in stock valuations.

If banking becomes available, state-legal companies could get mortgages, credit lines, and liquidity. The Drug Enforcement Administration has been weighing issuing research licenses that would allow companies to grow and sell marijuana for research and testing. Currently, the DEA gives only the University of Mississippi that privilege. “That’s going to change in the next year,” Greiper said.

Proposed social equity programs in states like New York and New Jersey could lead to those states legalizing marijuana for adult recreational use.

Moses, of The Big Short fame, likened the cannabis climate to other investing moments: the housing crisis, the dot.com bubble, and the telecom boom and bust. But Moses said cannabis affords some rare advantages: “I’ve never seen a sector with these kinds of tailwinds: economic wellness and political.”

He counseled jittery investors to take a long view.

“Try the product and remember why you invested in it in the first place.”