Yet Another Value Podcast - Aaron Edelheit is high on Cannabis stocks

Episode Date: November 4, 2021

Aaron Edelheit returns to the podcast to discuss all of the opportunities he's seeing in the cannabis world and why he's chosen now to launch a Cannabis focused fund.Aaron's Cannabis manifesto: https://mindsetvalue.substack.com/p/the-cannabis-manifestoSeth Rogen profile I mention during the pod: https://www.nytimes.com/2021/04/20/magazine/seth-rogen.htmlChapters:0:00 Intro2:45 Why is Aaron launching a cannabis fund now?12:00 Professional athletes and cannabis16:55 How Cannabis today reminds Aaron of single family homes after the GFC26:50 Aaron's views on federal legalization37:35 Is Aaron more interested in the direct cannabis plays or the "picks and shovel" providers?45:50 Using Verano to highlight the growth and valuations Aaron is seeing54:00 Will the industry stay vertically integrated, or will we start seeing more focused players?58:55 The tax issues with cannabis plays and why EBITDA is so important here

All right. Hello, welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm happy to have Aaron Edelight. Aaron is the founder of Mindset Capital. He's the author of The Hard Break, the case for it's the case for the 24-6 lifestyle, I believe, which I read and really enjoyed and it's really impacted the way I kind of structure my life. My wife always talks about that. So I'm happy to have on the pot is the bottom line. Aaron, how's it going? It's going great. And I can tell you that I am on. a giant high right now. And it's not because of cannabis, but it's because this lifelong Braves fan is just could not be happier that the Atlanta Braves won the World Series. And I got to

go on Friday to Atlanta and go to a World Series game with my best friend. And I just feel I am just on like a giant high. Well, congrats, buddy. That's all. I didn't remember a Braves fan. I follow them close because I'm a Liberty fan. I'm a Liberty fan. So you've got to be a brave fan if you're a Liberty fan. But congrats, that's awesome. Yeah, no, it's great. I literally, I wanted to beat Dale Murphy when I grew up and I played baseball and lived in. I went to high school in Atlanta, a college University of Georgia, lived in Atlanta for 15 years.

And I'm just so happy for the city and for all my friends and for the team. It's just been so exciting. So I'm doing great. Did you own any brave stock or anything? No, no, no. You got to own them just for the no, no, no. I love them too much. I don't want to mix money. I hear you. But hey, let me start this podcast the way I do every podcast first. Just a disclaimer for everyone. Nothing on here is investing advice. That's probably particularly true for this podcast because we're going to be talking about cannabis stocks in general. And cannabis, obviously, I don't want to say it's the wild west out there, but it's still a very much evolving industry. The stocks can be very volatile. Who knows how it plays out. So everybody just remember extra risk here. Please do your. your own investment. Please do your own research, do your own diligence, consult a financial

advisor, all of that. Second thing I start this podcast with is a pitch for you, my guest. This is your second time on here. You know, I'm just excited to have you on. I already said how much I like the hard break. And, you know, anytime we can talk to you, I just think you're a super sharp guy. I almost get too excited because you ride this high. You come with so much passion. I can get a little too excited. I'm happy to have it on again. My pleasure. I really enjoy this. we talk single stocks, but you are in the process of launching a cannabis focused fund. I'll include a link to the Cannabis Manifesto that you published on your site in the show notes. So people can go read that to see in the written forum what you're thinking about the opportunity.

But I just wanted to have you on here. I find cannabis endlessly fascinating. There are going to be some huge winners in here. Obviously, you're launching a fund because you think you can find some huge winners. So just wanted to have you on here to talk about the cannabis sector in general, what you're seeing, why you decided to launch a fund. how you're thinking about the world. So I'll flip it over to you. What's going on with the cannabis fund? Why are you launching now? So I spent about three years researching cannabis, investing in it, but really started when, and I want to start this by talking about how I think cannabis is legalization

or decriminalization or however it goes forward, is actually a good thing for society and for most people. And specifically, I've suffered from insomnia in times of my life. And I wouldn't wish one of, I wouldn't wish insomnia on my worst enemy, especially having three small kids. I would not wish it. And, you know, instead of using prescription pills or just suffering through it, The idea that I can take a low-dose cannabis gummy or tea of some kind can reset my sleep system, wake up with no groginess, no addiction, and now it's to the point where I just know that it's in my cabinet, that if after an hour of laying on the pillow, I can go grab it, is life-altering.

And I think what's happening is more and more people are realizing. the medicinal and health and wellness aspects to cannabis, and that the thing that I always say is, do you know what happens when they legalize cannabis in different states? No, go ahead. Nothing happens. Nothing. Actually, things get a little better. People drink less.

People use less prescription pills. actually teenage use goes down and tax revenues go up and jobs go up and I think part of what you're seeing now and what I wanted to this is why I wrote this white paper that I'm calling the cannabis manifesto is it's not enough that cannabis that we can make money like and it's not enough that it's super cheap and undervalued. And then if you look at the growth versus the valuations, that it's completely out of whack. Yeah, that's all of that's true. But the most important thing is that it's absurd that cannabis is illegal. And it is illegal for racial reasons that make no sense. It was started first to stop Mexican immigration into Texas.

And second, as a way to drive voting and specifically to target African-American communities. And so when you look at that in an age when tobacco is legal, alcohol is legal, prescription medicine is widely available. Opioids are everywhere. The absurdity of cannabis being federally illegal is the number one thing. of why you should be looking at the sector. If I can just hop in here for a second with two comments. We may have said this on our first podcast where we talked about Glass House, but I grew up in the South like you.

Actually, I grew up in New Orleans, Atlanta's our big rival. But it's so funny now when I was growing up, I was saying, oh, weed, you touched that once. And it's the ender. And now that I'm older and have a little more experience, I'm like, how is it possible that weed is illegal, but alcohol, which is, you know, using consumption, in my moderation is completely fine, but alcohol is extremely destructive. How can that be legal and weed is illegal or opioids, as you said, obviously you need a prescription, but hugely addictive. Prescribe like

their tick tax at some points. It's like weed, not addictive at all, great for pay. All the stuff, it's just mind boggling to me that it's illegal. And then I wanted to ask you, did you see the interview with Seth Rogan a couple months ago where he talked about his cannabis use? I did, I did not. No. I'll send it to you. I'll try to include it in. show notes for I remember, but he was just talking about, you know, he's obviously very much, he was early on the weed is great and he probably used it more than you or I would use. But he was talking about, look, I was failing out of school. I was awful. I couldn't pay attention to anything. Awful ADHD. And he's basically high all the time, but he said,

weed is the way I can control my life. Like, without this, I was going to be awful. And his parents seeing its praises and all this sort of stuff. And it's just, it's just crazy how this thing that's not addictive and I think is, you know, used correctly is really helpful, has been just stigmatized and illegal for so long. And that's why all of our society's understanding about cannabis is based on myths or lies and misunderstanding about the cannabis. And so I want to go back to the absurdity of why it's illegal and explain, like, once you start peeling back the layers of cannabis and you look for facts, one of the most remarkable things is that whenever they legalize cannabis in a estate, workers' comp claims go down.

Yep. And then you're like, wait a minute. why would workers' comp claims go down? And then you realize, oh my gosh, people are self-medicating with really terrible things that is affecting their job performance. And then when they replace it with cannabis, they actually perform better on their job, that you find that opioid use goes down, alcohol use goes down. Cannabis is not what has been claimed in the past, a gateway drug, it's actually an off-ramp drug that you can get off fentanyl, that you can get off alcohol dependency by using cannabis. But not only that, it's amazing. Look to the sports world.

The most remarkable thing is this running runners article that I include in my links in my manifesto where cannabis is taking over the running world to the point. where ultra-marathoners are running faster and farther with cannabis than before, and the regulatory body is looking up, should we ban it, as a performance-enhancing drug, not because it's illegal. And that just for amateurs, taking a gummy and running is taking over the runner's world. And then you're like, wait, I thought that cannabis leads to decadence and you're sitting on your couch, and doing nothing.

And then you read articles like Mike Tyson saying, my God, I wish I could have used cannabis and not been used alcohol. I wouldn't have been so angry. I wouldn't have gotten into fights. And the effects I would have fought longer and better. And why, so why, I could think of a lot of reasons, but I am very interested. Why are amateur and professional runners finding? being success taking cannabis.

So what I believe in this article's amazing is that it lowers the kind of the anxiety or wondering, oh my gosh, cannabis has anti-inflammatory properties. And it's a pain reliever. So running is painful, right? Especially you think of an ultramarathoner. and it allows you to just get into a calm, focused state, which is perfect for running. And so I think that's one of the reasons. I think you see Kevin Durant and in the NBA.

And I was recently on conference with Chris Weber. I sat next to Chris Weber. I was amazing. Amazing person. He's starting a social equity investment fund with Jason Wilde, the CEO, Teresend. And he was telling me and others that he had a micropherson. fracture in his knee, which almost no NBA player is able to come back. And the doctors gave him these pain pills that literally created holes in his stomach. And he was throwing up

constantly. And finally, out of desperation, went to holistic and tried cannabis and was able to relieve the pain, come back, and actually play. And ever since then, he's a huge proponent of cannabis. And that's why the hidden secret in the sports world is, and you're seeing more and more professional athletes come out and say, cannabis helps me. Cannabis is good. It doesn't let me sit in my couch. These are NFL, NBA, runner, et cetera. And this is part of what I'm trying to tell the investment world, the institutions, the banks, the country is that if used properly and regulated and legal. Cannabis is a good thing. You know, just on the sports world, so the NBA in the bubble. So at the height of COVID, the NBA did the bubble where they sent, I think it was 24 of the

30 teams to Disney World and they put them in a bubble. And there was lots of negotiations with the bubble. And one of the things they did with it was the players said, you cannot test us for marijuana. I think they said drugs, but it was marijuana is what it was started at. I'm sure the NBA players don't want to go take some of the much harder some. But they say all the NBA players gave the NBA the feedback, hey, our level of performance went way up. And part of it was we were in a bubble so we didn't have to do a lot of travel. But another part was you weren't testing for marijuana.

And lots of NBA players, maybe they like to use it recreationally or maybe they like to use it for the performance enhancing aspects that you said. But either way, they like to use it. And it clearly doesn't affect their play because they were saying, if you legalize this or don't test it for anymore, our level of performance is going to go. up. And NBA, it's a performance product, right? That's exactly right, because it has anti-inflammatory properties. So athletes are finding that they recover quickly and bounce back faster. And so if you think about how hard professional

athletics are on the body. And the fact that you can reduce inflammation without having something that's toxic to your body and you use it in the correct way, like this is amazing right so so i love this as a backdrop you know it's it's almost one last one last thing i just want to say is it's not just that it's for kids with seizures it's they find that uh patients that are undergoing these really toxic cancer uh drugs and treatments they can tolerate it better that it's for migraine relief that it's for general pain relief i have relatives that are using it for knee pain and back pain and i i can go on and on. But I want to just stress this, that to invest in the sector, to scratch the surface,

it's not enough. Because it's federally illegal, it's not enough to say, oh, it's cheap in growth or whatever. And this is part of why I wrote the manifesto is I actually believe that Wall Street is way behind and actually kind of on the wrong side of history. And so that's why I start with how absurd it is to be illegal and how it's a good thing. But Wall Street is way behind their stopping custody. There was just news this week that J.P. Morgan is like, you can't trade cannabis stocks. None of the big money center banks are allowing anything to do with cannabis. And it's a shame because they're cutting off the.

small business owner, the social equity, the people of color who are starting cannabis businesses or our legacy operators, they're cutting them off from participating in this industry. Because people like me, the larger public cannabis companies, even though they trade on secondary tertiary exchanges, they know how to access the financial system. And there's, there's, you know, community banks and whatever that you can, in credit unions that you can use or whatever, but it's just really a shame and it's wrong what Wall Street is doing right now. And they are, they are on the wrong side of history in a time when ESG diversity, focusing on addressing the past wrongs of redlining and et cetera. and their current policies, I believe, hurt the little guy, hurt the minority communities, and it is wrong.

Well, look, I love that background for, as we'll talk about, I think you're launching a cannabis fund because you see profit and all this, but I love that background of flipping this on its head, right? A lot of people would look at cannabis to say, oh, Aaron is investing, you know, he's going against the ESG movement, he's investing in something dirty, he's investing in tobacco. And what you're saying is, no, this is something that it's something that it's good for the world. It's actually beneficial. In many ways, it is an ESG play, which I love that. But let's come back, you know, this is a little bit of a different podcast than I've done,

because normally single stock specific, and we're just talking to the cannabis sector in general. But let's turn away from the ESG and start talking, you're launching this fun, not just because cannabis is good for the world, but I, you know, you said many times in the manifesto and you're and I talking on your blog and everything that you see cannabis right now. I love the analogy of back to when you were investing in single families' homes right after the financial prices. So maybe you can give that analogy and then use that to further. What are you seeing in the cannabis sector that has you so excited that you're launching a fund specifically targeting cannabis? Yeah. So I remember I launched a small fund, really small, like a million

dollars in March of 2009 to buy single foreclosed homes and I remember and that's why Aaron's coming to us from his own private island right yeah yeah no no I made a ton of mistakes don't get me wrong and I'll talk about those mistakes um but I launched it because I was like I can't believe I can buy these homes below replacement cost and it doesn't make sense and I started with 16 homes people looked at me like I had a third eyeball like what are you doing and then and through 2011, I launched a couple of partnerships, I had 250 homes. And I looked at being on the courthouse steps in Georgia in Gwinnett County. And I remember looking around.

I see mom and pop investors. And I see myself and I'm like, why am I the only one seeing this? Like, I think, and then I went on CNBC, I went everywhere basically saying, you cannot build 4 to 500,000 homes a year in this country without developing a massive housing shortage. And I said, I don't know how long it'll take, but it's going to happen. And there's an incredible opportunity to buy homes. And it went out. And that's when things went nuts. And one year bought 2,000 homes, ended up with 2,500 single-family rentals. It was a crazy experience. sold the company to a private, a public reet.

And what's super fascinating now is reading this summer and seeing like Invesco is allocating $5 billion to buy single family rentals. And people told me, oh, you can't manage scattered site. Single family rentals are, oh, it's just a trade. And now 10 plus years later, every institution is now allocating resources or consider a single family rental as a as a as a space. And so what did I see then? I saw that it was all mom and pops. There was no institutional capital. And there's basically no competition. But I'm here to tell you that I made a mistake because what my call really was was a call on the housing

market. Yep. And so I went about creating a new business. I had to figure all kinds of stuff out. I had to, you know, there was no software that worked properly. People didn't know how to manage. I was scaling. I made tons of mistakes. In fact, I wrote about my book, I was like weeks away from like running out of payroll because I bought too many homes. What I should have done is just bought every housing related stock. I should have bought Lenar, home builders, like Lenar, D.R. Horton, should have bought Home Depot, should have bought Fortune, brands, which owns Moen and plumbing, they all went up like 10 times, 10. Aaron, I'm pulling the stock charts up for you right now. Yeah. So, Lanar at the time, you know, 2009, was at about $10 per share. And today it's $100 per share. So that's a 10 bagger in 11 years plus dividends along the way. And you wouldn't have had, as you said, if you do it through a fund, you're just a pencil pusher, right? You just press buy. And I could have invested in the best management teams.

Yep. And just let them do their job. And the most fascinating is if you pull up Home Depot is from where it bounced in 2009, from around middle of 2010 to 2012, it was flat. Yep. It didn't go anywhere. And they went up 10 times. So let's keep Lanar and Home Depot and those in mind for, because I'm going to come back to them later.

So, you know, your mistake is what you're saying is you went out and you built it. You built it with your hands, right? You started buying homes, operating, running them, all that. That was your mistake, Dan. You should have just done the simple thing, bought the stocks and let the management teams done their thing. So with your cannabis fund, so now we're in 2021, you see a similar opportunity for cannabis. Yeah, I see no institutional capital because it's federally legal and there's custody issues.

There's no institutions, almost none. And I'm looking around and being like, this is a great thing. Cannabis is being normalized much, much faster. and it's being legalized. States are legalizing it like crazy, especially neighboring states are looking at the other state being like, nothing bad is happening. Actually, it's good. Like, why are residents costing state lines? Exactly. It's a little bit of, if your neighboring state does it and you don't do it, you're going to have to do it real quick because you're going to look real fast to say, oh, our residents are pissed because they have to drive two hours to go get

their weed from across the state. And we're losing out on huge tax revenues because our, you know, New York, it's New York legalized it because Jersey and Connecticut, I've got friends in who every time they come in, they're like, hey, we've got legalized weed. Would you like any marijuana, Andrew? Because you'd have to break the law if you get it in New York. But we can get it like candy around the corner. Yeah, no, that's exactly right. And so I see the same kind of like this very powerful trends where you have this industry with massive tailwinds that is growing. And there's no institutional capital. But there should be.

And so I'm looking around again and I'm being like, why is there no one else doing this and all summer? So what happened is the cannabis sector went on a huge run last year when it was designated an essential business, which was really interesting. And then when the Democrats won, everyone thought, oh, because they view it through this. We can dive into this, but they view it. through this prism of politics, like it's a Democrat issue and that Republicans are not for it, which we can dive into, which is wrong, I believe. And then in February, it peaked when all

a sudden it was a slow realization, wait a minute, Biden is not pro-legalization. He's not going to move on it. You've had the slow, kind of painful sell-up where some stocks are down 50 or 60 percent. And we'll go into the details of that. But now we are where I'm looking around and I see the sector that is super exciting that is going to be, that has a runway for at least 10 years where I believe, I don't even know if we're in the top of the first inning of U.S. cannabis. I really think, you know, we're in spring training. The game hasn't even really started. And I'm looking around and I'm saying why.

And all summer I'm watching these dice go down. And I'm like, why isn't other people doing this? And I'm looking at the lack of investment capital. And I'm realizing, oh my gosh, I have to do this. Like, I don't have to launch a dedicated cannabis fund, but I have to because no one else is doing it. And so, anyway, that's when I decided to launch it. And, you know, you can see other sectors. It's not just the single family rental.

The other thing I would say is people forget. I started in 2009. Home prices kept going down. Yeah. They didn't bought them until end of 2011, the beginning of 2012. But I tell you what, I'll never forget. It was either in June or July of 2012 when me and my teen showed up for the oxens in Georgia and Blackstone and Colony Capital showed up.

And home prices were up instantly 50 or 100%. And we were looking around being like, oh, my God, how are they paying these prices? And now you see home prices today. And you're like, oh, they were underwriting for the long term. And so I see this. I've done it before. I've invested in illiquid stuff. I feel like I can see what's going to happen, but Andrew, I can't tell you when.

And so the idea of the fund is, can I tell this story and marry the risk capital and patient capital that agrees with my things? thesis and says, I accept the uncertainty of timing. I accept that the market may keep going up and I'm not going to participate. But one day it's going to happen and it's going to be amazing. The market's going to keep bidden up. Actually, I was going to talk about a certain SPAC that has been very hot recently. But I'll let readers figure that one out. I'll avoid the politics there. But speaking of politics, you know, I think the most common question you're going to get is going to be a very basic one. Hey, Aaron, is this a play on legalization? Right. And I'm sure the answer to some extent is yes, because the moment this gets legalized, the next day, all of these

companies are going to flip from backwater exchanges to the New York Stock Exchange. And the stocks are probably going to go through the moon just on that excitement. Right. But if we put aside that pop for a second, like you can talk about how you see legalization playing out. you want, but I'm also more interested in, what if we don't get legalization? Do you think this, does this play, can this fund still work if we're in this mismash of kind of legalized state by state and we never get these off the backwater exchanges? So this is another part of, I think, where my focus is just different is I'm not focused on the legalization process or congressional movements, or it's not a bet on politics.

If I can just say, I think that's the right way because my bet for legalization, it will come, but it's going to be a lot longer. It's going to be a lot more frustrating than anyone can imagine because that's just the way politics works these days. Yeah, no, that's exactly right. But when I look at that there's, because it's a capital starved industry, my big thesis is that there's only about 10 or 15 companies that have access to capital. and and they can borrow while they have to borrow at high rates like seven to nine percent

everyone else is lucky if they can borrow at 15 to 20 if they can have access to capital and so i've rarely come across an industry where there isn't some technology advancement or some you know IP but that there's such a gap between the haves and have-nots And meanwhile, you have big tobacco, alcohol, CPG, all the Canadian cannabis companies and giant private equity that are all on the outside looking in and like they can't get in or they're compliance departments saying don't do it and they're all looking in. And meanwhile, you have the leading companies like a Verano or a Green Thumb or air wellness, et cetera, that are literally free. in a standpoint. Now, they're still restricted, right? Because capital's tight. Yep. But they're free to build their moats without any of the traditional competition. And so the longer this goes on, the stronger these companies will be and the more valuable they will become when things are decriminalized

or legalized or when capital flows in. And one example that I try to talk about is, let's look at Florida. Florida is, there are many cities. So people always focus on the federal or the state, but they completely don't talk about the local and municipality controls. Yep. How many dispensaries has the city. of Boston approved. Do you know? I do not know, but I know, I will say, because you and I both

talk to the guys over at Glasshouse, I know that local municipalities, some of them will give them out like Tic Tacs, right? They'll approve 100. And then you'll have some municipalities to say, oh, we only need one or two. I'm guessing Boston is what, four or five? Six. Six. Okay. So what's the value for air wellness that has the one in downtown Boston next to the Apple store. What's the value of that? Oh, it's got to be incredible. And so what's happening in Florida is a foot race between three and five companies to develop their footprint because a lot of the cities in Florida will only allow two or three dispensaries. So you want you and but the problem in Florida is you have to be vertically integrated, which means you can't sell somebody's somebody else's

cannabis. So the proposition for you to open a store is actually quite expensive. And then once you have your footprint, once you're there, if someone wants to sell cannabis in many of the cities in Florida, you can only go through two or three companies. And so why is this important is what's the population of the state of Florida? 21 and a half million people. Do you know how many medical cannabis patients are there in Florida? You know, it's an older, it's an older thing. So there's six, right now there's 620,000 medical marijuana patients in Florida with a population of 21.5 million. It's old people, what old people have, aches and pains.

They don't have jobs. And what is the right percentage in a legalized world, in adult use Florida world? What's the percentage that would regularly on a month? basis by cannabis, do you think? I'm just curious. You know, I would guess because I personally, I think it would be pretty high because people love to have a drink with dinner. Now having a drink and having a gummy or taking smoke is a little different. But, you know, I could see, I know lots of people a little bit before bed, as you said, like it's a microdose to help them unwind or relax a little bit. I would guess it's pretty high and it goes higher. If we just say, if we just say 20%,

Yeah. That's that's like close to five million people. How many tourists does Florida see a year? 100, 100 million. Is it, is it recreationally legal there? Or is it only medicine? It's only medical. Okay. The medical card. So when I say, hey, if it's just 20% of the population, which I think is a conservative number, and you have 100 million tourists, I can make a very, very strong, argument that the Florida cannabis market is going to grow 10x. Yep. 10x. And that's the opportunity is that you get to invest in a company like Verano, which their subsidiary AltMed or Air Wellness, whose subsidiary, it was Liberty.

Yep. And they, Air Wellness moved their headquarters to Florida for a reason. And it's like, that's. the opportunity here is there's no there's no real competition there's no capitals in these companies so to your question the longer it takes the more these footprints get entrenched and then the only way to displace them is will be to buy them and it's interesting you mentioned florida because it's only medicinal right now but florida you know it's i guess it's a swing state but if i remember correctly republican governor republican house in florida and yes it's only medicinal right

now, but they didn't have to do medicinal, right? They could have just said marijuana is the devil, we're going to permanently outlawed. And medicinal is generally the gateway to getting so recreational. So it's just interesting. We mentioned people framed this as a Democrat or Republican issue. Increasingly, I just think it's going to become a, hey, are you going to get with the times or not issue? I think it's an age issue, to be honest. I think it's that did you grow up in the era of Reefer Madness? And do you know anybody that's using cannabis? for health and wellness. Yep.

And what I see from people, there's still that racial element. There's still the people who are, who view it through that lens or that scary lens. But to me, it's an age issue and where the older generation don't see it. And the reality is that time will fix that. Yeah. And once you get, once you get the person across the street from you who's getting it for glaucoma or to deal with some pain from kids, once you know somebody who doesn't need pain or back pain and I'm not on my opioids anymore. And it's like it's remarkable the anecdotes that I hear from somebody's mom who's like, I can't believe that this mom is, you know. And it's like, and the reality is as a society, we don't really have. and I'm one of them.

I have a lot of experience with alcohol, right? I know how much to drink or what does for me. I have a lot of experience. And then it's like, but I don't have much experience when it comes to cannabis. And it's going to be fascinating watch how as a society we start to learn about cannabis use, how to use it properly, what strains work for you, what's the right form factor. and it's going to be interesting to watch. Again, I have very limited experience with it, but that Seth Rogen article I mentioned earlier,

one of the really interesting things I heard about was, you know, especially growing up, my experience with marijuana was the dude wears my car. You get high and you giggle and, you know, you go to White Castle or something, right? But Seth Rogen, one of the things he was saying was, again, he's high all the time, but there are different strains. And he was like, oh, this is the weed I take when I'm working because you can focus better with it and you're not goofy. And then he had his unwind weed. And obviously it is a drug, but you can grow different strains that affect you in different ways. And I just thought that was

interesting because, again, my, until I learned a little bit more about it, I just thought all weed made you get the munchies and giggle a lot or something, right? And yeah, and then lay on the couch and fall asleep and check out a society. And this is part of the myths that I, that I think is really, really important that is not discussed enough. And I'm glad you're mentioned. is that this is part, this is the main part of the thesis, is that we have these myths and misunderstandings about the cannabis plan. And also why I say Wall Street has a culture of heavy drinking and a lot of other drug use, but is not associated with cannabis. And I actually think is part of why there's such, there's so few investors like myself.

I'm laughing to myself because if you had had cocaine stocks in the 80s or something, you could see Wall Street just getting all in behind it. But let me ask you, when you said, when we were talking about one of your regrets when you launched your single family home, you said, I could have just gone and bought stocks and bought the best, had the best management teams working for me. And you said, I could have bought Lanar, which is a home builder, which would have been direct play, right? But you also mentioned I could have bought Home Depot, which Home Depot is not building houses, but if you are building a house, home depot is pretty important, right? Your contractor

probably goes and buys lumber there. You get your everything you're putting in your kitchen from there and stuff. So we've talked about Verano, the AYR wellness, which are vertically integrated players who are going to grow the cannabis and then they're going to operate the retail store. But the other way you could play cannabis is you could do it through kind of the home depots, right? The people who are going to supply, the growing supplies and stuff. So I was wondering with your fund, is it only going to be focused on the AYR wellnesses, the people who are actually growing, or are you focusing on more of the Home Depot's, the suppliers, and if you can maybe talk about a couple of things. You're exactly right. And I'm going to be generally vague because I'm not, you know, I'm going

to be launching these funds, but the idea is to invest in the ecosystem of U.S. cannabis. So a publicly what I've talked about is the direct plays like MSOs or single-state operators like Glasshouse, but also there are companies that will benefit in the ecosystem that I've written about, for example, Merida Merger Corp is going to be merging with Leapley. And I've written about how interesting that is. I'm a big fan of Mitch Berkowitz at Merida Capital. They're one of the private equity venture investors in cannabis, very successful. He was the first outside investor in Grow Generation, which has been a phenomenal performer,

and that's just one of his many investments. And so what I think it's really interesting is you think about how hard it is to advertise in cannabis. Where do you advertise? And I think that a leafly is really interesting and a weed maps is really interesting. You can definitely see ordering is going to be important and like digital technologies around cannabis. But there's also different equipment, you know, picks and shovels plays out there that people are talking about. And my goal it will be to do deep dive research and invest in the best management teams. with companies that have clear-cut strategies and build a portfolio of like 12 to 15 of them

that is a bet on the cannabis ecosystem. It will probably be heavy on MSOs and like a single-state operator like Glasshouse. But it will also include those other plays that benefit from the massive amount of money that is going to be flowing through the cannabis space. But I'm going to wait it towards the companies that I think have the best management and have clear-cut, you know, kind of concise strategies, even if some of them may differ. It's okay because I don't really, I don't know how exactly this is going to play out.

I know what's coming. I know this is $100 billion revenue industry that is mostly illegal, that's like $25 billion of legal sales, that it's going to at least $200 billion, or most of it's going to be legal. But how and when that's going to play out? I don't know. And I think there's going to be branded plays eventually. I think there may just be retail. There might just be cultivation. I think there's going to be different software companies. And so my goal and what I don't see enough of is because there's no real institutional capital. There's very few. I've talked to them and we're like a little tribe. I'm trying to share research. Yeah, yeah, marijuana mafia.

I like that. But is to do deep dive research and try to gain an understanding of what these companies are doing and try to have a rigorous process that isn't just this subjective, like, hey, I think that this should be weighted or whatever, and to try to understand what you're betting on. I'm not betting on the timing of legalization. I'm betting that it's going to happen. I can accept the uncertainty.

And this is an important point. People have asked me, like, oh, why wouldn't I? There's an ETF out there called MSOS. And so, like, why wouldn't you just buy an ETF? And I guess you could. And, you know, they've done a good job of marketing the ETF. But I don't really understand how they've created or how they structure it, how they weight it, what company is at the top. There doesn't appear, and I'm happy to be educated, that there's a process.

And specifically, I'm not very bullish on innovative properties, which is a REIT that is taking advantage of weak and capital-star of cannabis companies to basically take predatory terms by offering them financings that look like sale leasebacks. And they're locking these companies into very expensive leases that escalate over time. And when cannabis is legalized or when the banking system is allowed to reach it, that whole business model falls apart. And it's very, very expensive. And I want to say it's like the third or fourth largest position.

and this is an ETF. I don't want to make that bad. It's a weird ETF. I haven't really looked at it, but I just pulled it up on Bloomberg. And that's the, this is just what Bloomberg's selling me, but 75% of the ETF is in cash. And then 13% of it is in innovative industries. I don't know if that's correct. You can go to their website. And the other thing is their swaps, so they don't directly own the stock. It says 13% is in there. So I don't know how much. I don't know how much. I don't think it's that high. You can go daily and see, but, you know, there's opportunities like Verano, for example, a newer company trades for, you know, almost half the valuation of like a cure leaf or green thumb.

And so I can't, I believe Verano has great management and they have, you know, very similar footprints to like a green thumb or a cure leaf. it's just that green thumb and curleaf has been able to cultivate some of the few institutional investors. And so it has a higher valuation. I'd much rather take advantage that there's no reason that Verano sells for half the valuation. And so I think that there's just a bunch of stuff that, you know, where again, this is a very inefficient sector. And so you want to take advantage of it, right? There's no competition. There's no, there's there's, there's, there's, there's, there's none. So I can write about a merit of merger and leafly and do a deep dive and then say,

hey, everybody, and I can tell people, I think the warrants are undervalued. And then the warrants went up like, you know, they were at one point up 100%, but they're up like 70%, right? And I think that's why you want to take advantage. You want to really put your nose down and do the research, do the work. And I think that there's lots of inefficiencies to uncover and that it's going to continue over time until you see this flood of capital come in. So you mentioned Verano a few times, right? And we've talked about the, I think everybody who's looked at cannabis knows that these, the companies that generally they trade in Canada, but they're growing very quickly and they trade at multiples that you would not expect for a company that's

growing very quickly. So let's just use Verano as an example, because that's when you're familiar with, you know, what's the growth rate? What is the valuation look like? You don't have to say what you think a fair valuation would be, but just to give me an idea. I believe they have a three-year compounded annual growth rate of like, I want to say it's at least 50%. It might be 40%. Is that organic or inorganic? Because I think they do deals. It includes both. It includes both. And they trade at less than six times next year's cash flow. And what's important about that is they're in a net cash position. And cash flow, by the way, is EBITDA.

And there's reasons why I use EBITDA and others. But it's six times EBITDA for compounded annual growth rate of 50%. And because cannabis, the capital constraints around cannabis, they're sitting on $300 to $500 million of unencumbered real estate. They own all the real estate. The other thing that's weird about some of the, these multi-state operators who talk about MSOs, is they do the cultivation, they do the distribution, sometimes of other people's products, they do the retail, they have their own

brands, they own real estate. At some point, capitalism is really good at slicing and dicing, and you're going to see a lot of value unlocked inside of these companies. But that, it's all trapped inside these companies. But I want to make a point that I have a, that is, I think, a critical insight. So when you look at a Verano. So hypothetically, it's like three and a half billion dollar valuation in US dollars. It might be a little less or a little more. These things are very illiquid. They trade on secondary or tertiary Canadian exchanges. So not the Toronto Stock Exchange, but the Canadian Securities Exchange or even something called the Neo. Okay. And this is an important point. I come to realize that what you're really doing is buying

a private company that has this weird trading stub. Yep. And for those who are experienced, is this kind of like buying a post-bankruptcy stock or some over-the-counter weird stock that almost trades by appointment. Why this is important is you have to be. have to know what you're buying. So when I go online and I read about people, you know, wondering why these stocks go down, people talk about conspiracy theories. People talk, oh, my God, I can't believe they're going down and all this stuff. And what I want to say is that's, you have to understand what you're buying. And when Burano on a good day is treating $8 million dollars of stock on a three and a half billion dollar valuation.

Yeah. And that $8 million can remove 8% of the valuation. And $8 million can move almost $300 million of market cap. You have to understand how illiquid. And you have to be okay with that. And that it's not a conspiracy, but there's no new capital entrance. Burrano is buying companies, air wellness is buying companies. There are private shareholders that for a variety of reasons may want to sell.

The cannabis sector hasn't been doing well. This is a good year. You want to generate tax losses. It's not, these things are not trading in an efficient manner or really a market. clearing mechanism that is like valuing these things properly. And you got to be okay with that. And you got to have the right amount of capital that will let you sit with it. And so what I hear a lot of people say is this is one of the few opportunities where individuals get a seat at the table or can participate ahead of institutions. And that's right. That's right. But the problem is

is that no one's educating these individual investors are talking to them about the volatility of the risks or explaining to them what they own. They own very illiquid kind of weird trading stubs that trade in backwater Canadian exchanges, and you've got to understand that they can go down 50, 70, 80 percent. You've got to be okay with it. It kind of reminds me of Bitcoin and Crypto, you know, three years ago before institutions could get involved in Bitcoin and Crypto and all that, except Bitcoin and Crypto basically went straight up. So the people who bought them, you know, yes, there was some volatility, but they never really experienced anybody who's invested in an OTC stock knows this. Some days, you'll say, oh, my stock was down 50% because seven shares traded down 50% from the last mark. And you'll look at it and be like, well, I'm pretty sure this company didn't lose, you know, $50 million of value.

just because seven share straight in hand, you'll get that mark. But let me ask you, you mentioned some, so last night, Jeremy Raper and I, my friend, I don't know if you've talked to him before, a super sharp guy. Yeah, I follow him. We were talking about pause a bit, which does, have you looked at this? I'm doing research on it now. It's interesting. I got introduced to one of the board members.

And I think I have a call with the CEO next week or the week after. And this is another example. I think there's lots of interesting companies. around the cannabis sector that really no one's writing or talking about. And I'm really glad that Jeremy's talking about it and some other people are writing about it. This is one of the reasons why I write and share my newsletter, by the way, is one of the great benefits. And I'm trying to encourage everyone to write. And I love how you write.

And I love how you share all your links and everything is like we wouldn't have never met if I wasn't. have written. And I wrote my, that I'm launching the fund. And then this one investor reached out and says, hey, have you heard a pose a bit? And was like, hey, I can introduce you. And I was like, oh, I don't know. It's some weird company. You know, it's like, you know, I have this weird reaction. And then they were like, no, let me explain. And then I get introduced to another person. And then they're like, hey, this is actually. And then you start doing the work on it. And then you got to spend the time. It's important, not just to click a button. and I would encourage everyone, no matter what you've heard on this podcast, do your work, do

your due diligence, understand what you own. And I think you can make bets on really good management teams around this incredibly exciting sector. And so, yeah, and so this is just one example of, I think, several, and this is why I'm starting the fund. Well, pose a bit, people, that was a great bit. People can go listen to the podcast I did with Jeremy for the full pitch. It's a very interesting company. Jeremy is one of these people who does deep dive research. He did really good research on that. And so what, you know, the thing is, there just aren't many people like Jeremy doing work on this sector. My question for you was, so we were talking about it and posed a bit just point of sales operations. And one of the questions I had was right now, you know, a lot of,

of the retail is mom and pops. They're smaller stores. Suppose if it has to go one by one. And one of the big risks to me is what happens if this gets legalized or institutional capital steps in and private equity players come and, you know, start buying out and you've got 100, 200, 200, 300 company storefronts that are run by one private equity firm. That could be bad for Pose a bit because if Pose a bit sells lots of mom and pops and all of those get bought out, they don't have a business. So I guess that's actually irregardless of my question. My question to you was right now a lot of the players are vertically integrated right they grow the weed they own the brand they operate the retail store that's much different than we see alcohol is the one that i've been

thinking of where most of them they own the brand and maybe they own the distillery as well but they definitely don't own the retail store so how as this kind of evolves over time how do you think that slicing and dicing as you called it a second ago how do you think that evolves do you think people are going to stay vertically integrated or are you going to see some companies that focus only on brands, some companies that focus on growing, some companies that retail, like, what do you think that's exactly right? I think you're going to have retail only plays, kind of like a Starbucks or, you know, any kind of retail or it's like, hey, this is what we do. I think you're going to have wholesale plays, distribution plays. I think you're going to have hybrids. I think

you're going to have vertically integrated. I think you're going to have one of the most interesting things is when you dive into cannabis. And this is the mistake I hear over and over is, oh, tobacco is going to come in. They're going to grow it. And they're going to take over the whole industry. And when you really dive in, the cannabis plant is very, very sensitive. And it's actually really hard to grow it at scale. And so one of the reasons I'm very bullish on Glasshouse is that if you want to have brands at scale, you need to have a mature supply chain. The thing that doesn't exist today that some companies are trying to figure out and work on is that there is no supply chain at scale.

And so one of the interesting opportunities is who's going to create that? Who is going to do that so that they can offer brand after brand after brand. And it's going to be really interesting to see who gets. there. And I think there's going to be massive winners by the companies that are able to create brands because they control or they have quality control over the supply chain. And so like an interesting company that's private that I wish was public is a company called cookies. I don't know if you've heard of them. But they're like ultra high premium and they go in And then they actually source for many companies, but they go through with like a fine-tooth comb.

They will only sign up the best of the best cultivators and sign agreements and then hold them to an inspection standard that is really incredible. And so they're building this brand on just ultra the highest end cannabis by really controlling their supply chain. Now, they're doing it with, like, many, many providers in different states and they're signing agreements. And so there's going to be really interesting things. That's why I say, this is spring training, right? And that's why I think you don't want to just bet on one company. You don't want to even bet on three or four companies. You really want to invest in the sector and not, but you don't want a shotgun approach because there's,

There's still, unfortunately, this is like the Wild West, there are still bad actors. There are still people who are not very good at capital allocation and are not treating shareholders well, maybe not unethically, but they're just not good operators. And so you want to make sure that you're with the right management team that is around the sector that is trying to attack a slice of it or as a strategy. and I firmly believe you build a portfolio of these, you know, some of them will disappoint, some of them will, you know, go blah, some of them will do well, and then you're just going to have like two, three, four, five, you know, that'll just go lights out.

You're going to have the one you bought, one of them will be the Amazon that you bought in 1996 in the dot-com bubble or something, except you're not paying Amazon prices. So I just want to bring this back. You know, about Amazon. This is a really important point because cannabis is getting like crushed right now, right? As a sector because they're very illiquid. But people always like to say, oh, cannabis is like, you know, or oh, Amazon, look how much it's up and all this stuff. People forget it. It went down like 95%. Buffet bought the bonds at like 50% of par. And obviously I know. I do just want to bring it back to valuation real quick. So when we talked to Verano, you said, hey, 40% growth, some organic, some. inorganic trading at maybe six times next year's cash flow, which find me anything trading at six times next year of cash flow, right? But we, you and I have talked about this before. We may have mentioned on the first glass house podcast, but for people who haven't looked at

cannabis, everyone values these on EBDA. EBDA sometimes gets a bad wrapper among investors, sometimes doesn't. But I think EBDA is a very, it is the best metric for cannabis companies for some very cannabis specific reasons. And I was hoping you could explain that. So people can hear that number and really process it. The reason is, because it's federally legal, cannabis is not, this is the wildest thing. It's illegal, but they pay taxes. They don't just pay taxes according to this IRS rule 280E. It's so absurd to even say this. If you're operating an illegal business, you can't think about absurd this is what I'm going to say. if you are operating an illegal business, the IRS still expects you to pay taxes, but

you're not able to deduct many of the expenses that other companies are able to. So what the IRS does is they say, oh, they're accepting tons of taxes from, and many times in cash, they have to have these special rooms. And the IRS is like telling the other parts of the government, like, hey, we really would like them to have access to the banking system. So we don't have to count all this cash and do all this stuff. It's the most absurd thing. And then the IRS will give guidelines to the illegal business, right? Name another company. Think about Verano. They're going to produce, I don't know, I don't have the top of my head for this year. I want to say it's like

like 400, 400, it's something of where they're going to end up in cash flow. But let's use next year, on top of mind, it's close to $600 million of EBITDA. Think about how much taxes they have to pay. Yep. And think of what they have to deal with. And it's like totally absurd. And so the reason you value it on EBITDA is because the idea is to just normalize it across is that eventually, this will be legalized. And once it's just legalized, they're going to pay taxes like everybody else.

And they're not, you know, some of the tax rates can go 60, 70 percent. Yep, exactly. So right now, you know, if you do $100 in sales, and let's just say, if I'm selling beer, maybe I do $100 of sales and it costs me $50. Well, I'd report $50 in profit and I pay $20% taxes, maybe so I pay $10 in taxes. What Aaron's saying is with Verano, if they do $100 in sale and their cost of goods sold was $50, well, they can't deduct that to the IRS. So the IRS says, oh, well, it looks like your net income was 100, so you need to pay, you need to pay 20 instead of 10. So, yeah, so.

And then part of there's some differences in cultivation and retail and some nuances around that. But yeah, that's the main thing is they're paying excessively high tax rates. And so just it's like an easy kind of rule of metric. That doesn't mean you don't ignore free cash flow. That doesn't mean you ignore cash flow from operations. One of the reasons I'm so bullish on Burano is they have the best metrics for cash conversion for free cash flow and cash flow from operations.

So if you have the best metrics for cash flow, cash flow from operations, and for that converting into free cash flow, why do you sell for half the multiple of some of the other leaders in the industry? And this is part of the opportunity. And so make sure that you just don't look at EBAA and be like, oh, EBITDA is everything. There's lots of ways that EBITDA can lead you astray. We're kind of running up on our time here. So I want to ask for investors who are looking to learn more about the space, I would say the best way is go read the cannabis manifesto that Aaron published.

Again, there's a link in the show notes. You can go read that. But for investors who are looking to learn a little bit more than that, what's the best way they can start researching this sector, you're learning a little bit more about the company. Should they just go read Verano's reports? Is there another company you point them at that they should start? Yeah, I would follow Verano. I would follow Air Wellness.

I would follow great. I haven't mentioned them, but another great company in the sector is Green Thumb. And what's really great is a lot of these companies are now developing, you know, presences on Twitter. I would follow Glasshouse. And Graham Ferrar is very active on Twitter. Twitter. You know, Todd Harrison, who is another investor in the space, does a great job of updating and providing a lot of links. He's got a weekly substack that I enjoy those. And every week, it's almost

every week, it's, well, cannabis stocks will get down another 10% this week or something. I literally, I'm dying to start buying these stocks from a new fund. I'm like, please don't go up. Let's wrap this podcast up like this, because you are in the process. of launching a cannabis fund. It hasn't quite launched yet. People should reach out to you if they're interested in learning more and stuff. Yeah, so it's, yeah, so just this is not like a solicitation.

And the fund is only open for accredited investors. And, you know, what I'm saying is really just for informational purposes. But I'm available. You can find me on Twitter, air in value, where you can go to my substack, you know, and contact me through there. If you just wanted to talk more about cannabis or anything else, and, you know, in investment. I love talking stock. So perfect. Anything else we should say on cannabis or anything before we wrap this up? All I would say is go braves.

There you go. Well, Aaron, thank you so much for coming on. It was a pleasure having you on for the second time. I love chatting stocks with you. And I'm really excited for you to get this cannabis fund off the ground. And it's going to be great in six months to have you on and do a little follow up on cannabis or something. Yeah, it'd be great. I love coming on. Thank you for having me. This has been fun. Perfect.