Aaron Edelheit is high on Cannabis stocks

Aaron Edelheit returns to the podcast to discuss the opportunity he’s seeing in cannabis stocks and why he chose to launch a cannabis focused fund.

You can find Aaron’s “Cannabis Manifesto” here, and Aaron’s book (The Hard Break) here. You can follow the podcast on Spotify, iTunes, or most other podcast players, as well as on YouTube if you prefer video! And please be sure to rate / review the podcast if you enjoy it, or subscribe to this Substack (it’s free!) to get all new podcasts and transcripts delivered right to your inbox!

Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript!

Transcript begins below.

Andrew: Alright. Hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker, and with me today, I'm happy to have Aaron Edelheit. Aaron is the founder of Mindset Capital. He's the author of The Hard Break: The Case For The 24/6 Lifestyle, I believe, which I read and really enjoyed.

It's really impacted the way I kind of structure my life. My wife always talks about that. So I'm happy to have him on the pod, is the bottom line. Aaron, how's it going?

Aaron: Hey, it's going great, and I could 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.

Andrew: There we go.

Aaron: The Atlanta Braves won the World Series, and I got to go on Friday to Atlanta and go to the World Series game with my best friend. I just feel— I am just kind of like on a giant high.

Andrew: Well, congrats, buddy. That' awe— I didn't know you were a Braves fan. [crosstalk] I followed you close because I'm a Liberty fan. So you've got to be a Braves stan if you're a Liberty fan. But congrats, that's awesome.

Aaron: Lifelong [crosstalk]. Yeah. That was great. Literally, I wanted to be Dale Murphy when I grew up, and I played baseball. I went to high school in Atlanta. College, University of Georgia, lived in Atlanta for fifteen years. 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.

Andrew: Did you own any Brave stock or anything?

Aaron: No, no, no, no.

Andrew: Oh, you've got to own them just for the—

Aaron: No, no, no, no. I love them too much. I don't want to mix money with...

Andrew: 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 thoughts in general.

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 own investment. Please do your own research. Do your own diligence. Consult a financial advisor, all that.

The second thing, I start this podcast with 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. Any time I 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.

Aaron. Oh, thank you.

Andrew: I'm happy to have you on again.

Aaron: My pleasure. I really enjoy this so.

Andrew: Well, normally, 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 could go read that to see in the written form 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 want 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?

Aaron: So, I spent about three years researching Cannabis, investing in it. But it really started when— and I want to start this by talking about how I think Cannabis 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. I wouldn't wish insomnia on my worst enemy, especially having three small kids. I would not wish it. Instead of using prescription pills or just suffering through it, the idea that I can take a low-dose Cannabis gummy or a tea of some kind can reset my sleep system, wake up with no grogginess, no addiction.

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. It's life-altering. And I think what's happening is more and more people are realizing the medicinal and health, and wellness aspects to Cannabis. The thing that I always say is, "Do you know what happens when they legalize Cannabis in different states?"

Andrew: No, go ahead.

Aaron: Nothing. Nothing happens. Actually, things get a little better. People drink less. People use less prescription pills. Actually, teenage use goes down, tax revenues go up, and jobs go on. 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.

It's not enough Cannabis that we can make money. It's not enough that it's super cheap and undervalued. Then, if you look at the growth versus the valuations, that it's completely out of whack.

Andrew: Yeah.

Aaron: 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's legal, alcohol's 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.

Andrew: 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 Glasshouse. But I grew up in the South, like you. Actually, I grew up in New Orleans, so Atlanta is our big rival. But it's so funny now. When I was growing up, I was saying, "Oh weed, you touch that once, and it's the end."

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 used and consumed in moderation, is completely fine?" But alcohol is extremely destructive. How can that be legal, and weed is illegal? Or opioids, as you said, obviously, need a prescription. But hugely addictive., prescribed like their Tic Tacs at some points.

It's like weed, not addictive at all, great for— all the stuff. It's just mind-boggling to me that it's illegal. I wanted to ask you, did you see the interview with Seth Rogen a couple of months ago where he talked about his Cannabis use?

Aaron: I did not. No.

Andrew: I'll send it to you. I'll try to include it in your [inaudible] term. But he was just talking about— He's obviously very much— He was early on the "Weed is great." He probably used it more than you or I would use. He was talking about, "Look, I was failing out of school. I was awful. I couldn't pay attention to anything, awful ADHD."

He's basically high all the time. But he said, "Weed is the way I can control my life. Without this, I was going to be awful." His parents sing its praises and all this sort of stuff. It's just crazy how this thing that's not addictive and I think, if used correctly, is really helpful, has been just stigmatized and illegal for so long.

Aaron: No. That's why all of our society's understanding about Cannabis is based on myths or lies and misunderstandings about the Cannabis plant. So I want to go back to the absurdity of why it's illegal and explain 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 state, workers' complaints go down.

Andrew: Yep.

Aaron: And then you're like, "Wait a minute. Why would workers' complaints 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."

Then 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. Our Runners article that I include in my links in my Manifesto where Cannabis is taking over The Running World to the point where ultramarathoners are running faster and farther with Cannabis than before.

The regulatory body is looking up, "Should we ban it as a performance-enhancing drug?" Not because it's illegal. For amateurs, taking a gummy and running is taking over the Runner's World. Then you're like, "Wait. I thought that Cannabis leads to decadence and you sitting on your couch and doing nothing."

Then you read articles like Mike Tyson saying, "My God, I wish I could have used Cannabis and not 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."

Andrew: Aaron, I can think of a lot of reasons, but I am very interested. Why are amateur and professional runners finding success taking Cannabis?

Aaron: So what I believe in these articles, they're saying is that it lowers the kind of anxiety or wondering, "Oh my gosh." Cannabis has anti-inflammatory properties, and it's a pain reliever. Running is painful, right? Especially if you think of an ultra-marathoner. 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. I was recently on a conference with Chris Webber. I sat next to Chris Webber. It was amazing. Amazing person. He's starting a social equity investment fun with Jason Wild, the CEO TerrAscend. He was telling me and others that he had a microfracture in his knee, which almost no NBA player is able to come back.

The doctors gave him these pain pills that literally created holes in his stomach, and he was throwing up constantly. 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.

That's why the hidden secret in the sports world is, and you see more and more professional athletes come out and say, "Cannabis helps me. Cannabis is good." It doesn't let me sit on my couch. These are NFL, NBA, Runners, etcetera. 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.

Andrew: 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 him in a bubble. There was lots of negotiation with the bubble. One of the things they did with it was, the player said, "You cannot test us for Mari-." I think they said drugs. But it was Marijuana is what it was sorted out, right?

Aaron: Yes.

Andrew: I'm sure the NBA players don't want to go see some of the much harder stuff. But they say all that all the NBA players gave the NBA the feedback. "Hey, our level of performance went way up. 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."

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 for anymore, our level of performance is going to go up." In the NBA, it's a performance product, right?

Aaron: That's exactly right because it has anti-inflammatory properties. So athletes are finding that they recover quickly and bounce back faster. 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. This is amazing, right?

Andrew: So I love this as a backdrop. It's-

Aaron: And then, one last thing I just want to say. It's not just that. It's for kids with seizures. They find that patients that are undergoing these really toxic cancer 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.

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 deep and growth or whatever." And this is part of why I wrote the Manifesto. I actually believe that Wall Street is way behind and actually kind of on the wrong side of history.

So that's why it 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 JP Morgan is like, "You can't trade cannabis stocks." None of the big money-centered banks are allowing anything to do with Cannabis.

It's a shame because they're cutting off the small business owner, those social equity, the people of color, who are starting Cannabis businesses or are 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.

There's Community Banks and whatever, and 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 on the wrong side of history in a time when ESG, diversity, focusing on addressing the past wrongs of redlining, and etc. And their current policies, I believe, hurt the little guy, hurt the minority communities, and it is wrong.

Andrew: Perfect. Well, look, I love that background for. As we'll talk about— I think you're launching a Cannabis Fund because you see profit in all of this. But I love that background of flipping this on its head, right? A lot of people look at Cannabis and 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 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 little bit of a different podcast that I've done because normally single stock specific and we're just talking in general. But let's turn away from the ESG and start talking. You're launching this fund not just because Cannabis is good for the world.

But you know, you said many times in the Manifesto and in, you 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 crisis. So, maybe you can give that analogy and then use that for further. [crosstalk] What are you seeing in the Cannabis sector that has you so excited that you're launching a fund specifically targeting Cannabis.

Aaron: Yeah. For sure. [crosstalk] Yeah. So I remember, I launched a small fund, a little like, really small, like a million dollars in March of 2009 to buy single foreclosed homes, and I remember [crosstalk] people looking up...

Andrew: And that's why Aaron's coming to us from his own private Island right now.

Aaron: Yeah. No, I made ton of mistakes. Don't get me wrong, and I'll talk about those mistakes. 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 that I started with 16 homes. People looked at me like I had a third eyeball, like, what are you doing? And then, the year 2011. I launched a couple of partnerships. I had 250 homes.

And I looked at it being on the courthouse steps in Georgia in Gwinnett County. And I remember looking around, I see Mom and Pop investor, and I see myself, and I'm like, "Why am I the only one seeing this?" I think, and then I went on CNBC. I went everywhere. Basically saying, you cannot build 4 to 5 hundred thousand homes a year in this country without developing a massive housing shortage.

And I said, I don't know when and 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 then in 1 year about 2,000 homes, but ended up at 2500 single-family rentals. It was a crazy experience. Sold the company to apply a public reach. And what super fascinating now is reading the summer and seeing, like Invesco is allocating 5 billion dollars to buy single-family rentals.

And people told me, "Oh, you can't manage scattered-site single-family rentals" or "Oh, it's just a trade," and now, ten plus years later. Every institution is now allocating resources are considered single-family rental as a spacing. 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 housing market.

Andrew: Yep.

Aaron: 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 boy. I was like, weeks away from 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 Lennar. Homebuilders like Lennar, D.R. Horton, should have bought at Home Depot, should have bought Fortune Brands, which owns Moen and Plumbing. They all went up like 10 times, 10.

Andrew: Aaron, I'm pulling the stock charts up for you right now. Yes, so Lennar at the time, at 2009, was at about $10 per share, and today it's a $100 per share. So that's a ten-bagger in 11 years plus dividends along the way. And you wouldn't have had, as you said, if you do it through refund, you're just a pencil pusher, right? You just press why you're done.

Aaron: I mean, I could have invested in the best management teams.

Andrew: Yep.

Aaron: And just let them do their job. But 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.

Andrew: Yep.

Aaron: It didn't go anywhere and then went up ten times.

Andrew: So let's keep Lennar and Home Depot and those in mind for because I'm going to come back to them later. So, 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. And you should have just done the simple thing, Bob. Bought the stocks and let the management teams on their thing. So with your Cannabis fund, so now we're in 2021. You see a similar opportunity for Cannabis-

Aaron: Yeah. I see no institutional capital. Because it's federally legal there, and there's custody issues. There's no institutions. There are almost none. And I'm looking around and being like, this is a great thing.

Cannabis is being normalized much, much faster than 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 crossing state lines.

Andrew: 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 real quick because you're gonna look real fast 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 right, New York, legalize it because of Jersey and Connecticut.

I've got friends in Connecticut 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 give you like candy around the corner."

Aaron: Yeah. No. That's exactly right. And so, I see the same kind of like this very powerful trend where you have this industry with massive tailwinds that is growing and, 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 in 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 would thought, "Oh," because they view it through this. It's, 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. But they then- and then in February, it peaked. When all of a sudden, it was a slow realization. Wait a minute. Biden is not pro-legalization. He's not going to move on it.

Even had to slow set kind of painful cell up, or some stocks have gone 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 US Cannabis. I really think we're in spring training.

Where are we at? The game hasn't even really started. And I'm looking around, and I'm saying why? And all summer, I'm watching stocks 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 can see other sectors. It's not just the single-family rental. The other thing I would say is people forget. I started 2009. Home prices kept going down.

Andrew: Yeah.

Aaron: They didn't bottom until end of 2011, 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 team showed up for the Auxins in Georgia, in Blackstone, and Colony Capital showed up. And home prices were up instantly, 50 or a 100 percent. 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, [inaudible] were underwriting for the long term." And so I see this, I've done it before. I've invested in a liquid stuff. I've seen, 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 pace capital that agrees with my thesis. And say, 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.

Andrew: The markets going to keep bidding up. Actually, I'm not. I was going to talk about a certain spec 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 Black Backwater exchanges to the New York Stock Exchange, and the stocks are probably going to go through the moon just to on that excitement, right? But if we put aside that pop for a second, you can talk about how you see legalization playing out if you want, but I'm also more interested in. What if we don't get legalization? Do you think does this play? Can this fund still work? If we're in this mish-mash of kind of legalized state by state and we never get these off the Backwater exchanges.

Aaron: So this is another part of I think where my focus is just different. I'm not focused on the with the legalization process.

Andrew: Okay.

Aaron: Or Congressional movements, or it's not a bet on politics.

Andrew: If I can just add, 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.

Aaron: Yeah. No, that's exactly right. And, but when I look at it, because it's a capital star of the industry. My big thesis is that there's only about 10 or 15 companies that have access to capital. And they can borrow while they can. They have to borrow at high rates like 7 to 9 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.

Andrew: Yep.

Aaron: And meanwhile, you are big tobacco, alcohol, CPG, all the Canadian Cannabis companies, and giant private equity that are all on the outside looking in. And they can't get in or their Compliance Department 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 Ayr Wellness et cetera. That are literally free in a standpoint, although still restricted, right? Because capitals tight.

Andrew: Yep.

Aaron: But they are free to build their moats. But 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 the 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.

Andrew: Yep.

Aaron: How many dispensaries has the city of Boston approved? Do you know?

Andrew: I do not know. But I know, I will say, because you and I both talked to the guys of our Glasshouse. I know that local municipalities, some of them, will give them out like Tic Tacs, right? They'll approve a hundred, and then you'll have some municipalities say, "Oh, we only need one or two." I'm guessing that's exactly what 4, 5?

Aaron: Six.

Andrew: Six, okay.

Aaron: So what's the value for Ayr Wellness that has the one in downtown Boston next to the Apple Store. What's the value of that? Oh, [crosstalk], this is incredible. And so what's happening in Florida is it's a footrace between 3 and 5 companies. To develop their footprint because a lot of these cities in Florida will only allow 2 or 3 dispensaries. So you want you.

But the problem in Florida is you have to be vertically integrated. Which means you can't sell 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 2 or 3 companies. And so why this is important is, what's the population of the state of Florida? 21 and a half million people.

Andrew: Yep.

Aaron: Do you know how many medical cannabis patients are there in Florida?

Andrew: You know, it's an older. It's an older thing is for [crosstalk]

Aaron: Right now they're 620,000 Medical Marijuana patients in Florida, with a population of 21 and a half million. It's old people, what do 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 monthly basis buy Cannabis, do you think? I'm just curious.

Andrew: 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 and relax a little bit. I I would guess it's pretty high and it goes higher as...

Aaron: If we just say if we just say 20%. That's that's like close to 5 million people. How many tourists does Florida see a year? 100 million [crosstalk] is so when I use it.

Andrew: Is it recreationally legal there? Or is it only medicinal? [crosstalk] It's only medicinal, okay.

Aaron: No, It's the only medicinal. You need 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 a hundred million tourists. I can make a very, very strong argument that the Florida Cannabis Market is going to grow 10x.

Andrew: Yep.

Aaron: 10x [crosstalk], and that's the opportunity. Is that you get to invest in a company like Verano, which their subsidiary, AltMed, or Ayr Wellness, whose subsidiary it was Liberty.

Andrew: Yep.

Aaron: Ayr Wellness moved their headquarters quarters to Florida for a reason, and it's like that's the opportunity here is. There's no real competition. There's no Capital. So 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.

Andrew: And it's interesting you mentioned Florida because it's only medicinal right now. But Florida, 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 [inaudible] and medicine.

Medicinal is generally the gateway to getting some recreational. So it's just interesting. We mentioned, people frame 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.

Aaron: 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? And what I see from people there 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. We'll fix that.

Andrew: Yeah, and once you get the person across the street from you, who's getting it for glaucoma or to deal with some pain from [inaudible].

Aaron: And it's like knee pain or back pain, and I'm not in 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 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 the drag or what does for me.[crosstalk] [laughs] and it's like, but I don't have much experience when it comes to Cannabis, and it's going to be fascinating to watch how's 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

Andrew: 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 it was, you know, especially growing up, my experience with Marijuana was the "Dude, where's 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, 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?

Aaron: 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 think is really, really important that is not discussed enough. And I'm glad you're mentioning this, is that this is the main part of the thesis. Is that, we have these myths and misunderstandings about the Cannabis plant. 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 so few investors like myself.

Andrew: I'm laughing to myself because if you had cocaine stocks in the 80s or something, you could see Wall Street just getting all in behind it.

Aaron: Yeah.

Andrew: 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 Lennar, which is a home builder, which would have been a direct playwright. But you also mentioned, I could have bought Home Depot, which Home Depot is not building houses, but if you are building the 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 and Ayr Wellness which are vertically integrated players who are going to grow the Cannabis, and then they're going to operate the resale store. But the other way you could play Cannabis is you could do it through kind of the Home Depot's, right? The people 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 Wellness's the people are actually great. Or are you focusing on more the Home Depot's, the suppliers? And if you got people talking about the fury [crosstalk].

Aaron: Yes, you are 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 US Cannabis. So, 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 Leafly, and I've written about how interesting that is.

I'm a big fan of Mitch Baruchowitz at Merida Capital. They're one of the private Equity Venture investors in your Cannabis, very successful. He was the first outside investor in GrowGeneration, which has been a phenomenal performer. And that's just one of his many investments. And so what I think it's really interesting, as you think about how hard it is to advertise in Cannabis. Where do you advertise? And I think that Leafly is really interesting and Weedmaps is really interesting.

Andrew: Yep.

Aaron: You can definitely see ordering. It's going to be important and like digital Technologies around Cannabis. And so, but there's also different equipment, you know, picks and shovels play's out there that people are talking about, and my goal 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 MSL 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. The Cannabis space. But I'm going to weigh it towards the companies that I think have the best management and have clear-cut, 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 a hundred billion dollar revenue industry that is mostly illegal. That's like 25 billion of legal sales. That it's going to at least 200 million, 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 talked to them, and we're like a little tribe. I'm trying to [crosstalk] [inaudible].

Andrew: You're a little Marijuana mafia.

Aaron: Yeah, Marijuana mafia, I like that. But if you 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 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 that people have asked me like, oh, I wouldn't, there's an ETF out there called MSOS. And so, why wouldn't you just buy an ETF? And I guess you could, and 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've weighed it. What company is that 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 financing that look like sale-leasebacks. And they're locking these companies into very expensive leases that escalate over time. And when cannabis is legalized, when the banking system is allowed to reach it, the whole business model falls apart. It's very, very expensive, and I want to say it's like the third or fourth-largest position in the ETF. I don't want to make that bad.

Andrew: It's a weird ETF. I haven't really looked at it, but I just pulled it up on Bloomberg, and this is just what Bloomberg is selling me. But, 75% of the ETF is in cash. And then 13% of it is in innovative industries.

Aaron: I don't know what that's that's correct. You can go to their website.

Andrew: Yeah.

Aaron: And the other thing is there's swap, so they don't directly on [crosstalk].

Andrew: That's a good point, but it says 13% is in there. So that's a [crosstalk]

Aaron: 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 early for a Green Thumb. And so, I believe Verano has great management, and they have very similar footprints to like Green Thumb or CuraLeaf. It's just that Green Thumb and CuraLeaf 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 this bunch of stuff that, 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 none. So I can write about a Merida 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, I know they were at 1 point up a 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 it's going to continue over time until you see this flood of capital come in.

Andrew: 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 are 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, 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 [crosstalk] give people idea.

Aaron: I believe they have that 3-year compounded annual growth rate of. Like I want to say, it's at least 50%. It might be 40%.

Andrew: Is that organic or inorganic because I think they do deals.

Aaron: It includes both, includes both, and they trade at less than 6 times next year's cash flow. And what's important about that is there in a net cap, cash position. And cash flow, by the way, is the EBITDA, and there's reasons I use EBITDA than others. But it's 6 times EBITDA per compounded, annual growth rate of 50%.

Andrew: Yeah.

Aaron: And because Cannabis, that Capital constraints around CannabisCannabis. They're sitting on three to five hundred million dollars of unencumbered real estate. They own all the real estate. The other thing that's weird about some of these multi-state operators who talked about MSOS, if they do the cultivation, they do the distribution. Sometimes of other people's products. They do the retail. They have their own brand. They own their 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 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 of might be a little less 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 are even something called the NEO. Okay, and this is an important point. I've come to realize that what you're really doing is buying a private company. That has this weird trading stub. 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 is this important is, you 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 talking, "Oh my God, I can't believe they're going down" and, all this stuff, and what I want to say is that you have to understand what you're buying.

And when Verano, on a good day, is treating eight million dollars of stock. On a three and a half-billion-dollar valuation. And that eight million dollars can remove 8% of the valuation. And eight million dollars can move almost 300 million dollars 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 it's, there's no new capital entrance. Verano is buying company. Ayr 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.

These things are not trading in an efficient manner or a 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 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 got to understand that they can go down 50, 70, 80 percent. You got to be okay with it.

Andrew: 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, yes, there was some volatility, but they never really experienced. Anybody who's invested in OTC stocks 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 looking good. Well, I'm pretty sure this company didn't lose, you know, 50 million dollars of value, just because Seven Trees share straight, and 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. He's a super-sharp guy. We were talking about POSaBIT, which is, have you looked at this?

Aaron: 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 of there. 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 [crosstalk] have not written and I wrote my- I'm watching the fund. And then this one investor reached out and says, "Hey have you heard of POSaBIT?" And was like, "Hey, I can introduce you," and I was like, "Oh, I don't know, it's some weird company." It's like, I have this weird reactive, and then they are like, "no, let me intro, and I'll 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 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 this is just one example of, I think several, and this is why I'm starting the fund.

Andrew: Well POSaBIT people know. It's a great pity. People can go listen to the podcasts I did with Jeremy for the full pitch. It's a very interesting...

Aaron: And Jeremy, Jeremy is of one of these people who does deep-dive research.

Andrew: He did really good research on that.

Aaron: And so what, the thing is there just aren't many people like Jeremy, doing work on the sector.

Andrew: My question for you was, so we were talking about it, and POSaBIT just point of sales operations. And one of the questions I had was right now, a lot of the retailer's mom-and-pops, their 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 start buying out.

And you've got a hundred, 200, 300 company storefronts that are run by one private Equity Firm that could be bad for POSaBIT. Because if POSaBIT sells, lots of mom-and-pops and all those get bought out. They don't have business. So, I guess that's actually your- regardless of my question.

My question was right now, a lot of the players are vertically integrated, right? They grow the wheat. They own the brand. They operate the retail source, that's much different than we see. Alcohol is the one that I've been thinking of where most of them big, own the brand, and maybe they owned the distillery as well, but they definitely don't own the retail source.

So, as this kind of evolved over time, How do you think that slicing and dicing, as you called it a second ago, How do you think that involves? Do you think people are going to stay vertically integrated? Are you going to see some companies that focus only on brand, some companies that focus on growing, some companies that retail? Like, what do you think?

Aaron: I think that's exactly right? I think you're gonna have a retail-only place, kind of like a Starbucks or, you know, any kind of retailer. It's like, hey, this is what we do. I think you're going to have wholesale place, distribution place. 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 it when you dive into Cannabis.

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 them 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, it's private that I wish was public is a company called Cookies. I don't know if you've heard of them [crosstalk], But they're like ultra-high premium, and they go in. And they actually source for many companies, but they go through it 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 their 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 1 company. You don't want to even bet on 3 or 4 companies. You really want to invest in the sector and not you, but you don't want a shotgun approach because they're 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 on ethically, but just 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 has 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 2, 3, 4, 5 that just go lights out.

Andrew: 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 pricing. So I just want to bring this back.

Aaron: About Amazon. This is a really important point because Cannabis is getting crushed right now, right? As a sector, because they're very illiquid. But people always like to say, "Oh, Cannabis is like, or Amazon, look how much it's up," and all this stuff. People forget it when [inaudible] like 95%

Andrew: [inaudible] bought the bonds at like 50% of par, and obviously [crosstalk] I do just want to bring it back to valuation real quick. So when we talked Verano, you said, "Hey, 40% growth, some organic some inorganic trading at maybe 6 times next year's cash flow," which find me anything trading as 6 times this extra cash flow, right?

But we, you and I have talked about this before we may have mentioned on the first Glasshouse podcast, but for people who haven't looked at Cannabis everyone values, these on EBITDA. EBITDA sometimes gets a bad rep among investors sometimes doesn't, but I think EBITDA 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 here that number and really process it.

Aaron: The reason is that because it's federally legal, Cannabis is not, is the wackiest thing, it's illegal, but they pay taxes. They don't just pay taxes, according to this IRS Rule 280E. This is, it's so absurd to even say this. If you're operating an illegal business, you cannot think about how absurd this is. What I'm going to tell you 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 in 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 for 400, 450, it's something of where they're going to end up in cash flow, but let's use next year. Top of my- It's neat, it's close to 600 million dollars of EBITDA, think about how much taxes they have to pay.

Andrew: Yep.

Aaron: And to think of the, 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 this legalized they're going to pay taxes like everybody else, and they're not, some of the tax rates can go 60, 70%.

Andrew: Yep. Exactly. So right now, you know, if you do a $100 in sales and let's just say, if I'm selling beer, maybe I do a $100 dollars in sales and cost me $50. Well, I'd report $50 in profit, and I pay 20% taxes maybe, so I pay $10 in taxes. What are insane is, with Verano, if they do $100 and say on their cost of goods sold was 50. Well, they can't deduct that to the IRS. So the IRS says, oh well, looks like your net income was a 100. So you need to pay. [crosstalk] you need to pay 20 instead of 10%

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

So if you have the best metrics for cash flow, cash flow from operations, and for that, converting it to free cash flow. Why do you sell for half the multiple or 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 but EBITDA and be like, oh, EBITDA does everything. There's lots of ways that EBITDA can lead you astray.

Andrew: 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, 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? That they should start.

Aaron: Yeah, I would I follow Verano, I would follow Ayr 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. It's, a lot of these companies are now developing, you know, presences on Twitter. I would follow, I would follow Glasshouse and Graham Farrar is very active on Twitter, Todd Harrison, who is another investor in the space. Does a great job of updating and providing a lot of links.

Andrew: He's got a weekly substack that I enjoy those

Aaron: Yeah.

Andrew: And every week it's well, Cannabis stocks went up another 10% this week.

Aaron: I literally, I'm dying to start buying these stocks in fund, I'm like, please don't go up.

Andrew: What is a podcast of like this because you are in the process of launching a Cannabis fund? Hasn't quite launched yet; people should reach out to you if they're interested in learning more and stuff and [crosstalk]

Aaron: 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, Aaron Value, where you can go to, my substack, and contact me through there. If you just wanted to talk more about Cannabis or anything else, investment. I love talking stock.

Andrew: Perfect. Anything else we should say on Cannabis or anything? Before we wrap this up.

Aaron: All I would say is Go Braves.

Andrew: 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 pond 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.

Aaron: Yeah, it'd be great. I love coming on. Thank you for having me. This has been fun.

Andrew: Perfect.

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