Investing in Cannabis: The Path Forward through the Perfect Storm

Public market opportunity and private equity potential must level-set until Washington provides federal guardrails.

Color umbrella in sky . Mixed media
Illustration: Sergey Nivens / Shutterstock

As the economy careens toward recession, smart businesses have reached back to a familiar strategy we all leaned into during the pandemic: The Pivot. Millions of companies have pivoted business models. The huge growth of online sales during the pandemic is now becoming permanent and has been called the small business “pivot to digital.” Even employees are pivoting, seeking new careers in what has been coined the “Great Resignation.” There’s so much pivoting, most of us have whiplash at this point.

Although it is sometimes viewed as a Hail Mary pass, the pivot is instead a strategic maneuver that smart businesses undertake when circumstances demand. And today is an excellent time to contemplate a pivot. The economy is in a state of flux. And cannabis companies, in particular, are in a precarious position. First, the challenging macroeconomic environment coupled with the haze around federal permissibility has near completely shut off the flow of capital to the industry. Add to this new wrinkle the ongoing challenges we’ve faced since the beginning of the nascent industry a decade ago: interstate commerce is banned; profit margins are thin due to over-taxation; access to basic financial services is severely restricted and heavily marked up; and opportunities for capital and financing are scarce. But this industry has always been built on ingenuity, dedication and its ability to pivot when needed — and that is no different under current conditions.

Advertisement

When voters ushered in a Blue Wave in 2020 and Democrats took control of the White House and Congress, the cannabis and investment communities alike viewed this as a cue that federal permissibility was imminent. Top investment groups read the signal as the time to jump in early and big with huge investments and large gambles. As the months–and now years–have ticked by, the realization that the Democrat-controlled federal government wouldn’t be able to deliver immediate change, these same white shoe firms pulled back so hard the proverbial rug was ripped out under the cannabis industry.

As cannabis companies try to decipher a read-out from Washington and Wall Street, some considerations present themselves. First, the question for the industry is not only which kinds of capital are available, but what strategies are in fact optimal for the times. If you have a strong constitution, even bigger risk tolerance along with historical and business expertise, investing in privately held companies may present a good opportunity. And if this investment is currently a non-functioning asset, the assumed risk is as high as the return is expected to be massive.

And while the majority of cannabis companies are privately-held, dozens of cannabis companies are trading on the public market. Publicly traded companies must report material events, essentially marketing their value to their shareholders on a daily basis. Meanwhile private companies—which are dependent on organic growth or private equity debt—aren’t legally required to consistently disclose publicly the daily minutiae of the company until they move to conduct a substantial raise. The bottom line: Cannabis companies on the public markets are currently taking a public thrashing on their stock prices because we can actually see directly into their books, revealing the true effects of the forces—political, financial, cultural—they face that are completely beyond their control.

At this moment in time, some of the most valuable and durable publicly traded cannabis company stocks are on sale at bargain basement pricing. With the right research and counsel, some of the best growth opportunities will be achieved by picking up some of these deals.

Today, current conditions suggest operators must focus on organic growth within their jurisdictions until political and market conditions are corrected to allow for these organizations to scale. When federal policy is clarified and the cannabis industry can receive fair—and not overly burdensome—taxation and banking, market and advertise similar to any other comparable industry in a normalized way nationwide, and biomass can move across state lines, conditions will improve for companies to consider leveraging public markets. But as exemplified by the lack of progress on several bills introduced to both sides of Congress, federal policy movement is not likely this year and may not have any real potential for progress for years to come.

Macroeconomic forces across industries and around the world are forcing a closer look at the best use of investment dollars. Industry experts are waiting for the market to bottom out. But with institutional investors, decent available debt and other financial vehicle options, private funds currently hold one type of an advantage on one hand, while publicly traded companies offer—if selected strategically—have the growth potential of the next P&G or Anheuser-Busch InBev.

The federal government must provide clear guidance on permissibility around legal cannabis. When that happens, watch for the public markets to reward companies that were previously battered. Until then, consider the value buys on the public market while smartly and strategically investing in successful privately held entities with sustainable and conservative burn rates.


Joe Caltabiano Choice Consolidation Corp mg MagazineJoe Caltabiano is founder of JSC Fund, a family office seeking opportunities in regulated industries including cannabis. Previously, he co-founded Cresco Labs, one of North America’s largest vertically integrated cannabis operators, and grew the company from a start-up to a multistate operator with annualized revenue of more than $250 million and operations spanning nine states.

Advertisement