What has COVID-19 Meant for Cannabis?

What has COVID-19 Meant for Cannabis?

I think the Dickens line, "It was the best of times, it was the worst of times," wraps it up nicely. How's that for a pretentious start to a newsletter, quoting Dickens? To balance, I can promise that I watched far more Tiger King than I read classics these days.

I digress, forgive me I forget how to interact with humans of late. To reiterate, this idea of a dual sided coin is an apt comparison for what is happening in cannabis as the virus spreads. I'll let the medical community postulate on the pandemic and instead give you a perspective on our little corner of the world. I think you'll find there are more silver linings here than we thought and these days, every silver lining is a welcome one.

Let me break down for you the wild world of cannabis in a corona-virus world.

Positives:

As an investor in cannabis I can safely say we at Entourage Effect Capital haven't seen a more attractive entry point from a valuation, revenue, proximity to legalization (given the essential services mandate) and a capital constrained standpoint. If it is true what they say, "Real wealth is made in the downturns and collected in the rallies," we may be at a seminal point in history. Here's my take on why:

Essential Service

Cannabis went from illegal to essential in about two weeks flat. Nearly all the 33 states that allow some form of cannabis consumption have declared the industry an essential service. Contemplate for a moment that cannabis is now listed right alongside hospitals, doctors, grocery stores, gas stations and fire departments as an essential service. This ability to continue to serve consumers is unprecedented and leads to my belief that legalization may be closer than we anticipate.

Surging Cannabis Sales

Deliveries are at all time highs, with some delivery groups in Nevada showing 400% increase in deliveries post COVID-19. Cannabis retailers across legal states have seen wild swings in sales of late with some weeks leading to tripe digit growth, to sales plunging back down as consumers stockpile. We anticipate this volatility will continue to even out but in a world with more alone time and 10x the level of stress and anxiety, we feel pretty safe assuming sales aren't going anywhere anytime soon. It only takes you imagining (or living the life of) being a parent of multiple small mini animals (ahem) humans, while trying to work and quarantine, #freepotforparents should be trending.

Increase in New Consumers

From new consumers of all ages, to increasingly more elderly patients re-engaging with the plant, cannabis is moving into the mainstream. I lead a call the other day with Eaze, Weedmaps and Caliva (for Arcview Group) and they each said new consumers were increasing week over week by anywhere from 150-600%. Our portfolio companies from Sublime, to Sunderstorm, to Urbn Leaf, to Holistic, to CANN all have seen similar pops in demand.

Recession Resistant Thesis Gets Tested

We've long surmised that cannabis may be recession resistant both given it's vice nature (aka alcohol and tobacco both perform better than the broad market during downturns on average), it's medicinal nature (aka consumers continue to buy medicine even during recessions), it's consumer staples aspect (aka consumers may limit discretionary spending like going to Disneyland but they are still going to buy Lucky Charms cereal). It appears we may be right.

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Cannabis Stocks Are Up (Finally)

Perhaps given all the above, cannabis stocks have just now (almost a year since their first plunge in June 2019) seen a rebound and outperformed the S&P500. Also cannabis companies are finally seeming to follow their promises on the path to profitability with GTI, and a few others, hitting EBITDA positive numbers. This trend will continue and speaks to the demand.

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Negatives:

If everything was perfect there certainly wouldn't be any opportunity so it is certainly worth noting a few of the downsides to the industry notably:

China Supply Chains Touches Cannabis

Even though using or holding cannabis in China could net you the death penalty (isn't that fun), the industry isn't entirely insulated from it's supply chain. As the number of masks and protective gear diminishes, and manufacturers of vape or cannabis hardware slow their production, the industry could feel the affects. Especially when it comes to testing and lab sanitation. That said, thus far the affects have been minimal to non-existent for most companies.

Black Market Uptick

We haven't seen data to support this yet but typically when recessions occur consumers are more price sensitive and given the amount of taxation on the legal cannabis industry it is very tough to compete price wise with competitors that pay 0% and follow 0 regulations. Watch to see if black market grows on the back of this market.

Labor Shortages

Companies across the industry have seen the single biggest demand in temp workers since the dawn of the industry. Employees are determining they do not want to come into work for fear of infection or exposure. Let me tell you running a business without humans is still in this day an age a difficulty. The market is looking to fill with those who see the economic benefits of temporary labor.

To drive towards hope is the premise of humanity, continuing to progress and innovate is the premise of entrepreneurs. We sit at a time to see much of both.

Codie Sanchez

Cannacurious? Want to get into the game... here's our contrarians' guide or find out more information on our firm below.

IG: @codiesanchez

EEC: www.entourageeffectcapital.com

CS: www.codiesanchez.com


This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Entourage Effect Capital, LLC or its affiliates. Any such solicitation of an offer to purchase an interest will be made by a definitive private placement memorandum or other offering document.

Ashur P.

Co-Founder and Co-CEO @ TruLeaf, Inc. | Cannabis Cultivation

4y

As you said cannabis is essential and Church is now illegal. 🤣

Matt O Brien

Passionate about misunderstood industries

4y

Very informative & insightful article! I would love to obtain your perspective on how you see this impacting cannabis legalization on a more global scale. Given that many nations around the world have brought their economies to a complete standstill and are now facing considerable deficits would you see this being a factor of consideration in the ongoing efforts to legalize cannabis given the vast employment opportunities and taxation revenue legalization creates/generates? . . . Codie A. Sanchez

Thanks Codie, I appreciate the update & agree that the realization MJ is "Essential" shows us the authorities are catching on and progressing as rapidly as you imply. A lot of friends complain, in Cali especially, it's difficult for legal companies to compete with illegal companies who don't need to pay high state fees, taxes, no federal 280E deductions, etc.  I would think the illegal companies have troubles with logistics and operations with the present quarantine.  I agree that typically, in these times, consumers would become more price sensitive but am not sure about the accessibility. How do you think this horrible CV-19 situation will affect this illegal market pressure against legal MJ companies? Thanks again for your insight and especially for allowing the industry participants to compare notes & collaborate toward our common goal of a full legalization. Be safe, Steve  

Akshay Bawa

Targeted Skincare for Women

4y

Good read.

Matt Burlando

Innovative Healthcare/LEGAL CANNABIS/SaaS/Technology/Logistics Chief Financial Officer and Executive Leader

4y

Codie A. Sanchez tremendous article ! If this pandemic has taught us nothing else about cannabis, it is that America needs a home grown and controlled new pharmaceutical option. This pandemic should expedite the FDA clearing a way for an exponentially easier clinical pathway for all the wonderful Pharma options that can be derived from this multi faceted plant 🌱 Another great reason why this is the time to be a cannabis investor !

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