Mature markets exhibit oligopolistic tendencies while
emerging markets such as cannabis are highly fragmented.
In a federally legal environment, cannabis businesses face
three outcomes: the majority will not survive, a lucky few will get acquired and even fewer will remain independent. Steering an investment portfolio towards the latter categories can have an outsized impact on risk-adjusted returns.
“It is a poor business that makes nothing but money”
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Sector and time based tactical tilts are an important step in portfolio optimization:
Cultivation: Price declines in states with mature legal markets remain consistent as larger cultivators flood the market to establish consumer loyalty. Cultivators are well-served to embrace agricultural technology solutions for cost reduction and yield optimization, while for investors an understanding of flower commoditization’s sector and margin impact is imperative. Given the increased vertical integration efforts for margin protection, it is of little surprise that this sector ranks amongst the highest for cannabis M&A activity. Local testing, compliance and taxation requirements have an outsized impact in certain states; short-term debt instruments and special situation funds are an effective way to capitalize on the arbitrage opportunities afforded in this market.
Tilt: Underweight