INVESTMENT ANALYSIS & VALUATION OF THE CANNABIS INDUSTRY
MJResearchCo conducts rigorous investment analysis of the legal cannabis industry to help professional allocators of capital make better investment decisions.
We view legal cannabis as the most interesting growth theme of the next decade based on this thesis:
Increasing legalization and public acceptance of a proven medical/consumer product and its agricultural/industrial supply chain will see a legal industry grow through share gains of a $50-70 billion illicit market in the US and disruption of ~$400 billion in adjacent alcohol, pharma, tobacco, and wellness products.
Not all companies nor portions of the value chain will realize this opportunity equally given differences in local regulations, market structures, business models, strategies, and management teams.
The cannabis industry remains rife with puffery, half-truths, short-termism, unprofessional practices, and poor capital allocation.
It also has underappreciated quality operators investing intelligently for the long term, and it is difficult to discern these with a surface level analysis.
Layer on complex capital structures, byzantine tax and regulatory regimes that are rapidly changing, and investors cannot blindly invest in generic “cannabis exposure” but must understand the company-specific drivers.
MJResearchCo brings the perspective of experienced buyside analysts and cannabis industry experts to help clients better allocate capital.
For Investors, By Investors
At MJResearchCo, our business model is “for investors, by investors”.
We charge a specific and transparent fee for skeptical, rigorous, proprietary professional-grade research on the cannabis sector that we think will add value to the investment process.
With over two decades of investing experience primarily at long/short equity hedge funds, we basically write what we would want to know as investors ourselves to select longer term winners, avoid long term losers, navigate regulatory changes within a multi-decade secular growth theme, and remain invested amidst volatility.
As described below, we do not write favorably in exchange for payment by companies and have no advertising. Any operating companies and corporate development teams that subscribe do not gain editorial favoritism; they subscribe to better allocate their own capital and understand how professional investors will view their strategies and valuations.
- All analysis is intellectually honest and defensible. You may disagree with the assumptions or conclusions, but we hope that you will respect the logic.
- We value companies thoughtfully on measures of profitability (EBITDA, EBIT, NOPAT, and FCF), while respecting the ability of the market to ascribe ever higher multiples for growth as long as the company’s narrative remains intact.
- We focus on the industry and company narratives, and whether actual results support or refute that narrative over the long term.
- We favor the qualities of any good investment: a long term sustainably profitable and value-added business model well executed by high quality management teams supported by a good balance sheet.
- We search and avoid the pitfalls of value destruction: excessive competition, pricing pressure, cost pressure, poor capital structures, misaligned incentives of the management, and a history of poor execution.
Why are we doing this?
We see a need, we see an opportunity, we a benefit to the industry, and at the end of the day it is fun.
The Need: We view the cannabis sector as a multi-decade secular growth theme, akin to the internet in the late 1990s, that will have investment implications across the entire supply chain as well as consumer, industrial, tech, pharmaceutical, and agriculture sectors.
The Opportunity: There is very little professional-grade investment research currently in the cannabis space, despite the fact that the industry is rapidly professionalizing with advancing legalization.
As laws change, we expect an influx of institutional capital into what is really a domestic emerging market of a proven consumer and pharma product that needs an entire agricultural and industrial supply chain to be built out.
Like tech in the early 2000s, we also see great dispersion in the specific companies involved, great disruption to adjacent industries, and a market that treats most companies the same without delving into the differentiating details.
This dispersion creates many opportunities to generate alpha.
The benefit to the industry: We think the industry benefits overall when stronger operators garner higher valuations and poor capital allocators get starved of capital, and investors benefit when misguided strategies are noted as such.
Ultimately, services such as ours ensure a more efficient allocation of capital to those with good ideas at more attractive rates to the benefit of investors, companies, employees and customers.
Few in society benefit when capital is wasted on bad ideas.
The Fun: We are experienced at learning new things, distilling lots of information to its core essence, and discussing ideas to ultimately arrive at the truth – because that is ultimately what we care most about. We get no points for being wrong, and seek to disprove our investment theses as quickly as possible.
But I get cannabis research for free…
When something is free, you are the product, not the client.
When someone provides free investment research, consider the underlying business model and why they are providing something that has real costs to produce and is supposedly of great value for free.
Some of the business models that we do not pursue:
- No Pay to Play: we do not write favorable research in exchange for payment from companies. Any public companies that chose to subscribe to our service are treated as merely another subscriber that does not curry any editorial favor. Smart management teams read our research for accurate valuations of the sector to guide their own capital allocation decisions, and to understand how professional investors will judge their strategies and capital allocation.
- No Advertising = Signal over Noise: Advertising revenue is driven by higher page views, which ultimately encourages touting noise over signal. We focus on the signal over the noise. If there is nothing to say, we won’t consume your limited attention with noise that could cost you by clouding an otherwise correct investment thesis.
- No Quick Hit Short Reports: some investment research is designed to generate its own catalyst by taking a short position and then publishing short reports, usually with more innuendo than analysis, and then cover into the short-term decline; we do not do this. Any negative report is based on factual fundamental analysis of why value will be destroyed over time, why results will disappoint vs consensus estimates, and are usually based on underappreciated competitive pressures, weak business models, and/or over-levered capital structures. We also try to describe ways management can remediate these issues.
What about our long positions?
As of March 2022, there are no long positions in cannabis stocks to ensure objectivity as a matter of policy. Broad passive exposure to the space via ETFs is possible.
Prior to March 2022, the authors had long positions that were were disclosed, and had defined sell policies and windows. New research that resulted sell trades were published to clients with a window to enable clients to sell ahead of selling ourselves. If a stock reached a previously published target price, we reserved the right to sell at that target price without notification.
What about our Free Membership?
We admit that the Free Membership is ultimately a lead-generation tool to increase conversion to paying customers. Enjoy the free samples of high-quality research, but know that the meaty analysis is for paying clients only.
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Michael J. Regan of MJResearchCo has over 20 years of investing experience, primarily as a generalist equity analyst at Roubaix Capital and Hawkshaw Capital, focusing on consumer durables and cyclicals, industrials, chemicals, aerospace, media, telecom, technology, and REITs.
He earned an MBA at MIT Sloan and a bachelors in Finance and Biology at Georgetown University.
His full resume can be seen on LinkedIn.
In addition to his work at MJResearchCo, Mike’s other works include:
As Chief Analyst for SIP, Mike Regan contributes his analysis, interpretive perspective and journalistic skills to client projects.
Prior Contributor: Colin Ferrian
In March 2022, Colin joined Poseidon Asset Management as a Portfolio Manager, and ceased his work at MJResearchCo.
Colin has been in the cannabis industry since 2017. Prior to MJResearchCo, he previously managed multi-state operator (MSO) accounts on behalf of Urban-Gro, a leading cultivation strategy, design, and equipment distribution firm.
His expertise in ongoing support functions for cannabis cultivations have been cited in:
He earned a bachelors degree in Economics and Finance at St. OIaf College.
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