The cannabis markets continue to defy expectations in good ways and bad ways. Last year saw significant challenges in mature (legacy) markets like Colorado and Oregon with competition driving prices down. This was good for the consumer but bad for the companies struggling to cut costs. High regulatory burdens, including taxes, took a toll on many firms and many operators closed shop entirely. At the same time, there were emerging markets pushing the national industry forward. States like Missouri outperformed expectations while lots of interest fell on New York and New Jersey. Other markets such as Massachusetts seemed to come into their own after a few years of trying to find some footing.
The investor view of cannabis has never been more negative. This is largely driven by the failure of the federal government to pass any meaningful legislation to help the legalization initiative. No SAFE banking. No decriminalization. No interstate commerce. No tax relief. Nothing. These failures surprised many, many investors though in hindsight perhaps we were too optimistic. There is no champion in Congress to drive forward legalization and we do not expect it anytime soon. If it happens, we’ll be ready but for now we expect little progress and we’ll be focused on building our assets in state markets.
We hope you enjoy this brief watchlist. Many, many markets and brands didn’t make this paper simply because we wanted to keep it short. The cannabis industry is about 50% of the way to the end of the first inning (cannabis being fully available in every state). The investment opportunities are abundant, and the due diligence needed to find them is significant. Please reach out with any questions or thoughts.
Key markets in 2023 will be New York, New Jersey, Massachusetts, and Missouri.
New York represents one of the nation’s largest potential markets with a high population and a high level of tourism. Additionally, New York City is the financial capital of the world, and it cannot be overstated the importance of familiarity with regard to policy changes. In other words, once the financial leaders of the world get used to recreational cannabis, they’ll be more likely to support financial servicing of the cannabis industry (i.e., SAFE banking).
New Jersey is one of the sleeper markets that people overlook because of its larger neighbors, New York and Pennsylvania. With a large population and strong tourism play (Atlantic City anyone?) the Garden State is poised to be a major cannabis market, beating New York and Pennsylvania to launch recreational sales. Another overlooked aspect of New Jersey is its wealth, ranking as a top state in the Union for average income. This bodes well for premium brands as well as average shopper basket size.
Massachusetts continues to come into its own with strong market performance. As a large and wealthy state, like New Jersey, Massachusetts is the dominant market in New England. Brands also play a strong role in Massachusetts and we’re watching closely to see if brands can leverage good performance there into other markets like New Jersey.
Finally, the Show Me state, Missouri, is growing strongly as they expand their already big medical market with recreational sales. Missouri is another overlooked state as it actually contains two large metro areas, Kansas City and St. Louis, in addition to being home to almost 5 million people. Tourism is not at the level of other states of similar size, like Colorado, so we don’t want to overstate the total size of the market but there will be room for a $1-2 billion in sales.
Picking brands is remarkably tough as consumer preferences evolve, competitors rise overnight, and internal company challenges can derail even a great brand. That being said, here are a few we’re watching in 2023 along with the market we’re most interested in.
Dialed in Gummies, Colorado.
Colorado remains one of the largest markets and was also the site of a head-to-head battle between two giants in the gummy category, Wyld and Wana. Dialed in Gummies emerged out of nowhere and is taking the market by storm with exceptional performance that threatens the dominance of much larger firms, driven by innovative products and a focus on high-quality. We’re excited to see how the Dialed in… approach does over time and whether Wyld and Wana can execute a counterattack to fend off this threat.
As a smaller (Massachusetts-only, at present) vape company, Fernway’s built a strong lead over larger, national, companies. Their focus on fundamentals is a pleasant shift from the slick marketing focus of most brands and we’re always impressed by their knowledge of the market and their own firm. With expansion plans in the works it will be fascinating to see if the Massachusetts foundation will allow them to rapidly grow to other markets. We’re also going to be watching to see their performance in Massachusetts as the market matures, now in its fifth year of recreational sales. This is a period when other markets have become significantly more competitive as companies start going head-to-head for the same consumers.
We’ve known 1906 since they started as a chocolates company in Colorado. Their emergence as the leading pill-format company was surprising (in a good way) and we’re looking forward to seeing how they evolve now that they are the leader in that format, and it’s not close. Will their success drive others to follow? Or is the pill category too small to garner attention from larger competitors?
Select, New Jersey
As one of the brands under the Curaleaf umbrella, Select is often compared to a Budweiser or Coors-type brand within cannabis. Their success in New Jersey speaks to either their execution or the strength of the Budweiser model. Or maybe just to the preferences of Jersey folks… Regardless, Curaleaf is a massive company and we’ll be watching to see if their resource advantage is enough to drive success in New Jersey as the market evolves.
One of our favorite product sets…and we love that it is one of the female-led brands, Gron is a bit of a throwback in that they sell products that hit hard and are loved by cannabis-savvy consumer, and yet they appeal to many newer consumers with strong branding. Bringing minor cannabinoids like CBN forward to the consumer appears to be a winning recipe as Gron’s Pearls products emerge as strong performers.
7thirty provides investment solutions to accredited investors as well as advisory services to companies and investors. Our quantitative approach sets us apart from other alternative-focused financial service providers and allows us to see the forest for the trees, avoiding pitfalls and doing the hard work to “get lucky”. We focus on data and use it to guide our intuition as we select and manage investments, and provide advisory services for our clients.
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Founded in 2018 with a focus on the emerging legal cannabis industry, 7thirty’s team brings decades of experience on Wall Street and Main Street in commodities, ag-tech, fin-tech, cybersecurity, and asset management. We are known for our hard-nosed diligence, quantitative focus, and unfailing ethics (as well as our use of the Oxford comma and single spaces between sentences…and maybe our lame humor).