Aaron Edelheit is high on Cannabis stocks

Episode Summary

Executive Summary: Andrew Walker interviews Aaron Edelheit about why he is launching a cannabis-focused fund. Edelheit argues cannabis is beneficial for health, wellness, and society, and that the industry remains deeply inefficient due to federal illegality, lack of institutional capital, and extreme valuation gaps. He says the opportunity is not a short-term legalization trade but a long-duration investment in the ecosystem, especially in vertically integrated operators and related picks-and-shovels businesses.

Main Topics: Why cannabis is socially beneficial and should be legal (Priority: 5/5): Edelheit frames cannabis legalization as a net positive for society, citing personal use for insomnia, reduced alcohol/prescription drug use, lower teenage use in legal states, and medicinal applications across pain, seizures, cancer treatment, and wellness. The investment case for launching a cannabis fund (Priority: 5/5): He compares cannabis to prior early-stage opportunities like single-family rentals in 2009: an overlooked sector with no institutional capital, inefficient pricing, and long-term upside that requires patient capital. Legalization, politics, and the real drivers of adoption (Priority: 4/5): Edelheit says the fund is not a bet on timing of legalization. He argues legalization will come slowly, but the sector can still compound through state-by-state normalization, capital scarcity, and entrenched local footprints. Valuation, liquidity, and capital constraints (Priority: 5/5): He emphasizes that cannabis equities are often thinly traded, underfollowed, and mispriced because institutions largely cannot participate. He warns investors to understand that these are illiquid trading stubs that can move sharply on low volume. Vertical integration and ecosystem investing (Priority: 4/5): He expects the sector to slice into retail, wholesale, distribution, branding, software, and supply-chain specialists, but says many leaders remain vertically integrated today. His fund will target the broader ecosystem, not just growers. Skepticism toward ETFs and predatory capital structures (Priority: 3/5): Edelheit criticizes broad cannabis ETFs for opaque construction and points to Innovative Industrial Properties as a business model he dislikes because it benefits from capital-starved operators via expensive sale-leaseback financing. Research process and best-in-class operators (Priority: 4/5): He recommends following companies like Verano, Ayr Wellness, Green Thumb, Glass House, and ecosystem names such as Leafly/Merida. He stresses deep research, strong management, and clear strategy over a shotgun approach.

Key Arguments: Cannabis legalization is beneficial: legal states show lower alcohol use, lower prescription pill use, lower teen use, higher tax revenues, and more jobs. Cannabis is not just recreational; it has legitimate health and wellness uses such as insomnia relief, inflammation reduction, pain management, seizure control, and cancer-treatment support. The cannabis sector is under-owned by institutions because federal illegality blocks custody and compliance, creating a powerful pricing inefficiency. This is not mainly a bet on legalization timing; the core thesis is that state-level normalization and capital scarcity create long-term opportunity even before federal reform. Cannabis companies with access to capital can build moats while competitors remain shut out, especially in markets like Florida with limited dispensary licenses and high barriers to entry. Many cannabis equities trade like private-company stubs on illiquid exchanges, so investors must accept volatility and understand that small trades can move market caps dramatically. The best opportunities are likely a mix of MSOs, single-state operators, software/order platforms, and other ecosystem beneficiaries rather than a single category. EBITDA is a useful metric in cannabis because the industry faces punitive tax treatment under IRS 280E, making reported earnings less meaningful than cash-flow economics. He believes current pricing often ignores operational quality; for example, Verano’s growth and cash generation look stronger than its valuation implies. The sector’s structure is likely to evolve over time into specialized brand, retail, cultivation, and distribution models, rather than staying fully vertically integrated forever.

Data Points: Research period before launching fund: About 3 years - Edelheit said he spent roughly three years researching and investing in cannabis before deciding to launch a dedicated fund. Single-family rental startup capital: $1 million - He referenced starting a small fund in March 2009 to buy single-family homes as an analogy for spotting an early inefficient market. Homes initially bought: 16 homes - He began his single-family rental strategy with a very small initial portfolio. Single-family rental scale: 2,500 homes - He said his platform eventually reached 2,500 single-family rentals. Homebuilder example valuation growth: Lennar from about $10 to about $100 per share - Used as an example of how buying the right sector exposure early can produce a 10-bagger over time. Estimated industry growth runway: At least 10 years - He described U.S. cannabis as having a decade or more of runway. Florida population: 21.5 million - He used Florida as an example of a constrained, high-potential cannabis market. Florida medical patients: 620,000 - He cited the number of medical marijuana patients in Florida to argue the market is far from mature. Florida tourism: 100 million visitors a year - He said tourism creates additional adult-use demand potential in Florida. Potential adult-use penetration: 20% of population - He suggested this as a conservative recurring-use assumption for a legal Florida market. Potential Florida adult-use market size: Close to 5 million people - Derived from 20% of Florida's 21.5 million population. Industry revenue estimate: $100 billion revenue industry - He described U.S. cannabis as a roughly $100 billion revenue industry, most of it still illegal. Legal sales estimate: About $25 billion - He estimated current legal sales at roughly this level. Long-term legal market potential: At least $200 billion - He projected that most of the market could become legal over time. Borrowing cost for better operators: 7% to 9% - He said the strongest cannabis companies may borrow in this range. Borrowing cost for weaker operators: 15% to 20% - He said many others face much higher borrowing costs if they can borrow at all. Verano valuation: About $3.5 billion - He described Verano as having an approximate market value around this level. Verano trading volume on a good day: $8 million of stock - He used this to illustrate illiquidity and how low volume can meaningfully move the stock. Illustrative impact of trading volume: $8 million can remove 8% of valuation / almost $300 million of market cap - He highlighted how thin trading makes prices highly sensitive. Verano EBITDA valuation: Less than 6x next year's cash flow / EBITDA - He argued the stock looks cheap relative to growth and balance sheet strength. Verano growth rate: About 40% to 50% CAGR - He cited approximate compounded annual growth, including both organic and inorganic growth. Verano unencumbered real estate: $300 million to $500 million - He said Verano owns substantial real estate, adding hidden balance-sheet value. Growth in cannabis sector during prior rally: Stocks fell 50% to 60% after peak - He noted a sharp selloff after the sector's post-election and post-essential-business run-up.

Pivotal Quotes: "“It is absurd that cannabis is illegal.”" — Aaron Edelheit: He used this as the central moral and investment premise for why the sector deserves attention. "“I don’t have to launch a dedicated cannabis fund, but I have to because no one else is doing it.”" — Aaron Edelheit: He explained why he felt compelled to create a fund despite the sector’s complexity. "“This is a good thing. You know, just on the sports world.”" — Aaron Edelheit: He was discussing athlete use of cannabis for recovery, inflammation, and performance-related benefits.

Implications: Listeners should see cannabis as a long-duration, inefficient market shaped by regulation and capital scarcity, not just legalization headlines. Winners may emerge among operators, supply-chain builders, and software platforms, but investors must accept volatility and illiquidity.