Pot Stocks Still Offer Promise — Many as Shorts, Fund Manager Says

Welcome to the latest issue of my weekly newsletter on cannabis and psychedelics. Stocks in these sectors have fallen steeply this year, and the much-predicted wave of consolidation has been slow to come. So what are investors doing?   

The perfect orphaned assets 

Chris Yetter, a founder and portfolio manager at New York-based cannabis investment fund Dumont Global, thinks half of cannabis and psychedelics investments are scams or overhyped. But that hasn’t kept him away from the sector.

former partner at private equity firm 3G Capital and Falcon Edge Capital sees cannabis and psychedelics as high-growth and dynamic sectors where it’s just as important to seek out the losers as the winners. His firm has around around $163 million under management, according to a recent recent regulatory filing

Dumont sat down with me over a green juice in Midtown Manhattan this week to talk about his investing philosophy and what he sees ahead.  

When Dumont Global split from 3G at the end of 2019, its plan was to invest across “orphaned” opportunities. How has it evolved?

For the past five years, Dumont has invested in orphaned assets — a word I use for any asset class neglected by large institutional investors, mostly due to regulatory or mandate restrictions. That includes frontier markets like Venezuela or Argentina that are below emerging markets, as well as litigation finance, micro-cap stocks — anything unclassifiable. In 2021, cannabis came on to our radar as the perfect orphaned asset: high growth, low participation of professional investors, and complex regulations. We launched an investment vehicle focused on cannabis, psychedelics and other active substances in January of this year.  

Who are your investors?

We have several sophisticated institutional investors, and some high-net-worth individuals. People who are comfortable with complex regulations like investors in new technologies or emerging markets. Our entire setup is to focus on the compliance needs of large, institutional investors.

It’s been a tough year for cannabis stocks. How are you doing, and do you see any light at the end of the tunnel? 

Absolutely, the average public cannabis or psychedelic has lost 50% of its value this year and private investments are probably down 75%. We don’t publicly disclose performance, but having an active short portfolio has helped us significantly outperform the broader market.

What are you invested in?

We’re a “crossover” fund that has flexibility between public and private markets. Today the public side is more compelling. Our main focus is on US cannabis companies, the multistate and single-state operators. We’re mostly interested in plant-touching companies. I’d prefer not to name any specific investments. We also have an active short portfolio. Most investors view the sector through rose-colored glasses, but if you run the screens on all the cannabis companies in the US, we estimate of the 300 to 400 public companies in the sector, more than half of them are scams, frauds or promotes — in other words, an overhyped story. This is an industry with few institutions and perhaps it’s easier to dupe retail investors. There are a lot of parallels to crypto in this regard: The industry has potential but the majority of companies and projects are out-and-out swindles. The same comment would apply to psychedelics. But that’s to be expected in emerging sectors.

What about opportunities in other countries? I’m hearing a lot lately about Europe’s potential. And there’s the argument that if we buy our strawberries from Mexico and our roses from Columbia, the US will eventually import marijuana from these favorable growing climates.

I think Europe is overvalued compared to the US. We’re interested in the next wave of legalization, that could come in countries like India, Mexico, Australia and Brazil. These countries have huge populations and they’re not inherently antidrug like China or Indonesia. In India, for example, there’s a long history of religious use. And Australia is like the US was 10 years ago in terms of a highly developed street market. There are some companies in South America that anticipate exporting to the US, but we see that as a long shot. Cannabis cultivation creates a lot of jobs and tax revenue, so it’s a sector ripe for protectionism. 

How do you view the opportunities in cannabis versus psychedelics at this point in time?

Cannabis is a much bigger industry. But we think it’s all the same narrative arc: One thing will get de-scheduled, then another, then another. But cannabis is likely to remain larger. Right now, about 12% of people in the US use cannabis monthly. We think it will go to 20%, including simple uses like CBD to sleep or for muscle aches. We don’t think it will get to that level of use with psychedelics. If you multiply the number of consumers by the times they use it per year, cannabis is a hundred times larger than psychedelics. Whereas you can consume cannabis several times a week, that’s not the case with psychedelics. They’re too powerful. For me, the mental model is that cannabis is a consumer product like Bud Light whereas psychedelics are a medical treatment, like Prozac.

And I’m more in the skeptics’ camp when it comes to microdosing.

Number of the week 

Quote of the week

What you need to know

• While some of the biggest US marijuana companies were preparing to join New Jersey’s newly legal recreational market, several were running afoul of state security and safety rules for their medical-weed operations, documents obtained by Bloomberg show.
• US regulated cannabis sales could advance by 7% to 8% this year as gains from new recreational programs in states like New Jersey offset slowing in mature markets, Bloomberg Intelligence analyst Kenneth Shea writes. Canadian growth could be around 10%. 
• Med-X, publisher of the Marijuana Times, has filed for an initial public offering
• Africa is about to get its first listing of a medical-cannabis-focused SPAC, or special purpose acquisition company, when Cilo Cybin Holdings Ltd. raises money in Johannesburg later this year.
• Bright Green Corp., one of the few companies selected by the US government to grow cannabis for research and pharmaceutical applications, has a securities purchase agreement with institutional investors that’s expected to raise $10 million
• Psychedelics have shown promise treating conditions like depression and PTSD. But even as magic mushrooms approach mainstream acceptance, research is still facing obstacles.

Wednesday 9/14

• High Tide Inc. reports third-quarter earnings after the market closes.

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