Investing in Cannabis Stocks? Check Out This Podcast.

In this episode of Industry Focus: Consumer Goods, Motley Fool contributor and cannabis expert Keith Speights joins host Emily Flippen as they celebrate April 20 by talking about how investors should (and shouldn't) get invested in marijuana, as well as some of their favorite ideas for all types of investors. 

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This video was recorded on April 20, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, April 20th, and I'm the host of this consumer goods focused episode, Emily Flippen. Today I'm joined by a very, very special guest, a face and a voice that you maybe haven't heard on Industry Focus for quite some time, at least I haven't since I've been hosting the Consumer Goods show; it is Motley Fool contributor, Keith Speights. Keith, part of the reason why you're on today's because we have a really fun and special episode. Today is April 20th, 4/20, and cool kid lingo and we're going to be talking about the cannabis industry.

Keith Speights: Lots of fun.

Flippen: It's rare that my day job gets to intersect with my podcast works so nicely. As listeners may be aware, in addition to the work that I do here on the podcast, I also moonlight as the advisor for our cannabis focus service here at the Fool and what people may be even less aware, actually maybe more aware of since you mostly work on the free side, you contributed a lot to fool.com articles. Is that Keith, you are a resident cannabis expert here at The Fool and you've been following the industry since the beginning.

Speights: I have, I don't know that I would say I'm the resident cannabis expert.

Flippen: I would.

Speights: But you're right. I have been writing about cannabis since this whole crazy thing started several years ago even before Canada legalized recreational cannabis. It's been a fun ride and I've learned a lot and it's been quite intriguing watching what unfolds with this industry.

Flippen: That's really putting it lightly because it's been eight crazy rollercoasters. I've been following the industry for only a fraction of the time that you have Keith. But when I started paying attention to it, it was during this crazy kind of boom and bust cycle we saw in Canada in 2018 on the rumors that Canada was going to legalize and then the subsequent sell-off once legalization actually happened. It's really been a different experience for investors. You'll hear a lot of people who say they've had such great success investing in the Canada space especially if they only started buying in the past year. Because these cannabis businesses, especially being essential businesses during the pandemic, have actually had pretty good years. On the flip-side, people who bought and especially during that initial high, especially into Canadian players, may have really lost their shot in the space. So it's crazy following this industry, especially having conversations with people because their experience and thoughts about investing in cannabis are so colored by when and how they got involved.

Speights: Yeah, you're exactly right and a lot of it, Emily, the hype was just crazy before Canada's magic date for when recreational marijuana was legalized. There were really some expectations that weren't grounded in reality at the time. People were thinking that that market was going to explode and be a lot bigger than it ultimately has turned out to be. As a result you are right, many investors who got in right at the peak hype ended up taking a bath. Many of the Canadian stocks plummeted and are still not even close to their highs from a few years ago.

Flippen: This was a question I was planning on posing to you later in the show, but it flows so nicely from this conversation. So before we get into some of the fundamentals about cannabis I have to ask, what lessons do you think investors can learn from what we've seen happen in Canada as it applies to the cannabis industries. Personally, I always think about the buy the rumor sell the news phenomenon and while there are differences in the U.S. and Canadian markets, I can't help but feel like we might see a similar rise and then sell off if the U.S. makes substantial movement toward legalization. But before we get into today's show, what should investors be thinking about as far as lessons to pull forward?

Speights: Well, I think you're right. There certainly is this aspect of the rumor that sells the news that occurs with any industry, but especially with the cannabis industry. We saw that in a major way in 2018 with Canadian stocks. But I think there's some clear lessons to learn. First of all, some of these companies are just growing at any cost. I will give you an example, and this is one of those very low cap stocks that we will warn everyone about the risks with MedMen. MedMen is a U.S. based cannabis retailer. I think they bit off way more than they could chew. The stock has performed dismally because they were trying to grow faster than they were able to. 

Another company that did the exact same thing was one of the big Canadian players, Aurora Cannabis (ACB -0.92%). Aurora went on a crazy buying spree and spent so much money that they were just acquiring companies left and right and that didn't pay off over the long run. Basically, it caught up with Aurora. Both of these companies spent like crazy and ultimately had to raise a lot of additional capital through issuing new shares that caused dilution in the value of their existing shares. Both companies ended up having to slash costs, cut back staff and saw their stocks implode. There is a definite lesson from looking at companies that are just trying to grow at any cost and not worry about the financial repercussions.

Flippen: What's really frustrating is that, even in, I guess, financial media, really cannabis media, because a lot of financial media follows that trend and these are still the businesses that receive a lot of press, especially the Canadian players. Aurora Cannabis, for instance, is still one of the most widely held cannabis companies among retail investors, despite the fact that it's written off nearly $5 billion Canadian in asset writedowns, goodwill writedowns from acquisition funded with shareholder value. That's more than twice where Aurora's market cap is right now. They haven't generated a single penny in terms of cash flow. These are businesses that really have a strong history of destructive shareholder value that are still getting a lot of financial press and a lot of financial media. It's frustrating because the industry is so driven by retail investors and these retail investors do take financial media at its face value, which I think has really done investors wrong by focusing attention at the most over-hyped and over-pressed businesses. But I'll hold my rant there. 

It is to say [laughs] that investors should be really cautious when looking and investing in the cannabis space. I really love having conversations about it. The conversation we'll have today for Industry Focus was a really broad one. I think it's going to be a fun conversation, but I also think it's important to acknowledge that the cannabis industry is still a challenging industry. You can hear a lot of press and media about financial tension around legalization. It doesn't mean that it's going to be an easy place to make money and we'll talk more about that today. But before we do so, I had to ask, this is the consumer goods show, so I have to relate cannabis back to consumer goods somehow. I actually think the two are really highly connected. But when you think about cannabis, Keith, do you view it as a consumer goods business or more as a commodity?

Speights: Well, cannabis is certainly a commodity. It's an agricultural crop, so from that standpoint, yes, it is a commodity. But I do think it's really a consumer goods business. Emily, I like to eat Frosted Flakes for breakfast. I love it. Love Frosted Flakes.

Flippen: Me too.

Speights: I've eaten Frosted Flakes since I was a kid, as Tony the Tiger says, they're great. But if you look at it, that cereal really just consists of commodities. It has corn, it has sugar and other ingredients, but it's really a commodity. But Frosted Flakes are differentiated. Kellogg who makes that cereal, they have their packaging that stands out. They have shelf placement in grocery stores. Don't forget Tony the Tiger, their mascot. So they have things that set that brand apart. I think cannabis is going to be like that, and already is to some degree. I think the winners in this industry are going to be the ones that differentiate what really is a commodity. But they will differentiate through their branding, through their marketing, through things that set them apart from other players in the industry. Sure, there are going to be some low-cost players just as they are that compete with Frosted Flakes. But I think this is an industry that should be viewed with the same lens as other consumer goods businesses because I think that's the future of cannabis.

Flippen: I love that analogy. We hear the beer comparison a lot and I also understand that. We [inaudible] these are commodities as well. This is the first time I've heard Frosted Flakes, and I'm going to steal that from you, Keith, moving forward. I love that analogy. I do think it's also important to highlight the differences in the U.S. landscape as it comes to product differentiation versus that in Canada. This is something that I think I've struggled with as an investor. This is personal. Everybody has their own thoughts and feelings. I tend to gravitate toward U.S. companies because the way that regulations in Canada have started to shake out, it's been really restrictive in terms of marketing and branding, and that shelf space excitement that you see when you look at a bag of Frosted Flakes. There's limitations put on products' abilities to have color, to have sweets or sugar in some provinces, anything that can be appealing, which I think has limited some level of differentiation in the products in Canada and the way that we don't see in the U.S., at least not yet. In part because the U.S. hasn't really regulated the space as much as they could. Either way, it is a consideration. I think all investors should be thinking of when investing in the cannabis space.

Speights: I totally agree with you there, Emily. I think that Canada has done a disservice to its cannabis industry by imposing so many of those regulations and limitations. As a result, they continue to see the black market flourish. That's been really problematic for them. I think if they had it to do over again, they might reconsider what they've done. But like you said, in the United States, it has been more of a piecemeal approach and so you do have some states that have more restrictive guidelines and rules for their cannabis industry. But in the U.S. it's been a much different story than in Canada.

Flippen: Definitely. Another question I get a lot has been, well, why would I ever want to get invested in cannabis? I know I have two reactions when I get this question. The first one is that of course, you don't have to be invested in the cannabis industry. In fact, I'm sure there's a lot of people who pulled up this podcast and clicked away. They never even heard me say this because they just aren't interested. That's totally fine. I don't think anybody is out there holding a gun to your head saying, "If you're not invested in cannabis, you're never going to make any money. You're never going to have a growth portfolio." I think if you have personal or moral objections or you just aren't interested, you can do fine by yourself, by never investing in cannabis. But that being said, the legal U.S. cannabis sales in 2020, so just over the past year, were nearly $18 billion. That was up nearly 50% year-over-year. They have the largest markets here in California, Colorado, Florida, which is only a medical market right now. These are really exciting opportunities and to the extent that you are interested, I do think that cannabis is going to be a burgeoning industry.

Speights: I totally agree. I think you're right. There are plenty of investors who would want to stay away from cannabis just as they might want to stay away from tobacco stocks or other types of stocks. But a lot of investors like getting in on the ground floor of something and we're still in the early innings of the U.S. cannabis market for sure. In a way, you can still get in on the ground floor with cannabis and there's some stocks that have some tremendous growth potential as the market expands. I think for investors who like that excitement, want to make money like any investor does, I think the cannabis market offers some real opportunities.

Flippen: It is rapidly changing though to the extent that anybody is interested in getting invested. I think it's important to have a five to seven, preferably even longer. I know that's asking for a lot, but preferably even longer time horizon for these investments because it will take so long, not only for us to see big movement in terms of federal legalization, which would really open up the landscape for cannabis companies in the U.S., but also just time for competitive landscape to shake out after legalization. These are businesses that will need to find their footing, they're completely new, and they're a completely new emerging industry that didn't exist a decade ago, and it will exist completely differently a decade from now. Give yourself time as an investor. When you look at how legalization is right now, on the U.S. scale, there's 18 states that have legalized cannabis for recreational adult use, and another 37 in total have legalized for medical use. There is a legal market on the state level, but really it comes down to the federal government and when we'll see some decriminalization or preferably legalization on the federal level. We actually got some exciting news, it's not quite decriminalization, not quite legalization, but it's coming on 4/20 this morning, I guess, yesterday evening, I should say. Keith, can you tell us what exciting news that the federal government has for us today?

Speights: All right. Emily, today was announced that the U.S. House of Representatives has passed the SAFE Act. Basically what this act does is it will open up traditional banking services to cannabis companies in the U.S. This is just one step obviously because it has to now go to the Senate and see if it'll pass there. Sometimes there are differences in bills that have to be worked out between the two legislative chambers. But it's exciting news for the industry. They've been hoping for this for quite a while. The cannabis industry in the U.S. has really been handcuffed by its limitation to banking services, and so this is a big story that comes on for 4/20 day.

Flippen: Yes, it was wonderful timing for the house to do that. I will say this has happened before, we saw the safe banking act, I believe it was last year or late 2019, I can't quite remember the timeline. But the House passed the safe banking act prior essentially died and what was at a time a Republican-controlled Senate. Now that the Senate has presumably flipped Democratic, I think there is an assumption that the Senate will attempt to pass the SAFE Banking Act when it reaches its desk, but that's never a guarantee, and it never a guarantee that even if that's something the Senate would want to pass, that they will make it a priority over other pending legislation. All of that's unknown, but it is just a further testament that cogs are moving and the very slow machine, that is the government. Hopefully, those cogs continue to move in the direction of opening up and loosening restrictions on the cannabis industry as they exist today. 

SAFE Banking is really critical for allowing access to, as you mentioned, banking services for state-legal cannabis businesses. The next big step, in my opinion, if it wasn't decriminalization or legalization, is reforming tax laws around how U.S.-based cannabis companies are taxed. They can't really deduct anything right now, so they pay outrageous amounts of money in U.S. tax, which doesn't contribute well to increasingly unprofitable business. When you think about the cannabis industry, Keith, we always get questions about, "Well, how do I get started investing?" You're telling me that all this high, all these excitements don't trust what I read. I mean, I might just gross to ignore the cannabis industry, how would you help somebody who is new and interested get started?

Speights: One alternative anyway is you don't have to go with investing in a stock of a company that actually grows cannabis, there are ancillary stocks that you could buy that have ties with the cannabis industry in some way. Going with an ancillary stock is actually a pretty good way to start out investing in cannabis for someone who just wants to get their toes in the water. These stocks usually always make most of their money from non-cannabis revenue sources, but then they also have some connection with the cannabis industry. They have some revenue coming in that's generated from the cannabis market. 

Now, I'll note, Emily, at the Fool, we differentiate a little here. We categorize ancillary stocks as those companies that have other primary revenue sources and don't make a lot of money necessarily from cannabis. Then their picks and shovels serve the cannabis industry and provide products and services specifically to the cannabis industry. Of course, that picks and shovels phrase comes from the gold mining days when it was said that the folks making the most money weren't the gold miners themselves, but those who were selling picks and shovels to the miners. There's the ancillary and the picks and shovels, and I think new investors to cannabis could go with either route there. They could invest in companies that have a very indirect tie to cannabis, or they can invest in companies that sell products to the cannabis industry as a good entry point into investing in cannabis stocks.

Flippen: You're being kind with that commentary about the ancillary versus picks and shovels. I think I was the one who confused the two. I like to differentiate between the two. In my mind, ancillary companies are companies that if the cannabis industry goes to zero, they will still be fine. You can own shares of them and still think to yourself this is a good business to own, and I didn't lose a lot of capital as a result. You can think about investing in a company that has investments in the cannabis industry as an example of that. If the investments go to zero, there will still be strong underlying businesses. Whereas picks and shovels. I think, especially as I thought more about the industry, have gotten increasingly very connected to the performance of the cannabis Industry alone. Picks and shovels, in my mind, are businesses that if the cannabis industry were to disappear tomorrow, well, their businesses would be more stable than a pure-play, they would also probably disappear. 

There's lots of ways that you can think about risk when setting up your exposure to the cannabis industry for people who want exposure, but don't want the downside risk, I think ancillary plays a great place to go. For other ones who are looking for more upside, but also more probably volatility, pure-plays and picks and shovels are great. We will give you examples of each of these businesses at the end of today's show, we talked about some of our favorite ideas. If this is really a more phase as we're talking about it here, don't worry, we'll provide some examples later on that hopefully color that a little bit better. Keith, in that same vein, when you're looking at a cannabis industry, whether it's ancillary or, pure-plays, what are you looking for when evaluating whether or not you want to buy that business or invest in that business?

Speights: Emily, I can't tell you how many times I've written about cannabis stocks over the last several years and emphasized that every factor you would look for in a stock in another industry still applies. I think it's a mistake to think of cannabis stocks with the emphasis on cannabis instead of on stock. These are stocks of companies and so you want to look at the same things with these companies that you would look at with any other company in any other industry. Look at the financials, look at their cash flow, look at their profitability, or if they're not profitable, maybe, look at their adjusted EBITDA, and look at their trends. Are they making progress toward profitability? Look at their debt levels. Some of these companies have taken on enormous amounts of debt and that makes it more difficult for them to achieve profitability. Look at their management teams. Unfortunately, Emily, they've been, I'm going to phrase this in as politically correct of way as I can, but there have been some characters who were less than exemplary, who've been attracted to the cannabis industry in some cases. 

Take a look at the management teams, make sure you understand their backgrounds. Then with any company, you want to look at their competitive advantages. For cannabis companies, sometimes they have some geographic advantages because of the states that they operate in. Look at their cost advantages. Some companies have lower cost structures and so they are better able to compete. I like looking at their partnerships. Sometimes the right connections open doors that aren't open to other companies. Look at all those things that you would look at with any stock when you're looking at a cannabis stock.

Flippen: I love that. I feel like whenever I talk about cannabis businesses, I say all those things you just said, but I never put it in the context of, this is the same thing that you look for when you buy any business. I love that context. There are a couple of things I would add and frequent listeners of Industry Focus have heard me say these words many times in the context of non-cannabis businesses, but to your point, they also apply here. There are two yellow flags that I look for in the cannabis industry. The first one is, everybody is going to know it, I should just not say it, but it's its internal controls. Cannabis companies, because of their small size, don't have to have internal control reporting for the most part, some of them do. You can't always get a lot of insight here. But if you see some red flags there in terms of internal controls, that's a concern for me. We've seen cannabis companies have to restate prior financials, which is never fun and usually never a good thing. They are never restating and they're like, "Oh man, we actually did 50% more revenue." It never happens. It's just something to be aware of. The second thing I'd say is, actually look for related party transactions. 

This goes back to what you were saying, Keith, about evaluating your management team. The related party transactions are transactions that the company takes with executives or professionals that work within the company itself and a lot of times these related party transactions can be set up in a way where they reward management even if performance of the business is poor. I'll talk more about that with one of the ideas that I'm going to bring together at the end of the show. It's a big risk. Again, it's a yellow risk, it doesn't necessarily mean that you're not going to invest. But I do think that everybody should be aware of how management is incentivized because with a lot of these small companies, and cannabis companies in general, they can set up incentive structures that reward them when you're losing money, which is not fun. Do you think we've teased everyone enough, Keith? Should we get to our favorite stocks?

Speights: Let's go for it.

Flippen: I'll kick it to you first. I guess, let's think about this in my totally arbitrary framework of ancillary picks and shovels and pure-play, starting with the ancillary first, do you have a favorite ancillary idea? Again, it doesn't have to be your favorite, but one you want to talk about today?

Speights: There are actually two that I really like and that I own.

Flippen: Awesome.

Speights: I love PayPal (NASDAQ: PYPL) and Square (SQ -2.74%). I realize that many people won't connect those with the cannabis industry, but hey, here's the thing. Retail is critical to the cannabis industry and I think these two companies, PayPal and Square, are becoming increasingly more critical to retail. They do have some ties, particularly Square has some ties to the cannabis industry. Of course, like you said earlier, Emily, ancillary stocks are the kind of stock that will be fine even if the cannabis industry disappeared. I would like PayPal and Square even if they had zero ties to cannabis whatsoever. Those are two of my favorites. I also like Constellation Brands (NYSE: STZ). Constellation has a closer connection to cannabis through its stake in Canopy Growth (CGC -2.11%), which is one of the leading Canadian cannabis producers. Of course, Constellation makes most of its money from its premium beer brands and its wines and spirits.

Flippen: Seltzer, increasingly. [laughs]

Speights: Seltzer, yeah. That's really a growth opportunity for them there. But I think Canopy gives Constellation Brands a great way to potentially profit from the cannabis boom. Particularly if the doors are open for Canopy to really expand into the U.S. market. Those are three that really jump out to me.

Flippen: I love that. In the context of PayPal and Square, I'm a shareholder in both those companies as well. Square actually has solutions for CBD companies here in the U.S.. If you're not already convinced, they have an entire offering just serving the CBD industry. Then PayPal has actually invested a lot of money, I shouldn't say invest, spend a lot of money lobbying [laughs] the federal government to pass some banking reform. Both management teams, I think, are conscious of the opportunity there. I think my ancillary idea is becoming less of an ancillary idea as every day passes. I'd almost say that this is probably more picks and shovels as I think about it more. But it's actually ScottsMiracle-Gro (SMG -1.33%). ScottsMiracle-Gro, everybody is familiar with as the fertilizer provider, the Miracle-Gro solutions. We all spray it on our plants. If you're watching this live, you can see a very dead plant behind me that has definitely not gotten it's fair dosage of Miracle-Gro. But ScottsMiracle-Gro is actually increasingly focused on a business that it acquired that works in the hydroponics supply space, it's called Hawthorne and this is a No. 1 supplier of hydroponics equipment to professional cannabis growers in the U.S. They have a dominating market share. 

Virtually, all of their growth is coming from Hawthorne at ScottsMiracle-Gro. It's crazy. Because if you look back only a few years ago, ScottsMiracle-Gro, the only way it was delivering shareholder value was by buying back shares and issuing dividends. It's fine, but it was a fertilizer provider and that's how they were incentivizing shareholders. Now it's turned into this crazy growth story with Hawthorne projected to grow more than two times the rate of ScottsMiracle-Gro's core business, which is already growing quickly as everybody started gardening during the pandemic. I love this business. I didn't think I'd love this business, but I love this business.

Speights: Actually, Emily, I agree with you there, and if we segue to picks and shovels, ScottsMiracle-Gro was one of the top picks and shovels places that I really like right now for all of the reasons you just mentioned. I did have another pick though, and it's one that I do on Innovative Industrial Properties (NYSE: IIPR). This is a picks and shovels play. Innovative Industrial Properties is a real estate investment trust that focuses on the medical cannabis industry. This company has been highly profitable, it's growing fast, even pays are really great dividends to boot, and so I really like IIP's prospects now. We talked about the SAFE Banking Act passing the House of Representatives today, that could present some issues for innovative industrial properties because basically, they provide real estate capital. So if cannabis companies have more access to traditional banking services, they could have more outlets to go get the cash that they need. But I still think that Innovative Industrial Properties' prospects should still be really good over the long run, and I still like that stock quite a bit.

Flippen: I was actually going to say Innovative Industrial Properties as well. Instead of switching it up, I'm going to double-down because this is a really interesting business and I want to touch on the point that you just mentioned. The question we always get, which is, OK, if and when the SAFE Banking Act changes, what happens to Innovative Industrial Properties? I love the fact that the management team has not only been really transparent with what they expect to happen, but their expectations have not changed since day one when they were asked about this question, which says to me that they are thinking really strongly about, OK, what the future looks like for this business. 

One of the things that they have constantly said is, yeah, we expect their cap rate to compress, we're not going to be able to get the same fees that we're getting right now when competition in the market heats up. But in order to prepare for that happening, they're increasing the length of their average term from 15 years to 20 years, so locking down those lucrative customers for longer periods of time. If and when SAFE Banking passes, Innovative Industrial Properties can actually do something that we haven't seen them able to do yet, which is lever up their balance sheet. Typically, that's not a good thing when you see a business taking on a lot of debt. But in the case of Ritz, it's actually great because they have a weird tax status that essentially allows them to pay out virtually, I think, 90% of pre-tax operating income to shareholders. Levering up is actually really beneficial in the context of the tax structure for Ritz, and they haven't been able to do that because of lack of access to banking. I love the fact that they can lever up and provide a little bit more shareholder value that way as well, just from that passage alone. Lastly, and perhaps, maybe save the best for last, maybe save the worst for last, I guess, depending on how you think about it, what are some of your or one of your favorite pure play ideas?

Speights: One pure play that I really like right now is AYR Wellness and they used to be called, I guess, Ayr or Ayr Strategies, but they changed their name. I think this dock is arguably the best bargain among all cannabis stocks, arguably. This company is growing leaps and bounds through acquisitions, has expanded into several new states, Arizona, Florida, Ohio are just a few. It's waiting for the close of a deal that'll get it into New Jersey, which I think presents a great opportunity for the company. AYR Wellness is projecting 2022 revenue of $725 million. They're looking for adjusted EBITDA of around $325 million. I think they're going to meet those goals. By the way, they projected 2022 numbers instead of 2021 because they're undergoing so much change in 2021 with so many acquisitions in the works. This company has a market cap of around $1 billion or so. I think it looks like a really good pick for investors who are like you said earlier, and we're willing to hang in there forfive, seven years or so. I think this could be a real winner.

Flippen: I love that, and when you first said the company name, I thought I didn't recognize it because I've been calling it AYR Wellness. But now that you've mentioned it, it does not have periods in between each of those letters. AYR Wellness may just be as accurate as AYR. I'm not sure, You may know it is either, but I also love that business.

Speights: Actually, I'm going to be honest here, Emily, I had called it AYR because their previous name had caps, AYR. They switched to lower case and I was curious, are they still AYR? Is it Ayr? I saw a video that some of their staff had made and they were pronouncing it Ayr, so I realized, OK, that's how they pronounce it.

Flippen: Well, I'd say that you save me some embarrassment, but I've managed to really put my foot in my mouth as a cannabis analyst now on this podcast by admitting that I hadn't even heard the name spoken yet before investing in it. But either way, I agree with you about AYR Wellness. It's, I think, an underrated player, although admittedly one that I think has probably a bit more execution risks as do all pure play cannabis companies, it all comes down to execution. Mine is one that I think is going to surprise a lot of people who have listened to me talk about cannabis companies in the past, because it's one that I've been a bit of a bear on, and that's actually Trulieve Cannabis. Trulieve Cannabis is the largest player, one of the first movers in the Florida medical market. I have been a huge skeptic of this business and part for a couple of still, for what I perceive to be very good reasons. 

The first one is, can they execute on their strategy and financial performance when they attempt to move outside of Florida? Do I trust management, in particular, management's compensation structure? Each of those things, I think, are still big question marks, and going back to related party transactions, I think Trulieve is one of the worst offenders when it comes to looking at management compensation. Their CEO, Kim Rivers, and numerous of their executives have set up their debt financiers to the business. They're getting paid some pretty lofty interest payments, regardless of whether or not Trulieve does well. But in Rivers' defense, she's also a majority shareholder of the business so she's invested alongside [...] and more importantly, I think Trulieve has proven out just how well they understand their core customer. Some of the things I like about this business is that they're one of the only players, the only player that I follow at least that breaks out customer retention rate which has consistently been above 70% in the Florida markets. That's really strong for a consumer packaged goods business. They still only have about 2% of the Florida market penetrated, despite being a market share leader at over 50% in terms of market share, especially for dried flowers. 

There's still lots of room to grow. Their average basket size in the last quarter was around $115 a visit with their customers visiting on average nearly three times a month. So customers are spending a ton of money. For context, Planet 13, which is another cannabis business, which is known for its really high basket size, had a basket size last quarter of just over $120. So truly, by pulling in customers left and right, they're retaining those customers pretty well and getting those customers to spend more and more money. I actually think that this business will have trouble expanding outside of Florida. I think they can, but I think they may face some troubles especially with brand recognition outside of their home state. But in my opinion, even if they fail,I think they have such a hole in the Florida market that it may not matter over the long term. Well, with that, I think we have made our investors and listeners hopefully proud by covering candidates today on 4/20 in a way that is foolish and we didn't manage to talk too much about Canadian players. That already puts us a step ahead of Zynga and the other cannabis outlets, at least in my opinion. 

Speights: I think you're right on that.

Flippen: Well, Keith, thank you so much for joining with me. I really appreciate you being willing to come on today and give your thoughts. You're clearly an expert and I really appreciate it.

Speights: I enjoyed it. Thanks for having me, Emily.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or you just want to reach out, feel free to shoot us an email at [email protected] or tweet us @MFindustryfocus. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Keith Speights, I'm Emily Flippen. Thanks for listening and Fool on!