Idea Brunch with Aaron Edelheit of Mindset Capital

The bull case for U.S. cannabis companies

Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Aaron Edelheit!

Aaron is currently the Chief Executive Officer of Mindset Capital, a private money management firm that he founded in April 2015. Before launching Mindset, Aaron worked as Chief Strategy Officer of Flo Technologies and ran The American Home, a residential home REIT that bought and managed 2,500 single-family rental homes from 2009 to 2012. Aaron frequently highlights interesting entrepreneurs and opportunities in his newsletter and is also the author of The Hard Break: The Case for a 24/6 Lifestyle.  

Aaron, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Mindset Capital?

Thanks for having me on Sunday’s Idea Brunch, Edwin!

I began reading the Wall Street Journal when I was nine or ten. I remember seeing the newspaper open on the kitchen table and asking my dad what the numbers and stock tables were. From that moment, I was hooked. I invested in my first stock at 14, buying 50 shares of Unocal and using up my whole month of free stock quotes that you got from punching buttons on the phone that corresponded to the stock symbols (I know I’m dating myself).

Fast forward several years, and probably because all I ever did was talk about stocks, I was given the opportunity to start managing a friend’s portfolio in 1998 after his company was bought. My grand start at investing money professionally started above my parents’ garage and somehow, I grew that to a $20 million small-cap value fund (the Sabre Value Fund) that outperformed the market for 11 years by 800 basis points.

In 2011, I wound that fund down, because I realized there was an incredible opportunity to buy foreclosed homes, fix them up, and rent them out. I had started the endeavor as a side investment buying 16 rental homes in March of 2009 and then grew that to 2,500 single-family-rental homes with full property management. I sold that company in 2015 to a publicly-traded real estate investment trust.

After that I wrote The Hard Break: The Case for a 24/7 Lifestyle, a book that makes the business case for taking one day off a week, and I started doing a variety of investments including some venture investments. I invested in a friend’s startup that was creating an automatic water shutoff device for homes that could detect leaks as small as a drop a minute and that you could control from your phone. In 2018, my friend asked me to join Flo Technologies, which I did as Chief Strategy Officer. We launched in Home Depot and eventually sold it to Fortune Brands at the end of last year.

In 2020, I went back to my first love and started a friends and family investment partnership to invest in the stock market again. And in late 2021, I launched a dedicated cannabis investment fund.

You have been prolific in writing about cannabis companies and the changing regulatory environment. What do you look for when analyzing companies in the cannabis sector? Are there any executives you particularly admire? And what can investors do to avoid the blowups seen by some players (e.g., Tilray, Canopy Growth, and Cronos)?

I look for companies with a very clear strategic vision, and executives that are ethical and have a clear understanding of what their competitive position and advantages are. I also like to understand how the executives think about capital allocation as well.

I respect and admire Jamie Mendola because he used to be a money manager like me and now heads up M&A for AYR Wellness (OTC: AYRWF — $461 million). I interviewed Jamie late last year here.

I also really respect Kyle Kazan and Graham Farrar for trying to do something hard and unique in California amidst a very challenging California cannabis market. I interviewed Graham Farrar last spring and should also mention that Kyle’s social justice efforts to stop non-violent cannabis arrests are inspiring.

As to Canada, I think they have poisoned the well in cannabis, by misleading investors about the true size of the opportunity in Canada (the Canadian cannabis market is smaller than California by itself) and by also pretending they were a way to play the US market, even though they have no operations in the U.S.

Because cannabis is federally legal in Canada, all the Canadian companies can list on U.S. exchanges. But because cannabis is federally illegal in the US, any company that touches the plant cannot trade in the U.S. So, you get this really weird situation where investors are buying Canadian companies that are in a very small market, that aren’t run well and are incinerating cash while they cannot invest in leading companies that are profitable and that operate in the U.S.

One final note is that none of the leading Canadian cannabis companies are very good at growing high-quality cannabis. It’s amazing that despite being in business since 2017, Canopy Growth is still having cultivation crop failures as late as last December.

As to the real investment opportunity, it is best to focus on best-in-class US operators who know what they are doing. I wrote a white paper on cannabis that explains my thinking on the opportunity.

Beyond Cannabis, you have a pretty diverse portfolio – ranging from a Mexican homebuilder to a microcap staffing company. How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?

I really enjoy finding diamonds in the rough that are either benefitting from some larger trend, like a shortage of housing in Mexico (Consorcio ARA), or a unique strategy and differentiated way of doing business (HireQuest). I love seeing strong insider ownership, so interests are aligned.

Over the past 25 years, I have developed a really wonderful network of other small-cap managers and we share ideas.

What are two or three interesting ideas on your radar now?

Nelnet (NYSE: NNI — $3.19 billion), a U.S. education and student loan conglomerate, is buying back 1% of the company every quarter and is on track to buy every free float share in nine years. And right now, the market is ignoring how aggressively the company is buying back shares. Management are phenomenal capital allocators and have grown book value by 17.2% a year since 2003 and they own ~50% of the company.

I wrote about the company recently and said, in part,

“Nelnet management studiously avoids the limelight. The company does not hold quarterly earnings calls and management comments seem to be limited to their annual letters (which are excellent, I recommend you read the last one!). So, it was very exciting when chairman Mike Dunlap agreed to a written interview of questions.”

I published an interview with Nelnet’s chairman here.

MariMed (OTC: MRMD — $203 million) is an under-owned U.S. cannabis stock with no debt that trades at 5 times trailing EBITDA despite having doubled revenue in the last two years and being on a path to tripling revenue in the next two to three years.