PSDN: 2nd Quarter 2022 Portfolio Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/psdn.

Performance

Since the launch in November 2021, AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) has endured an incredibly difficult trading environment for the broad equity markets and the cannabis sector as a whole. From the end of last year through the end of the second quarter of 2022, the largest four U.S. Multi-State Operators (“MSOs”), were down an average of -44%. During this same period, the S&P 500 Index was down -20%. As a note: MSOs are vertically integrated cannabis companies operating in the United States with cultivation and storefront retail operations across more than one U.S. State.

Holdings

Over the course of the second quarter of 2022, we de-leveraged given the high level of volatility to the downside. Leverage averaged 124% in 1Q 2022 and 122% in 2Q 202. However, from the beginning of May through end of June 2022,  leverage was reduced to an average of 116%. (The amount of leverage being used by PSDN is displayed on the AdvisorShares PSDN fund page and is updated weekly.) We also diversified our portfolio by adding additional international exposure with Intercure, Village Farms and Sundial, and an ancillary cannabis company, WM Technology. Our PSDN portfolio remains mainly focused on U.S. MSOs with close to 90% exposure, but strategically incorporates international and ancillary exposure as well.

Uniquely, PSDN is able to dynamically employ leverage to its portfolio of up to 1.5x net assets. Our goal as of now is to maintain leverage in the 1.10x – 1.20x range. Although it may add additional risk to the equation, use of leverage allows an investor to potentially realize outsized returns on the upside. However, in a draw-down market for cannabis, such as the first quarter, PSDN will underperform its unleveraged peers.

Top Holdings

Ticker Security Description Portfolio Weight %
CURLF CURALEAF HOLDINGS INC SWAP REC 19.76%
TCNNF TRULIEVE CANNABIS SWAP REC 19.30%
GTBIF GREEN THUMB INDUSTRIES SWAP REC 18.14%
AAWH ASCEND WELLNESS HOLDINGS SWAP REC 14.71%
VRNOF VERANO HOLDINGS CORP SWAP REC 13.89%
CCHWF COLUMBIA CARE INC SWAP REC 3.82%
AYRWF AYR WELLNESS INC REC 3.31%
CRLBF CRESCO LABS INC SWAP REC 3.22%
SNDL SUNDIAL GROWERS INC 3.00%
TRSSF TERRASCEND CORP SWAP REC 2.96%

As of 6.30.2022. Cash is not included. Subject to change.

 

Cannabis Sector Review

Returns on stocks in the cannabis sector continued to be impacted in the second quarter by five drivers: 1) macroeconomic factors and general market trends – such as rampant inflation, the Fed’s raising of interest rates and the Russia’s continued invasion of Ukraine; 2) weak first quarter earnings reports from the most cannabis businesses, 3) investor disappointment by the lack of Federal progress on cannabis legalization, 4) no substantial near-term catalyst and; 5) structural challenges from continued lack of custody and capital markets access for institutional capital engagement in the sector.

Outlook

Expectations for 2022

  • Sales and earnings estimates stabilized after the 1st half of 2022 reset by both companies and analysts. We have seen stability for 2022 sales and EBITDA expectations for the last few weeks, a welcome change after several consecutive months of lowering expectations.
  • We expect the 2nd half of 2022 to show stronger growth than the first half helped by New Jersey adult-use opening, and continued access expanding in other markets including the addition of 185 social equity cannabis dispensary licenses in Illinois.
  • Following in the footsteps of two major MSOs announcing a merger in late March, we anticipate further consolidation of MSOs and single state operators over the course of the next year as stock prices regain their footing
  • Any kind of Federal legislation that passes would be a significant positive for the sector, however we do not put more than a 25% chance of anything coming to fruition during the year. If any legislation does pass, we believe we are extremely well-positioned to benefit.
  • Further progress towards opening of adult-use in New York will likely occur. This revenue will likely come online in 2023 and provide substantial revenue growth for the MSOs with New York licenses.
  • There are four new cannabis state ballot initiatives for this November with Nebraska, Arkansas, North Dakota, and Oklahoma gathering enough signatures to be on the ballot. We expect increasing political attention as the mid-term election cycle picks up overall and within these states voting for legalization. Cannabis polls very well across the political spectrum and is often used to garner votes. We believe the increased attention could draw renewed interest and confidence in cannabis as an emerging opportunity for investors.

Rationale for an investment in PSDN

We believe the U.S. cannabis market currently represents the single best jurisdictional opportunity to invest in the ongoing legalization of cannabis throughout the world while also seeking additional opportunities in ancillary technology and international companies with balance sheets to endure and grow through this period of time

Second, we believe that quality of management teams and balance sheets are important attributes for navigating the current market environment. These companies also exhibit valuations that are at a material discount to their intrinsic value with an improving growth trajectory. An inability for the MSOs to list on major U.S. exchanges, leading to minimal institutional investors, material price volatility on a daily basis, unfair Federal taxation, and a lack of clear banking regulations all justify discounted valuations to other industries but we see several cannabis stocks as trading far below those levels.

Third, we believe that the upside in the cannabis sector is potentially 70-80% “Beta” and 20-30% “Alpha.” The Beta upside will come from both Federal and ongoing State legalization – any State legalization benefits all major players in the given State (the MSOs) and any Federal legislation that passes benefits the major players in the country (the MSOs). The Alpha, although important to the equation, will not be the primary driver to value over the medium-term. As a result, we are focused on quality and size in the US and strategic allocation in other aspects of cannabis sectors and geographies as good portfolio management through a challenging time.

For investors who agree with the above three points, we believe a long-oriented, intelligently leveraged and focused portfolio of the largest and highest quality U.S. MSOs and select international and ancillary companies as an attractive portfolio with the potential to achieve the best risk-adjusted returns.

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Alpha is a measure of perfomance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark is a fund’s alpha.
Beta measures the sensitivity of an investment to the movement of its benchmark. A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.
EBITA is earnings before interest, taxes, and amortization and is a measure of company profitability.

 

Respectfully,
 

Emily Paxhia
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager

 


Morgan Paxhia
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager

 

 

Tyler Greif
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager

 

Past Manager Commentary

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

Cannabis-Related Company Risk – Cannabis-related related companies are subject to various laws and regulations that may differ at the state/local and federal level. These laws and regulations may (i) significantly affect a cannabis-related company’s ability to secure financing, (ii) impact the market for marijuana industry sales and services, and (iii) set limitations on marijuana use, production, transportation, and storage. Cannabis-related companies may also be required to secure permits and authorizations from government agencies to cultivate or research marijuana. In addition, cannabis-related companies are subject to the risks associated with the greater agricultural industry, including changes to or trends that affect commodity prices, labor costs, weather conditions, and laws and regulations related to environmental protection, health and safety. Cannabis-related companies may also be subject to risks associated with the health care sector and the biotechnology and pharmaceutical industries. These risks include increased government regulation, the use and enforcement of intellectual property rights and patents, technological change and obsolescence, product liability lawsuits, and the risk that research and development may not necessarily lead to commercially successful products. In addition, rising costs of medical products and services, pricing pressure (including price discounting), limited product lines, and an increased emphasis on the delivery of health care through outpatient services may affect the healthcare sector

Leverage Risk – Leverage is investment exposure that exceeds the initial amount invested. The loss on a leveraged investment may far exceed the Fund’s principal amount invested. Leverage may magnify the Fund’s gains and losses and, therefore, increase volatility. The use of leverage may result in the Fund having to liquidate holdings when it may not be advantageous to do so.

IPO Risk – The Fund may invest in securities offered in IPOs or in companies that have recently completed an IPO. The market value of IPO shares can have significant volatility due to factors such as the absence of a prior public market, unseasoned trading, a small number of shares available for trading and limited information about the issuer.

Shares are bought and sold at market price not net asset value (NAV) and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined) and do not represent the return you would receive if you traded at other times. 

The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.