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This Could Be the Hottest Cannabis SPAC to Buy in 2021

By David Jagielski - Mar 10, 2021 at 7:34AM

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It isn't on a U.S. exchange just yet, but it should be soon.

Special purchase acquisition companies (SPACs) are some of the hottest buys of 2021. However, they also make for some ultra-risky investments, as investors don't have financial statements to look at to do the kind of analysis that they might normally do when picking a stock. Investors are essentially banking on the potential that a SPAC hits it big with an acquisition or merger.

One of the most popular SPACs this year has been Churchill Capital Corp IV, which has soared 133% year-to-date (the S&P 500 is up just 5%). It also recently announced a merger with electric vehicle maker Lucid Motors. Churchill has been around for a bit, though. If you're looking for what could be the next big SPAC, there's one in the cannabis industry that should be on your radar today: Choice Consolidation Corp.

Cannabis signal on a green traffic light.

Image source: Getty Images.

Choice Consolidation Corp begins trading on a Canadian exchange

The NEO exchange in Canada is home to some marijuana stocks that are looking to generate funding, and it is the exchange that Choice Consolidation Corp selected to raise money "due to their stringent listing requirements, which we believe provide increased transparency to both retail and institutional investor." In February the SPAC announced that it had raised $150 million in an initial offering, becoming the 10th SPAC to trade on the NEO exchange.

However, it's possible that it could end up on an over-the-counter (OTC) exchange in the U.S., as many multistate cannabis operators have taken a similar approach. With federal law still prohibiting marijuana, cannabis companies that want to raise money and do business in the U.S., or even just have exposure to the U.S. market, have limited options. In 2017, Aphria received a warning from the Toronto Stock Exchange (TSX) about its U.S.-based investments, and had to divest of them or risk getting delisted. The solution for many multistate operators often involves trading on an exchange like the NEO or Canadian Securities Exchange, both of which have laxer rules than the TSX, in addition to the OTC markets.

What makes this SPAC so special?

In the months ahead, the goal of this SPAC will be to find a multistate cannabis operator to invest in. Any SPAC can claim to do that, but the reason this one may be the horse to bet on is because of its management team. You may recognize the CEO, Joe Caltabiano, as the former co-founder of Cresco Labs (CRLBF 1.22%). Peter Kadens is listed as a director, and is a former CEO of Green Thumb Industries (GTBIF -1.92%) as well.

Today, Green Thumb and Cresco are among the top multistate operators in the country. They're worth nearly $10 billion combined, with market caps of $6.7 billion and $2.8 billion, respectively. Over the trailing twelve months, Green Thumb posted sales of $455 million, while Cresco's top line totaled $347 million. And both companies have been among the better-run cannabis producers out there, posting operating profits in each of their last two quarters.

Although it is debatable who should get credit for those companies getting to where they are today, Caltabiano and Kadens give Choice Consolidation an advantage over other cannabis-focused SPACs. They have industry knowledge and expertise that they can use to find and assess the next big multistate operator.  Caltabiano points to the impressive track record the SPAC's management has: It's already been involved with 25 cannabis acquisitions in the past two years, which spanned more than nine different markets, while its careful vetting process led it to pass on 125 out of a possible 150 transactions.

Without financials or a prospectus investors can dig through, arguably the most important factor in deciding which SPAC to invest in is its management. Sound leadership at the top can minimize the risk for investors. There is no guarantee that the company the SPAC chooses to acquire or merge with becomes the next Cresco Labs or Green Thumb Industries, but the SPAC's management team certainly increases the odds for success.

Should you invest in Choice Consolidation?

There is significant potential for Choice Consolidation to take off if it lands a great deal this year. But investors also shouldn't ignore the risks. This is still a speculative investment, and there are no guarantees that Choice's management will find a good deal out there -- after all, they have turned down many transactions in the past. But if you are OK with the risk, Choice Consolidation could be one of the most promising SPACs out there today.

If you want to invest in the U.S. cannabis market, a safer option may be to consider either Cresco Labs or Green Thumb themselves rather than betting on their former leaders. The companies already have results today that investors can analyze and assess, which can take a lot of the risks and unknowns out of the equation. You might limit your potential gains given the size of the companies today, but it's definitely a safer approach.

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Stocks Mentioned

Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
$4.14 (1.22%) $0.05
Green Thumb Industries Stock Quote
Green Thumb Industries
$12.75 (-1.92%) $0.25
Aphria Stock Quote
Silver Spike Acquisition Corp. Stock Quote
Silver Spike Acquisition Corp.
Churchill Capital Corp IV Stock Quote
Churchill Capital Corp IV

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