Cabot Cannabis Investor Issue: April 26, 2023

After another month of dramatic declines in March, cannabis stocks showed a little more stability in April.

This is encouraging, even though it is never really possible to “call the bottom” in out-of-favor groups.

How out of favor is cannabis? I’ve invested through three bear markets, and I don’t think I have ever seen a group as unloved as cannabis is now. Remember, this is a good thing if you are a contrarian investor looking for bargains, as long as the group in question is not a value trap. (Like the declining newspaper industry years ago, a value trap that Warren Buffett got caught in.)

I do not think that is the case with cannabis, for reasons I explain below.

The Damage Done

First, to give you an idea of how profound and ridiculous the sell-off is, consider the following.

Shares of Curaleaf (CURLF), arguably one of the better companies in the space, are down 72% from where they traded right after its 2018 initial public offering. It has fallen to 2.29 from 8. Yet during the same time, it grew revenue to around $1.4 billion from $75 million, says Curaleaf founder and CEO Boris Jordan. “We have not had a down retail quarter,” says Jordan. “Every single quarter we have had more retail customers than in the prior quarter.”

Cannabis stocks overall are down 90% from their February 2021 peak even though several states have legalized since then and more people join the ranks of users, driving up annual legal cannabis sales to a current annual run rate of around $30 billion, from $25 billion in 2021. “We are seeing more and more customers signing up and buying products,” says Jordan. “We haven’t seen a let up with customers, and I think that is where the industry is going.”

CEO quotes in this issue come from quarterly earnings conference calls and interviews by AdvisorShares, which manages the cannabis sector exchange traded funds AdvisorShares Plus US Cannabis (MSOS) and AdvisorShares MSOS 2X Daily (MSOX), two of our portfolio names.

What to Do Now

Big picture, the cannabis sector is far from broken. It trades that way in part because prices are driven by retail investors only, who tend to trade more on emotion.

Yes, cannabis products are going through a bout of price compression, and legalization at the federal level has stalled. Not even “420 day,” or April 20 dubbed the “Super Bowl of cannabis,” could inject some life into the group’s stocks. The sector was down that day.

But polls continue to show the majority of voters favor legalization, even among conservatives. States continue to legalize. Europe is making progress on this front. And U.S. federal reform is far from out of the question.

The setup makes cannabis a contrarian investor buy. The trick is to continue to buy weakness in small amounts to average in. On most days, I set buy limits about 4%-5% below where stocks open, to pick up exposure. If you are looking for a quick trade, don’t do this. You will be disappointed. But in my experience, rapid-fire trading is not a strategy for success in the markets. Win a nickel, win a nickel, lose a dollar, is how one fund manager once put it to me. But a buy-and-hold approach with out-of-favor names that are not value traps is the way to go. I’ve slowly averaged into three bear markets, ultimately succeeding each time. The cannabis group feels like it has that kind of dynamic, again.

“There is a lot of negativity around the stocks, but in the sector things continue to go well,” says Jordan at Curaleaf. “This reminds me of 2001 in the tech sector.”

That was a year of malaise in tech following the blow up of the tech bubble. But it was also a time of tech sector regrouping and basing ahead of another spectacular run for tech. Similarly, cannabis stocks look attractive now “as long as you are looking at this with a medium- to long-term horizon,” says Jordan. “But if you are looking for a quick trade, this is not the place to be.”

European Expectations

While the hoped-for marijuana stock catalyst of U.S. federal reform continues to go nowhere, Europe just offered a major breakthrough that will create significant sales growth for cannabis companies with exposure to the continent.

The breakthrough came this month when Germany announced its proposed recreational use legalization program.

Several analysts worry Germany isn’t greenlighting commercial dispensaries right away. Instead, Germany calls for distribution through nonprofit “cannabis social clubs.” Another concern is that home grow will be permitted. This theoretically could reduce demand for commercially grown cannabis offered by publicly traded companies that we can invest in.

But the pessimists are overlooking a key aspect to the reform. Germany will effectively decriminalize cannabis by taking it off its list of illegal narcotics. Possession of up to 25 grams of cannabis for personal use will be legal.

The change will lead to an expanded use of medical marijuana, which is already legal in Germany. “This essentially means anyone will be allowed to apply for a medical use card. It becomes virtually like a recreational use program,” says Jordan at Curaleaf, one of the largest cannabis suppliers in Germany and Europe. Another bullish factor is that Germany is strict about shutting down illegal shops. Unlike, say, New York, California and many other parts of the U.S., where they thrive.

“We could not have asked for a better law. We are going to see very good growth in Europe,” says Curaleaf’s Jordan. “We are planning our supply chain as that decriminalization happens, to make sure we have enough cannabis to sell into that demand. That is the biggest issue we have right now and that is a good problem to have.” Jordan says Curaleaf is negotiating with a “major agricultural company” to partner on a growing operation. Curaleaf would provide the know-how and distribute the product. The unnamed company would supply the investment capital. Curaleaf already has production facilities in Spain and Portugal.

As for the home-grow provision, the plant count is low at three per person. Besides, a lot of people have trouble growing potent cannabis on their own because of the time demand and the need for special equipment.

Germany’s plan does open the path for dispensaries, but only gradually. The country will allow the licensing of a limited number of dispensaries for five years in some parts of Germany. Like Switzerland, Germany favors this more gradual approach so it can study the impact of shops on consumption trends and the illegal market. German legalization will go into effect sometime this year, and the dispensary pilot program will launch after that.

Here is another bullish factor for cannabis investors, in the German reform proposal. The plan clears the way for other countries to roll out similar programs, taking a lead from Germany and using its proposal as a blueprint. Expect progress in Czechoslovakia and Poland first.

The bottom line: While the announcement of Germany’s plan did little to move cannabis stocks, it is good news for cannabis companies that distribute product in Europe.

State Level Catalysts

Delaware recently became the 22nd state to legalize recreational marijuana. The state has allowed medical use since 2011.

Maryland is expected to legalize recreational use sales on July 1.

Texas is in the process of expanding the list of medical conditions that allow for medical use of cannabis, increasing the number of dispensary licenses and permitting higher percentages of THC in cannabis products.

Kentucky recently approved medical cannabis.

Alabama is launching its medical cannabis program.

Pennsylvania, Ohio and Florida will be the next big states to legalize recreational use in the next 24 months, says Jason Wild, the board chair at TerrAscend (TRSSF).

Meanwhile, several states reported solid sequential monthly sales growth in March. Notably, Michigan cannabis sales hit a record high of $250 million in March for a 4.2% gain over February. Most of the sales were in flower for recreational use. Colorado, Connecticut, Maine, Massachusetts, and Montana also reported sequential monthly growth in March in the 1.4% to 10.8% range.

“Green Shoots” on Pricing Pressure

In “4/20 day” interviews, both Jordan at Curaleaf and Wild at TerrAscend said they are seeing tentative improvements in pricing, driven by reductions in supply. Jordan cites the exit of several growers in Massachusetts in the past few months. “I don’t want to call the end to oversupply, but we are definitely seeing some green shoots around the country,” said Jordan. Wild cited similar, tentative progress in Michigan.

Officially, the volume-weighted average spot price of cannabis in the U.S. for the week-ended April 14 was $985 per pound, down 22.4% over the same week a year ago, says Cannabis Benchmarks. That is better than the 30%+ year-over-year declines we have been seeing. Price declines narrowed to 8% in California, 13% in Oregon, and 14% in Michigan. But prices fell sharply by 47% in Massachusetts and Rhode Island, and 37% in Maine.

Federal Reform

At a special 4/20 event in Washington, D.C. Senate Majority Leader Chuck Schumer (D-NY) vowed to “work like hell” to advance cannabis reform. Fittingly, cannabis stocks promptly sank by 3%-6%, in reaction.

The sell-off in response to Schumer’s fresh vow was no surprise. After all, cannabis investors were badly burned last December when promised reform in Washington, D.C. fell through at the last minute. Cannabis stocks sold off by 40% or more, and they’ve never looked back.

The dour mood is understandable. Despite robust sales growth in legal markets, federal reform remains the key driver of cannabis stocks. That’s because it would open the way for listings on serious stock exchanges, and institutional investor interest. A regression analysis by Curaleaf (CURLF) as part of its accounting overhaul found that news on federal legislation was really the only thing that mattered for its stock price.

So, the key question for cannabis investors remains the same. Is there any hope for reform from Washington, D.C.?

The consensus answer is “no.” Hence the sector’s 4/20 sell-off despite the renewed promises from Schumer and other politicians. But in investing, when a consensus view permeates the landscape so much that it is priced into stocks – as is the case with cannabis – the real question for investors is how, or if, the dynamic might change for the better.

Here are a few possibilities, for cannabis.

First, a stripped-down version of banking reform may return. Cannabis companies face serious challenges since they can’t enjoy banking services because cannabis remains illegal at the federal level. A perennial “SAFE banking” proposal in Washington, D.C. would fix that. But politicians continue to fail to pass it. There is still a chance they might make progress this year.

“SAFE banking seems like the low-hanging fruit,” cannabis investor Todd Harrison said in a 4/20 interview with AdvisorShares, which manages cannabis exchange-traded funds. “It should be introduced in the Senate in the next few weeks. If there is a will there is a way, and I think there is a will,” said Harrison, the founder of CB1 Capital, which invests in the cannabis space.

Sen. Sherrod Brown (D-OH), who chairs the Senate banking committee, confirms his panel will soon hold hearings on a simplified version of SAFE banking that strips out criminal justice reform angles opposed by conservative lawmakers.

SAFE banking proponents now aggressively pitch the reform as a “safety” measure, since getting rid of the cash-only nature of dispensaries makes them less of a crime target. “Framing the bill as a public safety measure could help, but the hurdles are high,” says TD Cowen Washington, D.C. analyst Jaret Seiberg.

“There is still a lot of work being done. A lot of bills,” says Jordan, at Curaleaf. “I am hopeful something will happen. When? I am not going to predict. I am never going to make predictions again.”

Next, a few long-shot developments could help.

One would be a revamp of the so-called Cole memorandum. Back during the presidency of Barack Obama, attorney general Jim Cole issued a memorandum stating the government would not enforce the federal prohibition on marijuana in states that made it legal. This boosted sentiment towards the group and encouraged cannabis businesses to flourish. This policy got rescinded by the next administration. Now, Attorney General Merrick Garland keeps hope alive that he will issue an updated version of the Cole memorandum. That could still happen.

Another possibility is a legal concept called nullification. Basically a “use it or lose it” provision, nullification means the federal government has given up its right to ban cannabis because it is not enforcing cannabis laws. “The problem is this requires a case to get to the Supreme Court,” says Seiberg.

But since nullification is a well-established legal principle and the federal government has obviously failed to enforce cannabis laws for so long, any progress on this front by cannabis advocates could shift sentiment towards the group. “Congress has a lot of work to do to catch up with the rest of the country,” Schumer said in his 4/20 day speech. “Congress is behind the rest of the country on this issue.” No kidding. A nullification drive could preempt Congress and render its endless foot-dragging irrelevant.

Third, the cannabis industry is in the process of mounting a legal challenge to the IRS tax code provision called “280E.” This prohibits companies from deducting expenses against the sales of certain illegal products, including cannabis. “A major lawsuit is about to be launched that challenges 280E,” says Jordan, at Curaleaf. “It is very well funded. The industry is coming together on this one. We are going to fight it. We want to bring attention to it because it is an unfair tax on one industry that is singled out to pay a higher tax.” This, too, could be a sentiment shifter.

Public Support for Legalization Affirmed

A CBS News and YouGov survey recently found that 64% of Americans think adult-use cannabis should be legal, and only 26% of Americans would oppose a cannabis dispensary opening in their neighborhood. The poll found that 73% of Democrats, 66% of Independents and 53% of Republicans think adult-use cannabis should be legal. The results confirm a long line of polls that show similar results. It’s important that a majority of Republicans favor legalization, even if it is just a slim edge. That’s because conservative lawmakers are the ones most likely to oppose reform.

Bad News from the Campaign Trail

In a speech before the National Rifle Association (NRA) presidential candidate Donald Trump said there may be a link between the use of “genetically engineered” marijuana and mass shootings.

He said if elected he would tell the Food and Drug Administration (FDA) to investigate whether psychiatric drugs, “genetically engineered” cannabis, narcotics, and “transgender hormone treatments” are causing psychotic breaks that lead to gun violence.

I’m assuming “genetically engineered” is a reference to the manipulation of cannabis plants that has sent THC concentrations up into the 30% range, which does seem unnecessarily strong to casual users.

As president, Trump never pursued a crackdown on cannabis, even though his administration rescinded the Obama-era policy of lax enforcement of federal prohibition (the Cole memorandum). Trump has also called for the death penalty for drug dealers, but this seems more like a reference to dealers trading fentanyl and other more dangerous substances.

Note that younger Republicans like Rep. Nancy Mace (R-SC) actively promote cannabis reform, citing the advantage this will create during campaigns in terms of winning over voters.

Company News

Ayr Wellness (AYRWF)

The company reports earnings on May 16.

Cresco Labs (CRLBF)

Cresco expanded in Miami by adding another store, increasing its Florida retail footprint to 29 dispensaries. Nationwide, Cresco has 64 locations.

Curaleaf (CURLF)

Curaleaf is opening two dispensaries in Florida in Boca Raton and West Palm Beach, bringing its total in the state to 60 stores. It is also launching its premium cannabis flower and pre-roll brand Grassroots in the Sunshine State. Curaleaf executive chair Boris Jordan says the company is emphasizing growth in Florida, Arizona, New Jersey, Illinois, Pennsylvania, and Massachusetts. It is rolling out automation in Florida to reduce costs. It also just bought a medical dispensary chain called Deseret Wellness in Utah, a high-growth and high-margin state. “Utah reminds me of New Jersey five or six years ago,” says Jordan. “Being the biggest operator there is exciting.”

Green Thumb Industries (GTBIF)

The company announced its RISE Dispensaries division is opening a new store in Pennsylvania and one in Minnesota, bringing its national store count to 79.

OrganiGram (OGI)

This Canadian cannabis company reported (April 11) that first-quarter sales increased 24% to $39.5 million, compared to the prior year, driven mainly by an increase in international revenue. Organigram is the third-largest licensed producer in Canada where it has the #1 position in milled flower and hash. Its popular brands in Canada include SHRED Tropic Thunder, Funk Master and Gnarberry milled flower. Organigram also shipped $10.7 million worth of product to Israel and Australia. It is not just a Canadian company, which is a good thing given tough market conditions there.

The company reported adjusted gross profit was $13.4 million, or 34% of net revenue, compared to $8.3 million, or 26% in the prior year. Margins increased mainly due to lower cultivation costs linked to higher plant yields, ongoing cost cutting, the increase in international shipments, and economies of scale at its Moncton production facility.

The Canadian company reported a net loss of $7.5 million compared to a net loss of $4 million in the prior year. The increase was mainly due to an adverse change in the fair value of derivative warrant liabilities.

The company reported adjusted EBITDA of $5.6 million vs. $1.6 million the year before. The operating cash burn was $19.7 million, up sharply from $803,000 in the prior year period. This was mainly due to an increase in accounts receivable in the quarter linked to increased sales, including international shipments. The company has cash of $72 million, and it expects $32 million in capex spending for the year. That will cover the expansion at its Lac-Supérieur facility and automation investments at the Winnipeg edibles and Moncton flower facilities. Organigram thinks its capital position is healthy and that there is sufficient liquidity available for the near to medium term.

After the quarter closed, OrganiGram invested $4 million in a vape technology company called Greentank to get exclusive access to its new vape cartridge technology. It will be proprietary to OrganiGram.

The new vape technology “replaces ceramic coils with a precision heating material that vaporizes all the oil that comes in contact with it in every puff,” says CEO Beena Goldenberg. “So, it doesn’t have the partially cooked oil that saturates the old ceramic coils that causes the clogging and leaks and the unpleasant flavor. We believe it produces a higher-quality vapor cloud that could lead to a higher potency per puff. We believe Greentank’s technology is the first true innovation in vaporization in almost a decade. We believe Greentank technology really is a game changer in the vape space.”

Verano (VRNOF)

Founder and CEO George Archos says the company will focus on expanding in Connecticut and Maryland this year. Connecticut recently legalized recreational use so it is a high-growth market, and Maryland will go legal for recreational use on July 1. Jordan, at Curaleaf, cautions investors to temper expectations on Maryland sales growth because the state has allowed liberal and broad use of its medical program. Verano has been in Maryland since 2015. It has four stores and a grow facility there.

Sector Performance

I’ve increased leverage in our portfolio by adding the AdvisorShares MSOS 2X Daily (MSOX). It is a top-five position, and this has hurt the portfolio as the sector sell-off continues. This has been a negative near term, but I believe the added leverage will pay off when sector sentiment rebounds. The New Cannabis Ventures Global Cannabis Stock Index is down 19.8% year to date, compared to a 31% decline in our portfolio. I personally continue to add leverage by purchasing the MSOX on any significant weakness of 2%-4% or more.

Portfolio

Company Profiles

Ayr Wellness (AYRWF) This is a vertically integrated multistate operator based in Miami. It has 84 dispensaries in eight states: Arizona, Florida, Illinois, Massachusetts, Nevada, New Jersey, Ohio, and Pennsylvania. Ayr has 18 grow sites, 11 national brands, and a proprietary library of over 160 cannabis strains.

AYR recently built out its brand development strength with the appointment of David Goubert as president and CEO. Goubert previously served as president and chief customer officer at Neiman Marcus Group, and he was at LVMH for 20 years before that.

Ayr is currently launching brands from its national portfolio in New Jersey, including Ayr’s Lost in Translation flower, Kynd flower, Road Tripper flower, STIX pre-rolls, Entourage vapes, Secret Orchard vapes, and Wicked soft lozenges.

Ayr reports $100 million in cash and $323 million in net debt. About $30 million of that comes due this year, and most of the rest comes due by the end of 2024. This debt overhang is one reason why Ayr trades at a minuscule .09 times sales. The company says it will be cash flow positive for the year in 2023. The company is founder-run, which can be a plus in investing. BUY

Cresco Labs (CRLBF) Chicago-based Cresco will become the biggest cannabis company in the world, if its acquisition of Columbia Care (CCHWF) is completed. The deal will double Cresco Labs’ retail footprint and give it the number one market share in five markets. It will reach over 70% of eligible U.S. consumers. Cresco maintains the deal will close despite delays which have some analysts questioning that.

The Columbia Care deal will create “the highest value footprint in cannabis, access to 180 million Americans, all 10 of the 10 highest projected 2025 revenue states, and exposure to the largest industry growth drivers of the next few years,” says Cresco Labs CEO and co-founder Charles Bachtell.

Cresco has the #1 market share position in Illinois, Pennsylvania and Massachusetts. The company has the top-selling branded portfolio of cannabis products in the industry. It has the top of branded flower and branded concentrates, and the third-best portfolio of branded vapes.

Cresco offers exposure to many attractive U.S. markets with an emphasis on Illinois. It is also in Pennsylvania, Ohio, California, Arizona, New York, Massachusetts, Michigan, Florida, and Maryland.

The company is founder-run, which can be a plus in investing. Cresco Labs has a trailing price to sales ratio of .52. BUY

Cronos Group (CRON) There’s been some big insider buying at Cronos Group, and I think it makes sense to follow the insider into this name. Cronos is mainly a foreign operator with exposure to Canada and Israel. It’s in turnaround mode, and often insiders buying their own turnaround is a good combination.

Cronos has respectable brand strength in Canada. It sells gummies, infused pre-rolls and vapes under the Spinach, Blue-Raspberry Watermelon and Tropical Diesel brands. Spinach products command 15.3% market share in the Canadian edibles category, and 19.8% share in gummies, according to Hifyre.

In Israel, Cronos sells dried flower, pre-rolls and cannabis oils in the medical market. In the U.S., Cronos sells hemp-derived supplements and cosmetic products under the brands. Cronos has a 10% stake in Cronos Australia, a publicly traded company.

Cronos has $877 million in cash, or about $2.31 per share, against minimal debt. Some of that cash could be deployed in acquisitions, possibly as a way to expand in the U.S. adult-use market.

As for the insider buying, director Jason Marc Adler purchased $4.4 million worth of stock in the 2.90 range in November and December. This is the first insider purchase in this name since August 2020. Cronos trades at .61 times book value. BUY

Curaleaf (CURLF) Massachusetts-based Curaleaf was the industry leader last year. It operates 148 dispensaries and 29 grow sites in 19 states and its European operations. Here are three factors that support growth.

1. Curaleaf is an R&D powerhouse. A team of scientists is currently developing about 180 products.

2. Curaleaf is an industry consolidator. The company’s executive chairman has a lot of experience rolling up fragmented and distressed industries. M&A is supported by a healthy balance sheet and good access to capital. Given how much the cannabis group has fallen in the past year, there are probably a lot of good bargains out there.

3. Curaleaf will benefit from progress on legalization in Germany and Europe. It has a majority stake in Germany’s Four 20 Pharma, a licensed producer and distributor of medical cannabis that has more than 10% market share in Germany. Curaleaf International is the largest vertically integrated cannabis company in Europe. It has a lot of room to expand production, and it boasts import and distribution in the U.K., Germany, Italy, Switzerland, and Portugal. Recreational use legalization in Germany is advancing, and it could open the floodgates to further legalization throughout Europe.

The company is founder-run, which can be a plus in investing. Curaleaf has a price/sales ratio of 1.41. BUY

ETF AdvisorShares Pure US Cannabis (MSOS) This exchange-traded fund (ETF) has large exposure to most of our portfolio names so it may seem redundant. However, I want to put it on your radar as a liquid trading vehicle for getting in and out of the group without having to make a lot of individual stock sales, and as a way to get exposure to many of our names with one purchase. It also gives us diversification beyond our names, to positions like Jushi Holdings (JUSHF) and Innovative Industrial Properties (IIPR), among others. Consider accumulating this ETF on weakness of 2% or more. BUY

AdvisorShares MSOS 2x Daily ETF (MSOX) This is the leveraged version of the ETF MSOS. It theoretically goes up (and down) by twice as much as MSOS, though the relationship does not always hold exactly. Consider accumulating on weakness of 2%-4% or more. BUY

ETFMG Alternative Harvest (MJ) This ETF has outsized foreign exposure, which means it could benefit more than other marijuana exchange-traded funds if we see progress on legalization in Germany and Europe. That could happen in the form of draft legislation and decriminalization of recreational use in 2023. “Legalization in Germany could be a tipping point for global expansion,” according to cannabis experts at ETFMG. This would put additional pressure on other European Union members to move forward with legalization. It could also encourage reform of the 1961 U.N. Single Convention on Narcotics which prohibits the cultivation and sale of recreational cannabis. “Such a result would be momentous and would open the doors to a global market,” says ETFMG. Owning this ETF broadens our industry exposure to names outside our portfolio, like Canopy Growth (CGC, WEED.TO), SNDL (SNDL), and GrowGeneration (GRWG), among others. BUY

Green Thumb (GTBIF) Chicago-based Green Thumb is our portfolio’s largest position. Green Thumb was the third-largest cannabis company in the U.S. last year, with operations in 15 markets. It has been the most profitable multistate operator of all the big ones – a sign of good management.

Green Thumb branded cannabis products include &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a chain of national retail cannabis stores called RISE. It has 79 retail stores in 15 U.S. markets.

Green Thumb is expanding its medical footprint in Florida through a lease agreement with the convenience store chain Circle K. This could be a big deal since the Circle K chain has 600 locations in Florida. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries.

Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power. Green Thumb trades at a price to sales ratio of 1.64. BUY

Organigram (OGI) Organigram holds the #3 position among Canadian licensed producers. It also sells high-margin flower in Israel and Australia. The company is negotiating with potential customers in Germany. The CEO has alluded to “creative ways” to get into the U.S. cannabis market but does not offer details.

OGI expects to generate positive free cash flows by the end of calendar 2023. OGI also guided for higher revenue this year. It expects improved profit margins because of increased international sales which produce higher profits, and increased sales of higher-margin finished products like those in its Holy Mountain lineup.

British American Tobacco (BTI) is a big investor in Organigram, owning 19.4% of the company, an endorsement of its potential. The two companies collaborate to develop cannabis products. The price to sales ratio is 1.53. BUY

Tilray Brands (TLRY) Tilray is a cannabis and consumer packaged goods company with one of the biggest global footprints in the industry. CEO Irwin Simon founded The Hain Celestial Group, a natural food company, which is in the business of brand development. This is a key factor for cannabis companies, too. So, the Hain Celestial experience may bode well for shareholders.

Tilray is a big recreational and medicinal cannabis supplier in Canada, but it also offers medical cannabis in 20 countries on five continents through its subsidiaries and agreements with pharma distributors. It has operations in Canada, the United States, Europe, Australia and Latin America. It sells craft beer and CBD products in the United States.

Tilray seems like a good play on expected legalization of recreational use in Europe over the next few years because it has been making significant investments there. It has a medicinal marijuana distribution network in Germany. It has production facilities in Portugal and Germany, the largest medical cannabis market in Europe. Once Germany legalizes, other countries will follow suit, probably using Germany’s regulatory framework as a blueprint for how to proceed.

Tilray sells hemp food products through its Fresh Hemp Foods division, and it has a craft alcohol business called SW Brewing, the tenth-largest craft brewery in the United States. The price to sales ratio is 2.38. BUY

Trulieve (TCNNF) Trulieve has long been the biggest medicinal marijuana vendor in Florida, where it has 50% market share. It has 184 dispensaries and two-thirds are in Florida. Cannabis activists are trying to get recreational use on the Florida ballot in November 2024. A win would be huge for Trulieve. Approval could make Florida the largest legal U.S. cannabis market with 22 million residents and 130 million tourists a year.

Meanwhile, Trulieve has been expanding across the country via acquisitions. It is diversifying its presence into Pennsylvania, Maryland, and Massachusetts, among other states.

The company finished the year with $290 million in cash. It has a very large $648 million in debt, but the only near-term debt maturity is $130 million due in June 2024. The company projects operating cash flow of $100 million this year. “U.S. cannabis has significant white space ahead, with many states yet to implement medical or adult use programs, and the growing appetite for substantive federal reform,” says CEO Kim Rivers. It has a price to sales ratio of .75. BUY

Verano (VRNOF) Chicago-based Verano is one of the top five publicly traded multistate operators in the U.S. by sales. The company has 123 stores and 14 cultivation and processing plants in 13 markets. One of the most attractive qualities of this company is that it has a big presence in high-growth markets like New Jersey, Illinois, Florida and Connecticut, and states that are about to legalize recreational use like Maryland and Pennsylvania.

It also has solid operating cash flow at a time when financial strength is important due to pricing and sales pressure in the sector.

The company’s portfolio of brands includes Encore, Avexia, MÜV and its signature Verano line of product. To capitalize on the consumers trading down to value brands, Verano moved up the rollout of a new budget line called Savvy last year. It operates dispensary concepts called Zen Leaf and MÜV. It also has a licensing agreement with Mike Tyson’s Tyson 2.0 cannabis company.

The company has been dialing back capital spending to bolster its balance sheet. But it has some of the strongest operating cash flow in the business. Verano produced $65 million in operating cash flow during the first nine months of last year. It ended the third quarter with $76 million in cash, against debt of $392 million.

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of 1.04. BUY

The next Cabot SX Cannabis Advisor issue will be published on May 31, 2023.