Cabot Cannabis Investor Issue: July 26, 2023

Politicians in Washington, D.C. let cannabis investors down once again.

Commentary from lobbyists and Senators had suggested the Senate banking committee might make progress on cannabis sector banking reform (allowing banks to work with companies) in late July.

That turned out not to be the case. I cautioned at the time that a risk here is that the actions politicians are hard to predict. But it was worth having exposure, in case there actually was progress on so-called SAFE banking, which seemed possible at the time.

The reform effort is certainly not dead. “I am very close to securing the ninth Republican co-sponsor,” says Don Murphy, a lobbyist with the Marijuana Leadership Campaign. “There is no doubt in my mind that we are filibuster proof.” Murphy says a Senator recently told him that no one is asking him to vote against SAFE banking. “The truth is, there aren’t a lot of people even in the Senate who oppose SAFE banking, who are willing to attempt to kill it.”

But the July SAFE banking setback put investors back into extreme skepticism mode on cannabis stocks.

One industry leader and long-term investor suggests this is a good contrarian buy signal on the group.

“The stocks have lost 90% of their value,” says Jason Wild, the executive chairman at TerrAscend (TSNDF; TSND.TO). “Everybody is so fatigued they can’t think about losing another thirty cents. This is where you have that asymmetric risk-reward. The level of pessimism is off the charts. I have never seen this level of pessimism in any sector.”

Sector Dichotomy Continues

The negativity is not completely justified, since there are several bullish trends at the state level, despite reform delays in Washington, D.C.

* States continue to make significant progress with legalization of both recreational and medical use.

* Sales growth in many states remains solid. Maryland recently posted $42.6 million in weekly cannabis sales, more than double the $21 million take in the first week of legal recreational-use sales in early July. Michigan cannabis sales hit another record high in June, reaching $261 million. Massachusetts cannabis sales reached $152 million in June also a record.

* Three large states appear to be on the cusp of legalizing recreational use over the next two years: Ohio, Pennsylvania and Florida. Smaller southern states, in terms of population, are also warming up to legalization, more evidence of the cultural shift in the U.S. towards accepting cannabis use (see below).

Given this ongoing wave of progress at the state level, which is not too surprising because polls continue to show a majority of voters want legalization, it seems odd that there is so much emphasis on federal reform.

When is it likely to happen? Recent history shows Democrats like to use cannabis reform as a way to pull voters in elections. So, at the latest, we’re likely to see stock-moving advances in banking reform and de-scheduling at the federal level during the 2024 election season.

What to Do Now

I personally continue to add on weakness, ahead of probable progress in Washington by the 2024 election season, if not sooner. Any of the names in our portfolio make sense, and I also like AdvisorShares Plus US Cannabis (MSOS) and AdvisorShares MSOS 2X Daily (MSOX) for diversified, and leveraged diversified exposure. As Jason Wild at TerrAscend points out, sentiment is at a negative extreme. That’s usually the time to build exposure to a group – as long as there are prospects of positive developments. I believe that is the case, here, due to ongoing progress at the state level and reasonable expectations of federal level reform by the thick of the next election cycle (September through October, 2024), if not earlier. I also suggest a new cannabis sector investment company below, called AFC Gamma (AFCG), which pays a 13.56% yield. The last one I suggested on March 29 this year, Chicago Atlantic Real Estate Finance (REFI), is up 18% including distributions, compared to 13.2% gains for the S&P 500. I own both of these as long-term positions for the yield and capital appreciation, and I plan to continue to add.

“Cannabis Plus” Portfolio

Waiting for politicians to act is frustrating. Rather than put all our eggs into a basket of producers and retailers that depend so heavily on politicians, I think it makes sense to get exposure to cannabis-related companies that do not actually touch the plant. I’m going to continue to find these and suggest them to you in a supplemental “cannabis plus” portfolio, alongside our pure play Cabot Cannabis Investor.

I will soon start tracking the results, but so far, so good. I suggested Chicago Atlantic Real Estate Finance (REFI) back on March 29. It is now up 18% including distributions. This is a real estate investment trust (REIT) that makes senior secured loans to state-licensed operators in the cannabis industry.

Now I would like to suggest a similar name.

AFC Gamma (AFCG)

I regularly analyze corporate insider buying patterns for bullish signals that suggest stocks are a buy. Like Chicago Atlantic Real Estate Finance, AFC Gamma has seen very solid insider buying. It pays a 13.56% yield.

This is an investment company with exposure to two of the worst sectors right now, mainly cannabis but also commercial real estate. That makes it an interesting contrarian play, especially given the insider buying here.

As you know, the cannabis sector faces several challenges, like price compression and federal reform delays. But the AFC Gamma cites bullish trends that will help its cannabis lending efforts. “As states continue to legalize cannabis for medical and adult-use, an increasing number of companies operating in the cannabis industry need financing,” says the company. “Due to the current capital constrained cannabis market, which does not typically have access to traditional bank financing, we believe we continue to be well positioned to act as a prudent financing source to cannabis industry operators given our stringent underwriting criteria, size and scale of operations and institutional infrastructure.”

Commercial real estate is another extremely troubled sector in part because of the slow return of workers to offices, and thus the weak occupancy at large office buildings in cities. Recession fears contribute to concerns. Debt defaults here were supposedly the next shoe to drop. But so far, we have not seen this. I do not believe this will be a huge issue since workers are returning to offices, and we are unlikely to see a recession.

AFC Gamma started off as a cannabis-only lender, but it expanded into the rest of commercial real estate to find more lending opportunities. Here is what it says about this new area of lending.

“As the Federal Reserve began to increase interest rates in 2022 to curb rising inflation, we believe the higher interest rates and associated pressures have created an opportunity in real estate lending, where there is currently less capital available in the marketplace to finance real estate projects,” says the company. “As a result of these market dynamics, we have identified a number of opportunities to provide acquisition and construction financing for real estate owners, operators and related businesses at attractive rates and secured by valuable real estate collateral.”

AFC Gamma may benefit as banks pull back on commercial lending due to concerns about deposit flight, and probable tighter regulatory standards on the way. AFC Gamma mainly does senior loans secured by real estate, equipment, value associated with licenses and other assets.

The CEO here is Leonard Tannenbaum, who founded Fifth Street Asset Management, which was sold to Oaktree Asset Management in 2017. Tannenbaum founded AFC Gamma in 2020.

The company just cut its distribution from 56 cents a share to 48 cents, or an annual rate of $1.92. That is a pretty big cut. But it is not necessarily a sign of more to come. The recent insider buying confirms this. Also, I think the distributions here will be stable based on my belief that the cannabis sector is bottoming here, and that sentiment towards commercial real estate will improve as more people realize we are not going into recession.

“Management anticipates that the June quarterly dividend represents a sustainable dividend level on the current portfolio,” says the company. AFC Gamma is doing a share repurchase program which it can dial back if it needs to preserve cash. The CEO and president bought $5.4 million back in early May at around $10.40. The shares are higher now. But insiders do not buy for short-term moves. And AFC Gamma still looks attractive because of the 13.5% distribution yield.

AFC Gamma is a real estate investment trust (REIT). That is important to know because it means more money from the business gets passed through to shareholders in the form of distributions which create a nice yield. But REITs complicate matters at tax time. One fix is to own REITs in tax-protected accounts.

Sector News

* Phillip Morris has agreed to purchase Israeli cannabis company Syqe Medical for $650 million. The proposal reflects Phillip Morris’ interest in the company’s metered-dose, pharmaceutical-grade inhaler that dispenses precise doses of medical cannabis to patients. Bulls speculate the deal suggests re-scheduling cannabis at the federal level under the Controlled Substances Act is in the cards. Note that the deal hinges on Syqe getting U.S. Food and Drug Administration approval for its inhaler.

* The Florida Supreme Court has given the state attorney general more time to file a brief arguing why voters should not get a chance to vote on recreational use legalization initiative in 2024. Attorney General Ashely Moody (R) is trying to invalidate the proposed referendum. Trulieve (TCNNF), a portfolio position and the major cannabis company in Florida, has contributed more than $39 million to the referendum effort. Polls show that nearly 70% of Floridians support rec-use legalization. The state already allows medical use.

* The National Collegiate Athletic Association (NCAA) is moving to take cannabis off its list of banned drugs and substances that it tests for. An NCAA committee on safeguards and medical issues recently signaled it favors this action. The change would be part of an ongoing cultural shift towards the acceptance of cannabis use, mirroring similar actions in professional sports. The National Basketball Association (NBA) no longer considers cannabis a prohibited substance. The NBA also allows players to endorse and promote CBD products. Major League Baseball has enacted similar reforms.

* Cannabis industry trade groups including The American Trade Association for Cannabis and Hemp (ATACH) recently sent a letter to Senate Banking Committee Chairman Sherrod Brown (D-OH) and Ranking Member Tim Scott (R-SC) imploring them to act on cannabis banking reform. “Many cannabis retailers are forced to do business in all cash and cannabis businesses are being targeted for violent robbery,” they wrote. “The latter examples have turned violent with dispensary robberies in places such as Washington, Oregon, Michigan, and Oklahoma.” The Senate banking committee is considering a bill that would allow banks to serve cannabis companies, called the SAFE Banking Act.

* New York’s Cannabis Control Board (CCB) approved a resolution to allow cannabis farmers markets. The board also approved 212 provisional retailer licenses taking the total so far to 463 licensees. The state has been criticized by the industry for its slow roll-out of dispensary licenses, and onerous regulation. The markets may be permitted at concerts and festivals. Less than two dozen legal retailers have opened in the state, so far. The state has also aggressively stepped-up enforcement against illegal cannabis sellers in the past two months.

Portfolio Company News

Ayr Wellness (AYRWF)

Ayr Wellness continues to expand its presence in large states likely to legalize recreational use in the next year or two.

In Florida, the company recently opened two dispensaries in Orlando and one in Winter Haven. The move expands the company’s Florida presence to 62 locations, out of a total footprint of 86 stores nationwide. It has opened ten dispensaries in Florida this year.

Floridians may get to vote on a recreational use initiative in November 2024, pending state supreme court approval of the referendum language.

In Ohio, Ayr just bought an option to take control of the medical cannabis dispensary company Twice the Wellness, which plans to open a store in suburban Cleveland. Ayr had already agreed to buy two dispensaries in Ohio pending regulatory approval: Daily Releaf near Dayton, and Heaven Wellness near Cincinnati. It is also building out cultivation and production in the state.

Cannabis activists in Ohio say they have turned in enough signatures to put a marijuana legalization initiative on the state ballot this November. The campaign was run by the Coalition to Regulate Marijuana Like Alcohol (CTRMLA). A recent poll by Spectrum News and Siena College Research Institute found that 60% of Ohioans support legalizing recreational use of cannabis.

Cresco Labs (CRLBF)

Cresco Labs announced the expansion of its partnership with the cannabis company Khalifa Kush to cultivate and distribute the brand’s products in Massachusetts. Khalifa Kush is a brand founded by the rapper Wiz Khalifa.

Curaleaf (CURLF)

Curaleaf may seek to list its shares on the Toronto Stock Exchange, according to a recent company filing. The change could increase flexibility for financing and broaden out the potential shareholder base. TerrAscend (TSNDF; TSND.TO), which is not a suggested portfolio name, began trading on the Toronto exchange on July 4. Subsequently, Morgan Stanley took the stock off its restricted list, which theoretically allows more investors to buy the stock.

Organigram (OGI)

OGI reported July 13 that its most recent quarterly sales dropped 14% year over year to $32.8 million. Earnings fell even more sharply, but mostly because of a large, one-off impairment charge.

The company blamed sales weakness in part on what it calls “THC inflation,” or false THC concentration labeling by competitors. Organigram says unscrupulous companies “lab shop” for testing companies that produce the most favorable results, or cherry pick the best flower for analysis. The practice forced Organigram to cut prices to compete.

“We are working collaboratively with key stakeholders in the industry on several initiatives aimed at bringing solutions regarding standardized testing and sampling,” said CEO Beena Goldenberg in the earnings call. Meanwhile, the company can withstand the challenge near term, she said, because of its solid balance sheet strength. Organigram reports $75 million in cash against minimal debt. It did, however, book negative operating cash flow of $5.5 million.

Two other factors hurt sales. One was a delay in shipments to Israel because of new international testing standards. The other was Health Canada’s removal of Organigram’s Edison JOLTS cannabis extract from the market. The product remains under review.

Meanwhile, the cost of sales went up 10% to $32.3 million, and Organigram booked a huge impairment charge of $191 million on property, plant and equipment. The upshot was a big decline in earnings. The company reported a net loss of $213.5 million, compared to a loss of $2.8 million in the same quarter a year before. Note that most of that was due to a one-off charge which will not be repeated.

The company was reporting its third quarter, which ended May 31.

Not All Bad News

Organigram guided for revenue growth next quarter, and it predicted it will be free cash flow positive by the end of the year.

The company also announced two investments. An investment in Green Tank Technologies will give Organigram exclusive access to Green Tank’s vaping systems which reportedly improve delivery. OGI also invested in the seed genetics company Phylos Bioscience, which has seeds that produce cannabis with high concentrations of THCV. This is a compound that counteracts some of the negative effects of cannabis like appetite stimulation. THCV also purportedly helps enhance focus, creativity, and calmness.

OGI also signed a supply agreement with Sanity Group, which gives it access to the German medical cannabis market. That market is set to expand around the turn of the year as restrictions on medical cannabis sales are eased.

Organigram held its #1 position in the Canadian market in milled flower and concentrates, and it was #2 position in gummies. Its SHRED brand is one of the largest cannabis brands in the Canadian market, netting $190 million in retail sales in the last 12 months. The company launched 28 new products in the quarter.

Industry Outlook

CEO Goldenberg predicted bankruptcies and restructuring at Canadian companies are set to pick up soon, because so many companies have excessive debt, and they struggling to keep up with taxes and payments to suppliers. Meanwhile, their equity valuations have fallen so much, it will be difficult to do financings.

“Many may not have enough cash to operate as going concerns,” she said. “As a result of this, we believe we are going to see the pace of corporate restructurings, including bankruptcies increase. I think it’s going to accelerate over the next 12 months. The capital markets are very tight. People can’t raise money. And as this unfolds, we will capture market share that becomes available.”

Tilray (TLRY)

Tilray shares rallied July 26 after the cannabis and beverage company reported a quarterly loss of $120 million, or 15 cents a share compared with a loss of $458 million, or 99 cents a share, a year earlier.

Tilray reported 24% sales growth to $184 million from $153 million in the same quarter a year ago. About two-thirds of that $31 million in sales growth came from the acquisition of the Canadian cannabis company HEXO which reported $21.6 million on a standalone basis in second-quarter sales.

The company reported $8 million in operating cash flow. It says it improved adjusted free cash flow by $200 million, though adjusted metrics have to be taken with a grain of salt. The company reported $448.5 million in cash against $544 million in debt and deferred tax liabilities.

Tilray was reporting results for the quarter ended May 31.

Tilray increased its #1 position in Canada, growing market share to 13% thanks to the HEXO acquisition. Tilray is #1 in flower, oils, and concentrates, #2 in pre-rolls and #4 in vape. The company expanded its medical cannabis share in Europe, where legalization should unfold over the next few years. Tilray has cultivation and distribution operations in Portugal and Germany.

The company guided for annual adjusted EBITDA of $68 million to $78 million in the fiscal year ending May 31, 2024, which would be 11% to 27% growth compared to the year before. It offered no sales guidance.

Trulieve (TCNNF)

Trulieve opened another medical dispensary in Florida. The Sanford dispensary is part of the company’s ongoing expansion in the state, ahead of possible legalization of recreational use over the next two years. Trulieve has been the main funder of a referendum initiative to allow voters a say on recreational use in the 2024 elections. The referendum proposal is being reviewed by the state’s supreme court. Trulieve is the biggest cannabis company in Florida, and it stands to benefit greatly from recreational use legalization. Approval of the referendum is not a given, because the Florida Supreme Court is dominated by conservatives who know that the initiative would bring out the liberal vote in 2024.

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. During the recent sector rally on expected progress on banking reform at the federal level, our portfolio was outperforming our benchmark. In the sector retreat since then, that is no longer the case. The New Cannabis Ventures Global Cannabis Stock Index is down 18.7% year to date, compared to a 31.2% decline in our portfolio. I personally continue to add leverage by purchasing the MSOX on any significant weakness of 2%-4% or more. Please use limit orders a bit below the bid because the bid ask spreads on our names and ETFs can be abusively wide. Portfolio prices are intraday, July 26.

Company Profiles

Ayr Wellness (AYRWF) This is a vertically integrated multistate operator based in Miami. It has 83 dispensaries. It operates in Florida, Illinois, Massachusetts, Pennsylvania, New Jersey, Nevada, Ohio, and Connecticut. Ayr has 18 grow and production sites, around a dozen 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 $96.5 million in cash and $618 million in net debt. This debt overhang is one reason why Ayr trades at a miniscule .13 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 companies are debating asset divestures and the right amount of cash to raise relative to the combined debt.

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, New York, Massachusetts, Michigan, Florida, Missouri, and Maryland. Most of those are states that recently expanded into recreational-use sales, or are expected to over the next two years.

The company is founder-run, which can be a plus in investing. Cresco Labs has a trailing price to sales ratio of .59. 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 $836 million in cash, or about $2.30 per share, against minimal debt of $3.5 million. Some of that cash could be deployed in acquisitions, possibly to expand in the U.S. adult-use market.

As for the insider buying, director Jason Adler has purchased large amounts in the $1.71 to $3.10 range. Cronos trades at .61 times book value. BUY

Curaleaf (CURLF) Massachusetts-based Curaleaf was the industry leader last year. It operates 152 dispensaries and 22 grow sites in 19 states and its European operations. It has one of the strongest brand portfolios in the U.S. led by Select, the number one selling vape brand in its markets. 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 15%-20% 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. Curaleaf has a 50% market share in the U.K.

The company is founder-run, which can be a plus in investing. Curaleaf has a price/sales ratio of 1.68. 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 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 national retail cannabis stores called RISE. It has 79 retail stores and 18 manufacturing facilities 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 1.53. BUY

Organigram (OGI) Organigram holds the #3 position among Canadian licensed producers. It also sells high-margin flower in Israel and Australia. It signed a deal in May to supply a German medical cannabis operator called Sanity Group. Germany should see robust growth over the next few years as it loosens rules on medical cannabis use. 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 increase 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 .89. 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 on 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 1.63. BUY

Trulieve (TCNNF) Trulieve has long been the biggest medicinal marijuana vendor in Florida, where it has 50% market share. It has 186 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 138 million tourists a year.

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

The company reports $188 million in cash against $1 billion in debt. 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 .62. BUY

Verano (VRNOF) Chicago-based Verano is one of the top five publicly traded multi-state operators in the U.S. by sales. The company has 132 stores and fourteen 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 states that may soon legalize recreational like Florida, Ohio and Pennsylvania. The company’s strategy has been to position with medical dispensaries in states most likely to soon go recreational.

Verano also has consistent operating cash flow at a time when financial strength is important due to pricing 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 consumer’s trading down to value brands, Verano moved up the roll-out 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 and cutting overhead to bolster its balance sheet. But it has some of the strongest operating cash flow in the business. The company reports cash of $95 million against debt of $502 million.

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of .99. BUY

The next Cabot Cannabis Investor Issue will be published on August 30, 2023.