Cabot Cannabis Investor Issue: May 29, 2024

Cannabis stocks remain unloved by investors. This makes the group buyable because catalysts are on the horizon.

The tricky part now is that it is more difficult to predict that we may see a catalyst near term, or even when the next one will occur. Patience is required.

Here is a look at the four main potential catalysts:

1. Rescheduling. The Drug Enforcement Agency (DEA) has published its proposed rescheduling rule, which would move cannabis to Schedule III from Schedule I under the Controlled Substances Act. This change would provide a huge boost to cannabis companies by exempting them from an onerous Internal Revenue rule called 280E which bars them from deducting operating expenses. Our Curaleaf (CURLF), for example, would get a $150 million cash boost this year if the change took place. The top five cannabis companies (all portfolio names) would save $560 million a year in taxes, based on their 2023 tax bills.

   The DEA’s proposed rule is now in a 60-day comment period. It’s not clear whether or not the Department of Justice (which houses the DEA) will hold administrative law judge hearings on the proposed rule. It also remains unclear how much hearings would delay the process, if at all. Many analysts close to the process continue to predict full rescheduling could happen before the elections in November, or by the end of the year. This would be a huge catalyst for the group.
   

2. Banking reform. The SAFER Banking Act, which would let banks handle cannabis companies as clients, continue to languish in Congress. Proponents like Senate majority leader Chuck Schumer (D-NY) maintain hope that there will be progress on passing this bill by the end of the year.
   

3. A Cole memorandum redux. Many sector analysts expect Attorney General Merrick Garland to issue a memo stating the federal government will not enforce cannabis laws in states that have legalized. A similar memo was published by Deputy Attorney General James Cole under the Barack Obama administration. The timing of a repeat is unknown, and tough to call.

   4. State progress on legalization. Floridians will vote on legalizing recreational use in the November election. The referendum requires 60% approval by voters to pass. Polls show the vote will be close. Analysts point out that an abortion referendum will also be on the ballot which could bring out voters on the left. If so, this would favor approval of the cannabis referendum.

The bottom line: Sentiment has swung to a negative extreme again on cannabis. These have normally been good times to buy, and I believe that’s the case now. Catalysts loom. But the timing is anyone’s guess. Patience required. Use the lull in catalyst news to average in on weakness. Plan purchases in swipes of five or more.

What to Do Now

Cannabis stocks have weakened enough again to consider entries. Because of the potential catalysts on the horizon over the next several months, and given the current weakness in cannabis names, consider taking both trading positions and multiyear positions now.

Then, if a catalyst creates a 15%-25% kind of rally, consider exiting trading positions and selling covered calls against multiyear positions. Consider selling calls about a month out in time, and starting at two to three points above the current price, and up.

Portfolio names are: Ayr Wellness (AYRWF), Cresco Labs (CRLBF), Curaleaf (CURLF), Cronos (CRON), AdvisorShares Pure U.S. Cannabis (MSOS), AdvisorShares MSOS 2X Daily (MSOX), ETFMG Alternative Harvest (MJ), Green Thumb (GTBIF), Organigram (OGI), Tilray Brands (TLRY), Trulieve (TCNNF) and Verano (VRNOF). For simplicity, consider getting exposure via MSOS or the leveraged version, MSOX.

In a volatile sector like this, I prefer to add on weakness rather than strength. When or if we do get a catalyst, that will create a rally in which to trim positions and de-lever a bit. De-lever in this instance means trimming MSOX and putting the funds into cash or the MSOS.

Cannabis News from Around the World

Part of my core thesis for being bullish on cannabis stocks is that there continues to be tremendous cultural momentum toward cannabis reform around the world. I’m convinced cannabis stocks will not remain ignored forever.

We see evidence of this powerful cultural momentum in the changes in laws to legalize cannabis, big tobacco investments in the space, robust cannabis sales growth in states that legalize, increased cultural acceptance in the form of relaxed drug testing standards in sports leagues and the workplace, and poll results that show a growing majority of people support legalization regardless of age and party affiliation.

These trends tell us cannabis stocks are a strong contrarian buy that will turn very profitable for patient investors with a medium-term horizon. The sector is so volatile, it is easy to get shaken out of names by heightened emotional reaction to drawdowns. So, it is important to catalogue evidence of this cultural momentum. That is the purpose of this section of Cabot Cannabis Investor.

* The number of Americans who use cannabis daily or nearly every day has surpassed the number who drink alcohol regularly, according to a study by Jonathan Caulkins at Carnegie Mellon University.

* California lawmakers approved a bill to legalize cannabis cafes in the state. It was approved by the assembly by a 58-6 vote. It now goes to the Senate. Cafes would be able to offer food and non-alcoholic drinks, and host live events like concerts. Gov. Gavin Newsom (D) has vetoed a similar proposal, citing California’s smoke-free workplace rules. Nevada has approved cannabis cafes and several are already operating.

* A majority of Tennessee voters favor legalizing recreational cannabis, according to a poll conducted by Vanderbilt University.

* Bank of America analysts predict cannabis rescheduling under the Controlled Substances Act could happen before the November elections. Part of their reasoning is that a research note from the Office of Legal Counsel (OLC) inside the Department of Justice adequately refutes potential legal challenges to rescheduling. The OLC note defends the Department of Health and Human Services rescheduling recommendation, and concludes the change will not violate a U.N. treaty on cannabis.

* Nebraskans for Medical Marijuana says it has collected enough signatures to put medical cannabis legalization on the ballot in upcoming elections.

* Michigan’s cannabis retailers sold nearly $1.1 billion worth of marijuana products during the first four months of 2024, a 21% increase over the same time frame a year ago.

* Colorado cannabis sales rebounded by 11% sequentially in March to $126.6 million. Tax receipts suggest April sales are even stronger. March sales this year were still well below the $139.6 million tallied in March 2023.

* Ohio’s Joint Committee On Agency Rule Review has approved proposed regulations for sales of recreational use cannabis. Voters approved rec use last November. Sales could start as soon as this summer.

* New Hampshire’s Senate Judiciary Committee has approved a bill to legalize recreational-use cannabis sales. The state’s House approved legalization about a month ago.

* States that tax cannabis collected $20 billion in revenue as of the end of the first quarter of 2024 since launching legal sales, says Marijuana Policy Project. Last year they collected $4 billion, a record. The tally does not include taxes collected by cities and towns. The sizeable tax takes support efforts to legalize cannabis in prohibition states.

* A majority of Texans, or 60%, support the legalization of cannabis, according to a new Texas Lyceum poll. Support was strongest among Democrats at 72%, vs. 49% among Republicans. The Texas House of Representatives has approved bills to decriminalize cannabis, but they went nowhere in the Senate.

* Only 58% of Florida voters back a referendum to support the legalization of recreational-use cannabis sales, according to a poll conducted by Cherry Communications for the Florida Chamber of Commerce. That’s just shy of the 60% needed for approval. Cannabis companies supporting the change say they will ramp up their publicity campaigns in the two months leading up to November elections. Trulieve (TCNNF) CEO Kim Rivers has said internal data suggests support is closer to 70%.

* The House Armed Services Committee approved a defense spending bill that includes a proposal to prohibit the military from testing recruits for cannabis.

Company News

Most of our cannabis companies reported earnings in May. Overall, sales trends have not been robust. But cash flow has been improving, and companies are using the cash to right-size balance sheets and even buy back stock. They’ve also been busy opening stores in states poised to legalize recreational-use sales.

Ayr Wellness (AYRWF)

Ayr Wellness reported a loss of $1.08 per share for the first quarter on May 15. That sounds bad, but the real story here is all about Florida and the outcome of a November referendum vote there that would legalize recreational use. More on this below.

But first, there was good news in the earnings report as well. Ayr booked 3% sequential sales growth to $118 million. It generated free cash flow, and said it expects to do so for the entire year, as well. Ayr guided for flat sales growth in the second quarter, but “stronger growth” in the second half.

The most important angle here is that Ayr is well-positioned for further legalization of recreational use by key states. Ayr has 91 stores in eight states. But it has a big presence in Florida where voters may approve rec use in November (64 stores), in Pennsylvania which may soon legalize rec use (nine stores) and Ohio which is in the process of opening up rec use (three stores).

Ayr continues to aggressively position in Florida, ahead of possible legalization of rec use if voters approve it this November. It expects to have 70 stores there by the end of the year. That’s 70% of its store base. “We are poised to take advantage of the significant growth opportunity that the transition to adult-use presents across the majority of our footprint, without materially increasing our fixed cost base,” said CEO David Goubert in the earnings call.

In other news, the company launched its flagship premium edibles brand kynd in Florida and Nevada. Ayr also restructured debt, pushing maturities out to 2026. It ended the quarter with $71 million in cash.

Like many companies, Ayr is challenging the federal 280E tax by filing amended returns, but because the outcome is uncertain, it has not booked the $50 million refund as a receivable on the balance sheet.

Cresco Labs (CRLBF)

Cresco Labs reported a loss of two cents a share for the first quarter on May 15. It also booked flat year-over-year sales growth to $184.3 million excluding divestitures.

On the bright side, operating cash flow grew by more than tenfold compared to the year before to $36 million, and free cash flow was $33 million.

Big picture, the main story here is good exposure to states that could soon legalize recreational use. The company has five stores in Ohio, 15 in Pennsylvania, 33 in Florida. It also has 10 stores in Illinois where rec use sales are already legal.

“This is just the start,” said CEO Charles Bachtell, referring to the cash flow growth. “With upcoming adult use catalysts in Ohio and potential catalysts in Florida and Pennsylvania, we have the ability to generate significant operating leverage and additional cash flow going forward.”

CFO Dennis Olis predicted rec use in Ohio, Florida and Pennsylvania will provide “meaningful” year-over-year growth in both 2025 and 2026. Cresco holds the number one market share position in Pennsylvania (and also in Illinois and Massachusetts).

Cresco reported cash of $125 million. It cut overhead costs by 24% to $53 million, boosting gross margins by 5.8%.

Like other cannabis companies, Cresco is challenging federal 280E taxes for 2020-2023. If successful, this challenge would boost cash flow by $70 million this year. Cresco would reap a $210 million tax refund if it successfully challenges the 280E tax for 2020-2022.

The company reported 11% price compression across its markets. That’s not good. But it is better than the 20% two years ago. And price trends continue to improve. “There are signs of stabilization,” said Cresco president Greg Butler in the earnings call.

Cronos Group (CRON)

Cronos reported a loss of a penny per share and sales growth of 26% to $25 million for the first quarter on May 9. Sales advanced 31% in Canada year over year, and 27% in Israel. It was a record quarter for revenue. Its Spinach brand was a top three brand in Canada in the flower, edible, and vape categories. The company finished the quarter with $855 million in cash. Cronos launched its Peace Naturals brand in the U.K. in May. Cronos guided for an operating expense reduction of $5 to $10 million in 2024, to chip away it its high cost structure.

Curaleaf (CURLF)

Curaleaf reported a loss of seven cents per share and sales growth of 2% to $339 million for the first quarter on May 9. Sales declined sequentially.

The company posted operating cash flow of $46 million and free cash flow of $33 million. It used some of that to buy back $15 million worth of debt at an 8% discount. The company ended the first quarter with $105 million in cash.

Like most of our portfolio names, Curaleaf has good exposure to states poised to legalize recreational use, or Ohio, Florida, and Pennsylvania, as well as Germany which is in the process of liberalizing cannabis laws.

This sets the company up for “robust growth in 2025 and beyond,” said CEO Matt Darin. In Florida, the company is expanding production capacity and increasing its store count. Executive chair Boris Jodan predicted legalization of rec use in Florida could increase market size by two to three times, to as much as $6 billion in annual sales.

Curaleaf continued to turn itself into a global cannabis player across 15 countries. During the quarter, it bought Northern Green Canada, which is certified to produce cannabis for the European market (called “EU-GMP” certification). It also bought Can4Med, a pharmaceutical wholesaler in Poland.

“We expect our European growth catalyst to emerge more fully in the second half of the year and into 2025,” said Jordan. Its international business grew 59% year-over-year and 12% sequentially and remains on track to hit $100 million in revenue this year.

Like other cannabis companies, Curleaf is challenging the federal 280E tax. Success could bring over $150 million in cash for 2024. It is also amending prior year returns to claim refunds.

Jordan predicted the stock could join the MSCI Small Cap Canada, S&P TSX Small Cap and the FTSE Canada indices. He said Curaleaf qualifies because it is now listed on the Toronto stock exchange and major banks offer share custody.

Green Thumb (GTBIF)

Green Thumb continued to demonstrate why it is the blue-chip name in the cannabis space in the first quarter.

The company reported a 240% increase in net income on May 8 to 13 cents per share year over year, on revenue gains of 11% to $276 million. Sales advanced in large part due to store openings. It added fifteen RISE stores in the quarter. Same store sales or sales at stores open more than a year, advanced 1.8%. The launch of recreational-use sales in Maryland also helped.

Operating cash flow increase 12% to $84 million. It was a record quarter for sales and operating cash flow. Green Thumb bought back one million shares. It ended the quarter with $224 million in cash against debt of $310 million.

The company has good exposure to several states where recreational-use sales are coming online, like Ohio, and Minnesota. It also has good exposure to states which will potentially see this change, or Florida and Pennsylvania. “In the last 24 months, we’ve deployed significant capital into these markets and our well-timed investments should provide strong shareholder cash-on-cash returns,” said president Anthony Georgiadis

Unlike other cannabis companies, Green Thumb is not currently challenging the federal 280E tax. But it estimates it would save over $100 million in taxes a year, if 280E went away.

Organigram (OGI)

Canadian cannabis company Organigram reported a loss of 22 cents per share for the first quarter on May 14. Sales contracted 6% to $27.5 million because of problems with a customer on Israel. The customer is behind on payments. So, Organigram has stopped shipping to this customer.

“We are working with our Israeli customer on a payment plan and are optimistic that we will resume shipments to Israel in due course,” said CEO Beena Goldenberg in the earnings call. “The customer says they’ll pay us. We expect to continue to work with the customer, to get a payment plan that we’re comfortable with. It is our intention to get back to shipping to Israel. It’s an important market for cannabis, and it’s a higher margin market than Canada.”

Back home in Canada, Organigram maintained its #1 position in milled flower, #2 position in edibles and #3 position in pre-rolls and overall #3 position.

On the international front, during the quarter Organigram made its first shipments to Sanity Group in Germany and 4C Labs in the U.K. After the quarter closed it signed two new international supply agreements in Australia and the U.K. It also reported progress on getting its Moncton grow facility in Canada certified to export to Europe (the so called “EU-GMP” certification). On May 28, Organigram signed a deal to supply Avida Medical in the U.K.

The company closed the quarter with $83.6 million in cash. After the quarter it raised $28.8 million in cash for its Jupiter cannabis sector investment fund. Partner BAT, the U.K.-based tobacco giant, also invests in this fund, called the Jupiter Investment Pool.

Big picture, Organigram remains a play on international cannabis markets growth, and innovation in the space in vape technology, nanotechnology for THC delivery via edibles, and hybrid strains developed at its partner Phylos Bioscience.

Trulieve Cannabis (TCNNF)

This big Florida operator reported a loss of five cents a share on May 9, excluding non-recurring charges worth twelve cents a share.

Sales grew 2.9% year over year to $297.6 million. That was 4% growth sequentially. Strong first-quarter sales were driven by higher retail traffic and average basket size.

The company reported $139 million in operating cash and $124 million in free cash flow. Trulieve ended the quarter with cash of $327 million, including $50 million in tax refunds from amended returns related to its challenge of 280E taxes. It reported $482 million in debt. Trulieve has amended returns for the tax years 2019 through 2021, and received $113 million in refunds to date.

Trulieve continues to be the premier play on legalization of recreational use in Florida, which is being put to voters in a referendum this November. It opened three new stores in Florida during the quarter. Trulieve has 69% of its 196 stores in Florida. If voters approve the change, rec-use sales should launch in May 2025, predicts Trulieve. The company has 136 stores in Florida and over three million square feet of production capacity. It announced a new store opening there on May 10, after it reported earnings.

CEO Kim Rivers estimates the Florida market would grow to $6 billion in annual sales, one of the biggest markets in the world. The state has 22 million residents and 138 million annual tourist visits. “We believe passage with 60% approval is achievable, but we are not taking a single vote for granted,” says Rivers. Polls show the vote will be close.

The company has exposure to Ohio where rec-use sales will launch soon. It has one medical store, and it hopes to add licenses. Rivers estimates this market can reach $2 billion in annual sales.

Trulieve also has exposure to Pennsylvania, which may approve rec-use sales over the next year. The company operates 20 affiliated stores there and three grow sites. Rivers says this market could reach $4 billion in sales.

Trulieve said second-quarter sales will be flat at best, and possibly fall by a few percent. It will open 25 stores this year.

Verano (VRNOF)

Verano reported earnings per share of zero cents for the first quarter, on May 8. The company posted a 2.5% decline in sales year over year, to $221 million. That was a 7% sequential decline, but at least sales beat guidance. Revenue was weak in part because of the large number of cannabis store openings in New Jersey, which made that market more competitive.

The company reported operating cash flow of $31 million, and free cash flow of $21 million. It ended the quarter with $194 million in cash against $445 million in debt. After the quarter ended, the company prepaid $50 million in debt. Verano estimates it would save $80 million in tax payments if rescheduling eliminated the 280E tax.

Like most of the rest of our portfolio, Verano has good exposure to states about to legalize rec-use sales. It has a big presence in Florida (75 stores) where rec-use legalization is on the November ballot. CEO and founder George Archos estimates approval of rec use would boost the company’s 2023 Florida revenue of $222 million by as much as $300 million. “We think this estimate is conservative given the state’s large tourism influx of over 135 million people annually,” he said in the earnings call. Verano has 140 stores and fourteen production sites in thirteen states.

Verano has five stores and a grow site in Ohio which will soon launch rec-use sales. It has 18 stores in Pennsylvania which may legalize rec-use sales in the next 12 months.

The company guided for flat to low single-digit revenue growth guidance for the second quarter 2024.

Cannabis Plus Insider Portfolio News

This section offers updates on our Cannabis Plus Insider Portfolio names. These are companies that have exposure to the cannabis sector without actually touching the plant. They also must have favorable insider buying, according to my system for analyzing insider activity.

AFC Gamma (AFCG)

AFC Gamma reported a first-quarter loss of a penny per share on May 9. Revenue declined 12% year over year to $14.8 million. The company paid a dividend of $0.48 per share. The company originated $90.4 million of loans, or $34 million to cannabis operators and $56.4 million to commercial real estate developers. In cannabis, the company loaned $34 million to Sunburn Cannabis, a private, vertically integrated single-state Florida operator.

“We are increasingly optimistic about the outlook for the cannabis industry,” said CEO Daniel Neville in the earnings call. “The industry has seen expansion fueled by increasing state-by-state legalization and growing consumer acceptance. According to BDSA, the US cannabis industry is projected to continue its upward trajectory with sales hitting $32 billion in 2024 and growing to $46 billion by 2028.” BDSA is a research group that tracks sector sales trends.

He also cited progress on rescheduling at the federal level, which would eliminate 280E taxes on cannabis companies. “From a lender’s perspective, we expect that the elimination of 280E will enhance the cash flow and credit profile for our existing borrowers and expand our pipeline of potential borrowers,” he said.

As of March, its cannabis portfolio had a weighted average yield to maturity of 20%. “We have good exposure to early-stage and expected near-term adult-use transition states,” said Neville. “As of May 1, 2024, over a third of our portfolio based on commitments, has exposure to Ohio, Florida and Pennsylvania.”

AFCG’s pipeline of cannabis deals stands at $303 million. “The origination team is now firing on all cylinders. Given the limited supply of institutional capital, we believe this will allow us to both move up the quality curve while still achieving mid to high teens internal rates of return,” said Neville.

The spin-off of its commercial real estate portfolio, to be called Sunrise Realty Trust, remains on track.

Sector Performance

Because our main cannabis portfolio is leveraged, we lag in severe sector downturns. That is the case now. Our Cabot Cannabis Investor portfolio was up 11.5% this year as of the May 28 close. That was 6.5 percentage points below the 17% gain for the New Cannabis Ventures Global Cannabis Stock Index. We are slightly ahead of the 11.27% gains this year in the S&P 500, however.

Our portfolio is leveraged because of the large position in AdvisorShares MSOS 2X Daily (MSOX). It is a top-five position. The leverage hurts us when the sector is weak. Likewise, it helps capture more upside as we see progress on rescheduling cannabis, and progress towards approval of recreational use in more large states like Pennsylvania and Florida.

Once a few of these pieces of the puzzle are firmly in place, I will roll back leverage by trimming MSOX in favor of cannabis stocks or the AdvisorShares Pure U.S. Cannabis (MSOS) ETF. If you are a highly active trader, it would make sense to de-leverage into rallies in the same manner along the way, and then hope for a pullback to re-lever.

Our Cabot Cannabis Plus Insider Portfolio is up 39% since I launched it on March 29 last year. That’s more than twice the 16.6% gain in the Russell 2000 index over the same time.

The portfolio is well positioned to outperform because investments in Chicago Atlantic Real Estate Finance (REFI) and AFC Gamma (AFCG) pay attractive yields of 12.2% and 15.7%. The dividends were recently confirmed even though they look suspiciously high. Portfolio prices are as of the close, May 28.

Portfolio

Canna Plus Insider Portfolio

*Includes dividends by adjusting down the entry price to incorporate dividend payouts

Company Profiles

Ayr Wellness (AYRWF) This is a vertically integrated multistate operator based in Miami. It has over 90 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. Like many names in our portfolio, Ayr is strategically positioned in states that look poised to approve recreational-use sales. It has over 60 stores in Florida, for example.

Ayr has 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 $50 million in cash and $635 million in net debt. This debt overhang is one reason why Ayr trades at 0.39 times sales. The company is founder-run, which can be a plus in investing. BUY

Cresco Labs (CRLBF) Chicago-based 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 price to sales ratio of 0.81. BUY

Cronos Group (CRON) Cronos is mainly a foreign operator with exposure to Canada, Germany, Australia and Israel.

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. The company has a partnership with Cansativa Group which allows Cronos to sell its Peace Naturals brand in Germany, where the cannabis market should grow dramatically over the next several years because of liberalization of restrictions on sales. Cronos has a 10% stake in Cronos Australia, a publicly traded company.

Cronos has $862 million in cash, or about $2.26 per share, against minimal debt of $2.5 million. Some of that cash could be deployed in acquisitions, possibly to expand in the U.S. adult-use market.

Cronos trades at 0.95 times book value. BUY

Curaleaf (CURLF) Massachusetts-based Curaleaf was the industry leader last year. It operates 145 dispensaries and several grow sites in 17 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. Like many of the names in our portfolio, Curaleaf is well positioned to benefit from the opening up of rec-use sales in New York, Ohio, Florida, Pennsylvania near term.

3. Curaleaf will benefit from progress on liberalization of cannabis laws in Germany and elsewhere in 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 2.52. BUY

AdvisorShares Pure U.S. Cannabis ETF (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. 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. Green Thumb has 91 dispensaries across fourteen states. Green Thumb continued to strategically position itself in markets that look poised to expand to recreational uses sales, like Florida and Pennsylvania.

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 2.45. BUY

Organigram (OGI) Organigram holds the #2 position among Canadian licensed producers. It also sells high-margin flower in Israel, Australia and Germany. 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.

The company has the #1 market share position in hash globally driven by popular products like Tremblant, Holy Mountain and SHRED. It has the #1 market share position in gummies.

British American Tobacco (BTI) is a big investor in Organigram, an endorsement of its potential. The two companies collaborate to develop cannabis products. The price to sales ratio is 1.2. 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. It is ranked #1 there by sales for cannabis flower, oils, concentrates, and THC beverages; #2 in pre-rolls, #4 in vape, and among the top 10 in all other categories. 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.

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 1.74. BUY

Trulieve (TCNNF) Trulieve has long been the biggest medicinal marijuana vendor in Florida, where it has 50% market share. It has over 190 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. It is diversifying its presence into Pennsylvania, Maryland, Georgia, Ohio and Massachusetts, among other states.

The company reports $201 million in cash against $795 million in debt. “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 1.66. BUY

Verano (VRNOF) Chicago-based Verano is one of the top five publicly traded multi-state operators in the U.S. by sales. Verano has nearly 140 dispensaries and 14 production facilities in 13 states. 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 may soon legalize recreational like Florida and Pennsylvania. The company’s strategy has been to position with medical dispensaries in states most likely to soon go recreational.

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 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 reports cash of $175 million against debt of $542 million.

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of 1.47. BUY

The next Cabot Cannabis Investor Issue will be published on June 26, 2024.

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