Cabot Cannabis Investor Issue: May 31, 2023

Now that Florida Gov. Ron DeSantis (R) is officially in the race for the Republican presidential nomination, it’s worth knowing more about his views on cannabis policy.

After all, DeSantis will now play an even bigger part in the election debates, even if polls say DeSantis has a slim chance against frontrunner Donald Trump. His voice matters – since cannabis is such a politically driven sector.

The bottom line: DeSantis offers a mixed picture, but it’s not all bad for cannabis investors.

His record suggests that he opposes cannabis legalization. Yet he’s governor of a state with one of the most robust medical-use markets in the country. He even took steps as governor to support medical use. He helped eliminate a ban on smokable marijuana products for medical cannabis patients in 2019.

Regarding medical use, he’s on record endorsing the need to “respect the will of the voters.” That’s key, because reform advocates have collected enough signatures to put recreational use on the next ballot in Florida. The referendum language still needs to be approved by Florida courts.

In Congress, DeSantis voted in favor of amendments to protect state medical and recreational cannabis programs from federal interference. But he has opposed reform that would protect banks that provide services to state-legal cannabis businesses.

While this mixed record seems like a negative for cannabis stocks, it opens up the opportunity for politicians on the left to put cannabis reform on the agenda as a wedge issue to win votes. Any debate suggesting greater odds of cannabis reform could attract interest in cannabis stocks and drive them higher, as we saw last September when Democrats dangled banking reform and rescheduling in front of voters. Neither happened. But the moves created a huge rally in cannabis stocks.

SAFE Banking Update

The biggest gift near-term from Washington, D.C. could be progress on SAFE banking – even though few investors believe this after the debacle caused by the false promises late last year.

Cannabis lobbyists are surprisingly more bullish on the prospect of favorable banking reform than you’d guess by looking at how marijuana stocks trade. Reform may happen by the turn of the year. That would be a big catalyst for the group – as would signs of progress along the way.

Known as “SAFE banking,” short for the Secure and Fair Enforcement Act, the reform would allow banks to provide services to cannabis companies. This would be a game-changer. It would allow retailers to stop operating in cash only – which makes them crime targets. It would lower the cost of capital for the sector. And it might even clear the way for institutional money to come into the space.

Big picture, there would be other favorable consequences, says Boris Jordan, the executive chair of Curaleaf (CURLF). “The minute we get this passed, everything else becomes ten times easier because you have broken the stigma,” he says. Approval would constitute formal recognition of the industry by the President and Congress. “Then it gets a lot easier to get stuff done in Washington, D.C., even rescheduling, which only needs the president’s signature. These things will move a lot faster.”

Rescheduling refers to de facto decriminalization of cannabis at the federal level by moving it down to a Schedule III category drug from Schedule I, under the Controlled Substances Act.

Given what’s at stake, let’s check in with the outlook of cannabis lobbyist Don Murphy, the director of Federal Policies at Marijuana Policy Project.

The bottom line: By his tally, SAFE banking reform as it was recently re-introduced in a stripped-down format, has filibuster-proof support of more than seventy Senators. The Senate banking committee held a hearing on the bill on May 11.

He thinks once the banking crisis and debt crisis have died down, SAFE banking will be approved by the Senate banking committee and go straight to the floor for a vote. He cites the simultaneous re-introduction of SAFE banking acts on the same day in the House and Senate as a bullish sign. “That speaks volumes,” he says. “It was stealthy. It takes a lot of coordination time and bandwidth. It does not happen just so they can have a bill hearing and let the bill die in the Senate,” Murphy said recently in an online interview.

The key for progress will be discipline by Democrats. They need to avoid adding too many social justice and equity provisions to the SAFE banking bill. This would alienate conservatives. Some form of expungement will probably be acceptable to politicians on the right, says Jordan. “But criminal justice reform issues, small business loans and any spending will be problems for the Republicans.”

Jordan thinks it is possible SAFE banking gets voted on in the Senate by the end of July. Then the House could approve it in the autumn, and the bill could be signed by the president around the turn of the year. “Today’s equity valuations do not appropriately reflect the opportunity in cannabis as this is still a dynamic and fast-growing industry with a long and bright future,” said Jordan, in his company’s May earnings call. Just keep in mind that projecting timelines on actions in Washington, D.C. is always difficult.

What to Do Now

The cannabis sector continues to be unloved, yet there are several potential catalysts on the horizon that will get the stocks moving upwards. The extreme negative sentiment has the stocks heavily discounted. Even though many of our companies are reporting revenue growth in the mid-single-digit range or higher – and sector growth should be robust over the next few years – our cannabis stocks trade for around 1.5 times sales, or much less (see below).

That’s the typical valuation for low-growth, low-margin supermarkets. This makes no sense, and at some point, sentiment will improve, lifting valuations dramatically.

What will drive this? I’ve outlined the potential progress on SAFE banking above. Below in the company update section, you will see that liberalization of cannabis laws in Germany will likely soon produce phenomenal growth there. Looking at the cannabis investor chatter on social media, no one is talking about Germany and Europe. It is hard to imagine the European growth is priced in. Germany is a large country, and reform there will inspire other European countries to reform their rules, too.

There are two wild cards in the deck. One is “de-scheduling” of cannabis under the Controlled Substance Act to Schedule III from Schedule I. This would be a game-changer. The Biden administration hinted heavily at progress on this front back in the last election season. The other wild card is a U.S. attorney general memo clarifying that the federal government does not want to enforce federal cannabis laws in states where cannabis is legal. This happened under the Obama administration, but the “ruling” was rescinded by the Trump administration.

Both of these wild cards would improve sentiment dramatically. Since these are political chits to play for Democrats, the odds of seeing these wild cards improve, the closer we get to the 2024 presidential election cycle, which starts in earnest next February. To me, an overriding force is that the majority of voters, even on the right, favor legalization.

In the background, projections of strong sector growth over the next few years are plausible because of the number of states mulling legalization of medical and recreational cannabis. I offer detail below.

All of this makes any of our companies and exchange-traded funds buyable, particularly on intraday weakness of 4% or more. I particularly favor AdvisorShares MSOS 2x Daily ETF (MSOX), for leveraged exposure. Use limit orders a little below the bid, because the bid-ask on many of our names and ETFs can be abusively wide. No need to enrich market makers who are just being greedy.

Even sector champion and seasoned investor Boris Jordan, the executive chair of Curaleaf (CURLF), recently expressed some doubts regarding his conviction and strategy of continuing to add to cannabis names on weakness. After talking with one of the largest investors in the space, he concluded the downside/upside risk-reward justifies continuing to add. He cites potential downside of 25% against potential upside of 1,000% over a few years. I am not endorsing those numbers. Just conveying his view. He knows a lot about the sector. He could be right, but even if he is off by half, that is still an interesting risk-reward. The key is to be patient, and to add on weakness of 4% or more, using limit orders a little below the bid.

Cannabis News from Around the Country

* Minnesota became the 23rd state to legalize adult-use cannabis when Gov. Tim Walz’s (D) signed the bill on May 30. Marijuana possession and cultivation will become legal on August 1. Licensing should begin in summer 2024, and sales should start in early 2025.

* In a bipartisan effort, Ohio lawmakers recently filed the Ohio Adult Use Act, a new attempt to legalize recreational use.

* Illinois has approved a bill with provisions to allow licensed marijuana businesses to take state tax deductions for expenses. They are prohibited from doing this at the federal level by an Internal Revenue Service code known as 280E.

* Cannabis sector price compression may be easing. The volume-weighted average spot price of cannabis in the U.S. in the middle of May was $1,063 per pound, down 12.5% compared to the year before, says Cannabis Benchmarks. For most of last year, wholesale prices were falling by around 20%. The improvement reflects a reduction in supply as producers exit. This is bullish for stocks in the space. Price trend improvements were biggest in California where prices only fell 4%, Oregon (+19.1%), Oklahoma (+6.2%) and Michigan (-11.8%). Deflation was the most severe in Rhode Island (-46%), Arizona (-39.5%) and New Mexico (-36.9%).

* Florida Attorney General Ashley Moody recently told the Florida Supreme Court that a proposal to place recreational use legalization on the 2024 ballot should be rejected. Moody said the proposal is too broad and ambiguous, which makes it unconstitutional. Smart & Safe Florida has collected enough signatures to place the initiative on the 2024 ballot. Trulieve (TCNNF), the biggest medicinal marijuana vendor in Florida, contributed more than $30 million to the campaign. I’m going to guess they got the language right if they spent that much money. A poll published this year showed 70% of Florida voters support legalizing recreational use. Still, we do not know how the supreme court will rule. It is conservative, and a cannabis referendum would bring out liberals. So the court may have a bias.

* A University of California, Los Angeles study found that, unlike cigarette smokers, regular cannabis users do not run the risk of developing chronic obstructive pulmonary disease (COPD). The study, “Impact of Marijuana Smoking on COPD Progression in a Cohort of Middle-Aged and Older Persons,” was published in the journal “Chronic Obstructive Pulmonary Diseases.”

* A recent Harvard University study found that delta-tetrahydrocannabinol (THC) reduces lung cancer tumor growth by half, and impedes the cancer’s ability to spread. The researchers think THC fights lung cancer by curbing epidermal growth factor (EGF), a molecule that promotes the growth of aggressive non-small cell lung cancers. Lung cancer experts cautioned more studies are needed to verify the results.

Company Updates

Generally, our companies are reporting decent sales growth and progress on shoring up their balance sheets, which is key at a time when price compression hurts revenue trends and money is more expensive because interest rates went up.

I cite Adjusted EBITDA because companies report it. However, be skeptical of these numbers. Adjusted EBITDA is a non-GAAP, company-managed metric. So take this number with a grain of salt, especially in the cannabis sector. Warren Buffett and Charlie Munger do not even consider EBITDA, let alone adjusted EBITDA, because EBITDA is subject to accounting adjustments. Adjusted EBITDA allows even more leeway. In many cases, though, the adjustments are legitimate because they take out one-off events and non-cash adjustments required by GAAP accounting rules.

AYR Wellness (AYRWF)

AYR reported an 18% increase in first-quarter revenue year over year to $117.7 million on May 16, and a 3% gain sequentially, excluding discontinued operations. Same-store sales, at stores open greater than twelve months, were roughly flat sequentially.

Adjusted EBITDA was up 64% to $26.3 million compared to the year before. The improved EBITDA resulted from efforts to boost sales, reduce expenses and better manage inventory, said the company. The company reported a loss of $2.78 per share.

Big picture, AYR is getting out of difficult markets like Arizona to focus on markets with more promising growth like Florida, which may see recreational use legalization in 2025. Legalization for recreational use will likely be put to voters in a 2024 referendum. Polls suggest voters will approve it. It generally takes about a year after referendum approval for actual sales to start.

Regarding the all-important balance sheet strength issue in these tough times for cannabis companies, AYR ended the quarter with $96.5 million in cash. That was a sequential increase of $19.7 million or 26%. The increase was driven by the net proceeds of $18 million from the sale of Arizona businesses, and $10 million from the upsizing of a mortgage with a local bank. Operating cash flow from continuing operations was a positive $8.6 million. AYR has $367 million in debt.

The company shored up its balance sheet, at least for the near term, by amending its agreement to buy Garden State Dispensary and Sira Naturals. The changes pushed back expected costs and dilution from the deal. The changes defer $28 million of cash pay obligations through 2024 and avoid a significant amount of equity dilution. AYR continues to work to extend debt maturities.

The company opened seven new stores in Florida since the start of 2023, bringing its footprint to 60 medical dispensaries. It plans to open ten more stores there this year. It is rebranding all the stores to AYR Cannabis Dispensary from Liberty Health Sciences. AYR entered into an option to acquire two Ohio dispensary licenses from Daily Releaf and Heaven Wellness to begin establishing a vertically integrated presence in the state.

The company projects 3% sequential revenue growth for the second quarter and reiterated expectations to be cash flow positive for the year. The company hopes to boost second-half revenue by upgrading stores, cutting back on discounting, getting better at tracking customer data, building brands, and improving product quality. It expects growth in New Jersey this year from the expansion of its Eatontown store to a customer capacity of 160, from 22. That expansion is just about finished.

Cresco Labs (CRLBF)

Cresco reported first-quarter revenue of $194 million on May 24. That was down 9.4% year over year, and down 3% sequentially.

The decline was driven mostly by challenges in Illinois. Overall Illinois state sales were down 5.6% as Missouri launched recreational-use sales. This put pressure on border stores in Illinois. Another factor was the opening of competing stores near Cresco’s stores in Illinois.

Beyond the hit from these challenges, Cresco saw growth across the rest of its store base.

Adjusted EBITDA came in at $29 million, which was flat sequentially. The company reported a first-quarter net loss of $28 million.

Big picture, Cresco is exiting challenging states like California and Arizona, to focus on what it thinks are more promising markets. For example, it opened eight Sunnyside stores in Florida and Pennsylvania. That brought the nationwide store count to 63.

Cresco retained the number one share position in Illinois, Pennsylvania and Massachusetts, and it had a top five share position in Michigan. The company also continued to have the top portfolio of cannabis brands in the whole sector.

On the all-important balance sheet issue, Cresco closed the quarter with $90 million in cash against $677 million in debt. The company spent $21 million on capex, primarily for new stores in Florida and for changes to its upstate New York facility needed to comply with regulations. The first-quarter capex outlay will be the biggest quarter for capex for the year. Expect a dramatic reduction in capex from here. The company generated positive operating cash flow of $3 million, after making $32 million in tax payments and that $21 million in capex spending.

Looking ahead, the company expects flat revenue in the second quarter compared to Q1. Sales growth from Florida and Pennsylvania store openings will be offset by competing stores opening near dispensaries in Illinois, Pennsylvania and Ohio, and the exit from California operations. The company projects margin growth due to cost-cutting, automation and improvements in cultivation. It expects the exit from low-margin states California and Arizona to materially improve margins starting at the end of Q2.

Cresco says it is well-positioned for the expected expansion of recreational use in Pennsylvania, Ohio, Florida and the development of the New York market as that state refines its regulations. “We continue investing wisely in those markets to improve our productivity, expand our product offering and strategically open new doors,” said CEO Charles Bachtell. “BDSA estimates these four states alone will double in size over the next three years as adult-use programs come online, and we will be ready.”

Regarding its proposed merger with Columbia Care, Cresco said it continues to negotiate divestitures needed to make the deal happen. The key challenge here is to agree on asset divestitures that raise enough cash relative to the combined debt of the two companies.

Cronos Group (CRON)

Director Jason Adler continues to buy shares in his company. In the middle of May, he purchased $665,000 worth of stock at 1.71 to 1.90. This follows purchases of $4.4 million worth of stock in the 2.90 range in November and December, the first insider purchase in this name since August 2020. These insider buys are a bullish signal for the stock.

Curaleaf (CURLF)

Curaleaf reported first-quarter revenue of $336.5 million on May 17, a nice increase of 14% year over year but a 2% sequential decline.

The company reported operating cash flow of $31 million and adjusted EBITDA of $73.2 million. It ended the quarter with cash of $115.8 million against debt of $1.1 billion. The company reported a net loss of $54.4 million vs. a loss of $36.5 million in the first quarter of 2022. The increase was mainly due to price compression. Curaleaf says it will cut capex in half this year to $70 million, supporting its expectation to produce $50 million to $60 million in free cash flow.

During the quarter, the company opened three new dispensaries in Florida, bringing the total there to 58. It launched recreational use sales in Stamford and Hartford, Connecticut. It completed the acquisition of Deseret Wellness in Utah, adding three stores there to take the total to 15. It ended the quarter with 152 stores nationwide.

Big picture, the company guided for low-double-digit sales growth this year. It also expects ongoing margin improvement linked to increased automation and the closures of operations in California, Colorado and Oregon.

However, the big news may come out of Europe over the next few years. Curaleaf expects robust growth in Europe, where it has been investing heavily ahead of liberalization in the German market. Curaleaf’s Four 20 Pharma has a 15%-20% share in Germany.

The big upcoming change is that Germany is taking cannabis off the list of illegal narcotics. This will make it a lot easier for doctors to prescribe medical cannabis. Users will be more likely to participate because signing up no longer lands them in a nationalized database. Another key factor here is that medical patients are eligible for insurance reimbursements in Germany. A subsidized legal market will be more competitive against the illicit market. The upshot will be huge growth in medical cannabis sales, predicts Curaleaf executive chairman Boris Jordan, who has been spending a lot of time in Germany lately preparing for the change.

How big? Currently there are around 200,000 medical cannabis patients in the country out of a population of 84 million. If medical use grows to 3.8% of the population, the rate in Florida, that implies a total patient count of over three million. That would be a 15-fold increase from today’s levels.

“We are investing ahead of this massive opportunity to drive share, and we intend to leverage the Four 20 brand, which is known for consistent high quality high THC potency,” says Jordan. The potential in Europe “remains meaningfully underappreciated by the investment community, but I suspect that as Germany launches and other countries follow suit, we will get more credit for these bold moves,” he says.

Getting back to the U.S., Curaleaf will benefit this year from the July launch of recreational-use sales in Maryland, where the company has four stores and a big wholesale presence. Curaleaf is also well-positioned in states likely to go legal for recreational use over the next few years, including Florida, Ohio, and Pennsylvania. The company is in the process of applying for licenses in Texas, Alabama, Kentucky, and North Carolina.

Green Thumb Industries (GTBIF)

In late May, Green Thumb opened a RISE dispensary in Bristol, VA. That takes the state store count up to five, and the nationwide count to 80.

Organigram (OGI)

Organigram in late May inked a deal to supply a German cannabis operator. The Berlin-based company, Sanity Group, sells medical cannabis. The move positions Organigram ahead of what may be a 15-fold increase in the number of medical use patients in Germany over the next few years to three million from around 200,000 now, as Germany loosens its cannabis laws. The flower will come out of Organigram’s Moncton facility, which already supplies medical markets in Israel and Australia.

Organigram also inked a deal with the Portland, OR-based Phylos Bioscience to distribute its “THVC” cannabis products in Canada and some international markets. A novel cannabinoid, THVC reportedly gives users an “energized and focused feeling” and “low to no cognitive impairment,” says Organigram. It also reportedly suppresses appetite. This explains the nickname “diet weed” for THVC (Delta 9-Tetrahydrocannabivarin). Organigram expects to launch flower, vape and gummy versions this summer.

Tilray (TLRY)

Tilray shares fell 20% on May 26 because the company launched an offering of $150 million in convertible senior notes. The notes carry an interest rate of 5.2% and have a conversion price of 2.66 per share. Tilray will have the option to redeem the notes after June 20, 2025, and they are due in 2027.

In other news, Tilray announced it will distribute three new cannabis compounds to pharmacies in Italy after receiving authorization from Italy’s Ministry of Health. Patients can get reimbursed by the nation’s healthcare system.

The company also announced a new infused tea collection from cannabis wellness brand Solei, marking the brand’s first cannabis-infused drink line. The tea will come in Peach Ginger, Lavender Chamomile, and Mint flavors and feature infusions of CBD, CBN, and THC.

Trulieve (TCNNF)

Trulieve reported first-quarter revenue of $289 million on May 10, a 9% year-over-year decline and a 2.6% sequential decline. The company blamed the weakness on price compression in the industry.

However, the company cut overhead by $24 million sequentially to $102 million. This helped narrow losses, compared to the fourth quarter. The company reported a net loss of $64 million, compared to a loss of $77 million in the fourth quarter. First-quarter adjusted EBITDA was $78 million compared to $85 million during the fourth quarter.

Trulieve ended the quarter with $195 million. It expects positive free cash flow this year, and operating cash flow of $100 million, thanks to expense and inventory reduction. Trulieve expects 2023 capital expenditures will be at least 50% lower than in 2022.

The company opened two new dispensaries in Florida and one in West Virginia. It launched recreational use sales in Bristol, Connecticut. Trulieve was the first to start medical use sales in Georgia with two dispensaries in Macon and Marietta. It plans to open three more dispensaries there this year supported by its production facility in Adel. Trulieve says it will soon open its first medical dispensary in Ohio.

Despite these potential positives, Trulieve expects second-quarter revenue to fall slightly compared to the first quarter, citing price compression.

Looking beyond the second quarter, the company should benefit from the July legalization of recreational use in Maryland because it has three retail locations and a production site in the state. However, possible recreational-use approval in Florida is the biggest potential catalyst over the next few years, since Trulieve is the biggest operator there. A Trulieve-funded campaign has collected enough signatures to put the issue on the November 2024 ballot. The referendum has to be approved by the Florida Supreme Court. Florida has 22 million residents and 138 million tourist visits a year.

Verano (VRNOF)

Verano reported a nice 12.3% year-over-year increase in first-quarter sales to $227 million, on May 10. The company attributed the gain to strength in markets that recently converted to legal recreational cannabis use, mainly Connecticut and New Jersey. Sales were up 1% sequentially.

The company reported operating cash flow of $17 million, free cash flow of $8 million and $71 million in adjusted EBITDA. It has reported positive operating cash flow every quarter since it came public. It spent $9 million in capex, down from $48 million a year ago. The company cut overhead to $75 million from $90 million mainly through layoffs and cuts in employee stock compensation expenses. Verano reported a net loss of $9 million, compared to a slight loss a year ago and a $216 million loss for fourth-quarter 2022. It reported cash of $95 million against debt of $502 million. The company guided for $50 million to $75 million in free cash flow this year.

The company added six dispensaries, including four in Florida and one each in Pennsylvania and West Virginia. The additions brought the store count to 66 in Florida, and 126 overall. After announcing the quarter, Verano opened another store in Florida and one in Pennsylvania. That brought the Florida total to 67, and the overall store count to 128. Verano is the second largest cannabis retailer in Florida, where voters may approve recreational use in 2024. Verano is also in Maryland, which will launch recreational use sales in July. It has four medical-use retail stores there and a big cultivation facility.

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 21% year to date, compared to a 24.7% 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. Prices as of the close May 30.

Portfolio

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 minuscule .18 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 .68. 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 purchased $3.9 million worth of stock in the 2.80 to 3.10 range in November and December. This was the first insider purchase in this name since August 2020. In the middle of May, he purchased another $665,000 worth of stock at 1.71 to 1.90. Cronos trades at .58 times book value. BUY

Curaleaf (CURLF) Massachusetts-based Curaleaf was the industry leader last year. It operates 152 dispensaries and 28 grow sites in 19 states and its European operations. Here are three factors that support growth. It has one of the strongest brand portfolios in the U.S. led by Select, the number one-selling vape brand in its markets.

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 1.5. 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 80 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 1.64. 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.

Organigram expects to generate positive free cash flows by the end of calendar 2023. The company 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 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 2.38. 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 finished the first quarter with $195 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 .68. 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 126 stores and fourteen cultivation and processing plants in thirteen 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 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 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 and cutting overhead to bolster its balance sheet. But it has some of the strongest operating cash flow in the business. It ended the first quarter with 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 1.11. BUY

The next Cabot Cannabis Investor Issue will be published on June 28, 2023.