Cabot Cannabis Investor Issue: December 28, 2022

Cannabis stocks and exchange-traded funds (ETFs) are ending the year at their lowest levels ever, and everyone knows exactly why.

Sector investors were let down by lawmakers in Washington, D.C. who had suggested they’d secure approval of favorable banking reform by year-end while they still had the votes.

This reform would have been a game changer since it would provide cannabis companies access to banking services and maybe even listings on major exchanges.

Ultimately, however, cannabis reform advocates – in particular Sen. Majority Leader Chuck Schumer (D-NY) – decided not to make banking reform a priority. Sector reform known as the SAFE Banking Act failed to make it into a key federal spending bill, where it would have hitchhiked a ride to approval.

This unleashed two powerful forces that drove most cannabis stocks and ETFs literally down to their lowest levels in history.

* First, a lot of traders piled into the group from October through December on expectations that the SAFE Banking Act would be approved by year-end. When it became clear this wasn’t going to happen, they all had to sell to get out. This created order imbalances that drove stocks a lot lower, in a hurry.

* That set off another powerful force, meaning tax loss selling. Virtually anyone who bought this year is now underwater. This creates a huge group of traders and investors with losses they might want to realize to offset any gains this year.

What to Do now

By now, it is too late to sell. And since the cannabis group is not exactly bereft of catalysts in 2023, it makes more sense to hold or to add to average down.

Sentiment is now dismal, which makes the group attractive from a contrarian point of view. Not even the sell-side analyst community, which often has an inherently positive bias, can muster many reasons to buy the cannabis sector. How much worse could it get? The answer to that question is always: We never know for sure. But a lot of negativity is priced into cannabis stocks (and the market overall) right now.

Should you join the crowd and realize some tax losses to offset gains? I can’t offer personalized advice on this tactic, because everyone’s tax situation and investment time horizons are different. However, personally, I am taking the other side of the tax loss selling dynamic trade here, and adding. Despite the bleak consensus view, there are several potential catalysts in the year ahead.

What Could Go Right

1. SAFE Banking Act redux

Schumer and other cannabis sector reform advocates now suggest that banking reform is not dead, and they will take another shot at it in 2023. Schumer says he’ll be “back at it” in 2023. Sen. Jeff Merkley (D-Oregon) tweeted in late December: “We’ve made so much progress on forging bipartisan consensus. We have a path forward in 2023.”

It’s tempting to buy into this commentary because Democrats will continue to control the Senate and Republicans will only have a slim majority in the House. That may minimize opposition in the House. (Democratic lawmakers tend to be more favorable to cannabis-friendly policies.)

But who is going to trust Schumer and other reform advocates, after the December debacle based on a false promise of reform? If your answer is “absolutely no one” you might not be too far from the truth.

That said, Cowen political analyst Jaret Seiberg sees a “narrow window” for passing SAFE in 2023. If the Senate treats it as a standalone bill rather than attaching it to another bill, that would limit Sen. Mitch McConnell’s (R-Kentucky) power to block it. McConnell opposed the inclusion of SAFE in the federal spending bill.

There’s a tougher road ahead in the House. But there, Rep. Nancy Mace (D-South Carolina) may champion banking reform. “That creates a path forward, though not an easy one,” says Seiberg.

“Not easy” are the key words here. “We believe the prospects for reform over the next two years through Congress are limited,” Stifel cannabis sector analysts W. Andrew Carter and Andrew Partheniou wrote in a December 20 note.

But recall that we don’t need approval for the group to move higher. Meaningful headline news of progress on SAFE banking will do the trick. This isn’t necessarily off the table for 2023, but it sure seems so. Extremely dark sentiment towards the group may have fully priced in the bleak prospects for reform in Congress. So, any positive incremental news would put a bid under the stocks.

2. Progress on federal decriminalization

As you may recall, the Biden administration recently made a high-profile pitch to the Department of Justice (DOJ) and other federal agencies to get the ball rolling on “down-scheduling” cannabis under the Controlled Substances Act. Cannabis wouldn’t have to be completely de-scheduled and legalized for cannabis companies to benefit. Just moving down a few notches from Schedule I to Schedule III would help cannabis companies by opening up access to banking services and making it easier to deduct expenses on federal taxes. A bipartisan group of congressional lawmakers just sent a letter to President Joe Biden stating the administration “should recognize the merits of full de-scheduling.”

De-scheduling is a complex, multi-year process requiring approval by the DOJ, Health and Human Services (HHS) and the Food and Drug Administration (FDA). Their review process is not going to happen overnight. “This will be a largely opaque process for which we expect the results in 2024,” say the Stifel analysts. But in a highly sentiment-driven sector like cannabis, investors don’t need a complete victory to see gains. Just headline news of substantial progress will help the stocks.

3. State markets continue to open up

States will continue to open up legal markets, regardless of the status of cannabis at the federal level. The momentum continues. Here are the highlights.

New Jersey reported third-quarter cannabis sales grew 27.9% sequentially to $177.7 million. This was the second quarter that both recreational and medicinal sales have been legal. Like Nevada, New Jersey is pushing ahead with the licensing of cannabis bars. Illinois reported November cannabis sales grew 4.2% year over year to $158.7 million. New York will open its first recreational use dispensary in Manhattan on December 29. Connecticut is opening recreational use dispensaries on January 10. Rhode Island started recreational sales in early December. Maryland should commence legal recreational use sales this year, following voter approval last November. Minnesota Gov. Tim Walz (D) recently said that he expects the state to legalize adult recreational cannabis by May 2023. North Carolina Gov. Roy Cooper (D) said in a recent media interview he thinks a medical cannabis legalization bill can pass in the upcoming legislative session.

The upshot is that for the three months ending November 2022, the U.S. state-licensed market grew 2.2%, say Carter and Partheniou at Stifel. “We believe the reacceleration in U.S. category growth is encouraging.” The analysts note that 35% of the U.S. population lives in markets that allow legal recreational use. Another 13.5% of the population lives in five states set to open up legal recreational use over the next two years, meaning New York, Maryland, Virginia, Connecticut and Montana.

4. The sector consolidates

The SAFE Banking Act setback will likely accelerate a much-needed industry rationalization, says Cowen analyst Vivien Azer. Widespread price deflation is putting pressure on smaller operators. “The shakeout needed in the industry to eliminate excess supply will likely now be pulled forward,” she says. Azer believes this consolidation will benefit the largest incumbents. She singles out the three large U.S. market operators, Green Thumb (GTBIF), Curaleaf (CURLF) and Trulieve (TCNNF). Azer just reiterated her buy ratings in these names, but she lowered her price targets.

While the SAFE banking setback tempers her view on the space, she remains bullish, long term. “We continue to believe that U.S. cannabis represents a profitable, disruptive industry with widespread and growing consumer appeal. For investors that can appreciate the long-term opportunity that cannabis presents, we find the current valuations compelling.”

5. Tax loss selling reverses

One common tactic for this time of year is to buy stocks getting beaten down by year-end tax loss selling because they’re trading near 52-week lows. Stocks getting hit the most by tax loss selling often show strength and outperformance in January and February as the new year begins and the tax loss selling eases.

Cannabis stocks fit the bill. The average cannabis stock is down 69% vs. a 20% decline for the S&P 500, notes Stifel. U.S. operators are down 75%; Canadian producers are off 65%; and ancillary services companies are down 75%. Yet there are still bullish trends for the sector, so a tax loss selling rebound in the first two or three months of the year is possible.

6. Europe continues to show progress

Germany will lead the way, with possible legalization of recreational use sales this year. Other European countries will likely follow Germany’s lead if it makes progress. Europe will be a large market given its population size. So, progress here will help cannabis companies. You might not know it, given all the attention on reform in the U.S.

Sector Challenges

To be sure, the cannabis group is not without issues. The derailment of SAFE banking reminds us of the ambiguous nature of support for reform among lawmakers, even though polls consistently show a majority of voters support reform and decriminalization, even among voters on the right. The bottom line here is that when politicians are your partners in investing, uncertainty levels increase substantially. Politicians do not always do what they say they are going to do, and predicting legislative outcomes is tricky.

Otherwise, U.S. spot prices remain weak because of oversupply. The volume-weighted average spot price of cannabis in the U.S. legal markets for the week ending December 16 was $950 per pound, down 26.9% year over year, notes Cowen. The biggest declines are happening in Arizona, Michigan, Oklahoma and Massachusetts.

On the bright side, low prices cure low prices by eliminating supply. This will continue to happen, benefiting the stronger, larger operators. Next, the bigger companies, like the ones I suggest here, have been able to protect margins with cost cutting. Declining legal-market prices help cannabis companies win over buyers from the illicit markets. Volume increases help offset price declines. “The latest data does showcase potential signs of stabilization with flower volume consumption accelerating in the fourth quarter, retail flower pricing improving, retail inventory levels below the prior year, and wholesale pricing data suggesting a plateau in pricing pressure,” say Carter and Partheniou at Stifel.

Sector Performance

The New Cannabis Ventures Global Cannabis Stock Index is down 72.1% year to date, compared to a 59.3% decline in our portfolio.

Portfolio

Stock Updates

Ayr Wellness (AYRWF) This is a vertically integrated multistate operator based in Miami. It has 79 dispensaries in eight states: Arizona, Florida, Illinois, Massachusetts, Nevada, New Jersey, Ohio, and Pennsylvania. Ayr has 18 grow sites, 11 national brands, and a proprietary library of over 160 cannabis strains. It makes the #2 carbonated THC beverage in the U.S. (Levia).

Ayr reported 24% year-over-year third-quarter revenue growth and 9% sequential growth to $119.6 million. It posted 4.5% same-store sales growth. Sales of national branded products grew 42.5% sequentially. The company bought two dispensaries in Illinois and opened more than 15 stores in Florida. It also added dispensaries in Pennsylvania and Massachusetts. Ayr reports losses, but adjusted gross profits rose 9.9%. Ayr projects operating income will grow 10% sequentially in the fourth quarter. The company ended the quarter with $100 million in cash.

“We grew retail market share in six of the seven states where we operate,” said CEO and founder Jonathan Sandelman. “Ayr continues to build market share with its revamped product offerings, a higher quality flower and premium genetics.”

AYR recently built out its brand development strength with the appointment of David Goubert as President. 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. In early December the company announced that three Garden State Dispensary retail locations it purchased in New Jersey had been re-branded to operate under the AYR dispensary name. Ayr looks cheap with a trailing price-to-sales ratio of .19. 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, once its acquisition of Columbia Care (CCHWF) is completed early next year. 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 says the deal will close at the end of the first quarter 2023.

“The Columbia Care deal creates arguably 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,” said Cresco Labs CEO and co-founder Charles Bachtell in the third quarter earnings call. “We are creating a company built to effectively compete today, and for industry leadership long-term.”

Azer, at Cowen, is not so sure. She recently downgraded her rating to market perform, citing doubts about whether the merger will go through given the failure of SAFE banking approval.

Cresco is already the #1 seller of branded cannabis in the U.S., with products in over 1,100 stores. It has a clear brand message that resonates with consumers. Cresco offers exposure to many attractive U.S. markets with an emphasis on Illinois. It holds a sustainable competitive advantage there with production limits 50% larger than its closest competitor and triple that of other large producers. It is also in Pennsylvania, Ohio, California, Arizona, New York, Massachusetts, Michigan, Florida, and Maryland.

Third-quarter revenue slipped 2% year over year to $210 million. It was hit by price compression, increased verticality among retailers and the strategic exit of third-party distribution in California. Adjusted for the changes in California, third-quarter revenue increased 2%. Retail revenue increased 11% year over year, to $118 million. On the wholesale side, revenue was down 7%, adjusted for the strategic exit from distribution in California. The company held market leadership in Illinois, Pennsylvania, and Massachusetts. It exited the quarter with cash of $130 million. The company opened a second dispensary in Orlando in December, bringing the Florida store count to 21.

Near term, the company expects sequential revenue declines in the fourth quarter, due to seasonality and a continued focus on verticality among retailers. But the company says this weakness will be temporary. It projects both wholesale and retail growth in 2023, thanks in part to store openings in Florida, Pennsylvania, and Illinois. The company is founder-run, which can be a plus in investing. Cresco Labs has a trailing price-to-sales ratio of .64. 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.

Exposure to Canada sounds ominous. It is a highly competitive market, especially in flower. But Cronos has respectable brand strength there. It sells gummies, infused pre-rolls and vapes under the Spinach, Blue-Raspberry Watermelon and Tropical Diesel brands. Spinach products command a 15.3% market share in the Canadian edibles category, and a 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. It’s exiting the beauty category, but it plans to ramp up cannabis sales.

Cronos has a 10% stake in Cronos Australia, a publicly traded company.

U.S. third-quarter revenue slipped sharply (down 76%) as Cronos wound down businesses. But sales grew 11% in the rest of the world. Overall, the company posted a 3% year-over-year revenue gain to $20.9 million on a constant currency basis. Canadian revenue was down 2% to $13.9 million. But sales in Israel increased 98% year over year to $7.4 million on a constant currency basis.

The company is slashing up to $25 million in costs this year, stemming the cash flow bleed. Consolidated adjusted EBITDA was negative $21.7 million, a $25.1 million swing from the third quarter of 2021. Cronos posted gross profit of $1.2 million in Q3, a $1.9 million improvement over the same quarter in 2021.

Cronos ended the quarter with $888 million in cash, or about $2.35 per share. It has minimal debt. Cronos isn’t sharing much detail, but with company valuations so suppressed in the cannabis space, some of that cash war chest could be deployed in acquisitions, possibly as a way to expand in the U.S. adult-use market.

As for the insider buying, director Jason Marc Adler purchased $4.4 million worth of stock in the 2.90 range in November and December. This is the first insider purchase in this name since August 2020. The price-to-sales ratio is 10, but Cronos trades at .81 times book value. BUY

Curaleaf (CURLF) Massachusetts-based Curaleaf was the industry leader in the third quarter, with revenue of $340 million from 21 states, 144 dispensaries, 29 cultivation sites, and European operations. But it will likely be surpassed by Cresco once the Columbia Care acquisition is complete.

Still, Curaleaf is the winner on the perception front. Its market capitalization of $4.8 billion tells us investors expect a lot from the company – and its price/sales ratio of 2.3 is among the highest in the group. Not that it hasn’t already proven its mettle. “By the end of 2022, Curaleaf will have grown revenue at a staggering compounded annual growth rate of roughly 105% since 2018,” notes board chair and co-founder Boris Jordan. The company projects $1.45 billion in 2022 sales, more than double 2020 sales. Here are three factors that support growth.

1. Curaleaf is an R&D powerhouse. A team of scientists is currently developing about 180 products. Near term, the company expects 75% growth in new product revenue year over year. About 20% of second-quarter revenue was generated by products launched in the last 12 months.

2. Curaleaf is an industry consolidator. It has a good M&A track record. 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. The company generated a record $60 million in operating cash flow in Q3 and ended the quarter with $198 million in cash against $599 million in debt, most of which is not due until December 2026.

Growth through acquisition is always risky. But given how much the cannabis group has fallen in the past year, there are probably a lot of good bargains out there. The company is cutting costs, which builds the M&A war chest. It expects at least $40 million in cost-cutting next year.

3. Curaleaf will benefit from progress on legalization in Germany and Europe. It just completed the acquisition of a majority stake in Germany’s Four 20 Pharma, a licensed producer and distributor of medical cannabis that has more than 10% market share in Germany. Curaleaf International is the largest vertically integrated cannabis company in Europe. It has a lot of room to expand production, and it boasts import and distribution capabilities in the U.K., Germany, Italy, Switzerland, and Portugal. The company thinks Europe’s population of 748 million people potentially supports annual legal market cannabis sales of $229 billion, compared to $677 million in 2021.

“While international remains a small part of our revenue story today, we are investing in the long-term growth of Europe’s cannabis future now and expect it to begin paying meaningful dividends in 2024 and beyond,” says Jordan. We will likely see significant progress on legalization of recreational cannabis in Germany over the next few months and during 2023. This could open the floodgates to further legalization throughout Europe.

As for the third quarter, Curaleaf reported 7% year-over-year sales growth on November 7, and 1% sequential growth to bring in $340 million in the third quarter. Retail sales (76% of revenue) increased by 16% to $260 million, driven in part by store openings.

The company added six retail dispensaries in Arizona, Nevada and Florida and closed one in Colorado, bringing the store count to 142. It opened two Florida dispensaries in November after the quarter closed, taking the total to 144. The company opened a second dispensary in Tallahassee in December, bringing the Florida store count to 55. Curaleaf posted its 19th consecutive quarter of retail sales growth. Wholesale revenue decreased 14% to $79 million, as the company continued to reduce its wholesale business in lower-margin states.

Sales growth was hurt by delays in the opening of a Bordentown, New Jersey store, and Hurricane Ian in Florida. Strong NJ sales growth and two new store openings offset these negatives. Curaleaf losses declined to $51 million compared to $55 million in the third quarter of 2021. Note that this company is founder-run, which can be a plus in investing. Board chair Jordan and board vice chair Joseph Lusardi founded Curaleaf. BUY

ETF AdvisorShares Pure US Cannabis (MSOS) This exchange-traded fund (ETF) has a large exposure to most of our portfolio names so it may seem redundant. However, I want to put it on your radar as a liquid trading vehicle for getting in and out of the group without having to make a lot of individual stock sales, and as a way to get exposure to many of our names with one purchase. It also gives us diversification beyond our names, to positions like Verano Holdings (VRNOF), Jushi Holdings (JUSHF) and Innovative Industrial Properties (IIPR), among others. 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 by the end of the year, 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 (WEED.TO, CGC), SNDL (SNDL), Cronos (CRON), 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. in the third quarter, with operations in 15 markets. But it will likely fall to fourth after Cresco’s acquisition of Columbia. Yet it has been the most profitable multistate operator of all the big ones, based on its consistent record of profitability over the past nine quarters – a sign of good management.

Green Thumb manufactures and distributes a portfolio of branded cannabis products including &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a chain of national retail cannabis stores called RISE. It has 77 retail stores.

Green Thumb is expanding its medical footprint in Florida through a lease agreement with the convenience store chain Circle K. Through this exclusive agreement, Green Thumb can lease space adjacent to Circle K stores. Green Thumb is starting with a “test and learn phase” that will see about a dozen medical dispensaries at Circle K convenience stores and gas stations in 2023. This could be a big deal since the Circle K chain has 600 locations in Florida.

Green Thumb reported 3% sequential Q3 sales growth and 12% year-over-year growth to $261 million, on November 2. Year-to-date revenue increased 17% to $758 million compared to the first nine months of 2021.

Revenue growth was primarily driven by increased retail sales in New Jersey and Illinois, the addition of 12 retail locations, and increased store traffic. Same-store sales (at stores open for at least 12 months) declined 1.6% as price compression offset continued traffic and volume growth. Gross margins slipped to 50.2% from 55.4% in the comparable period last year. Green Thumb posted its ninth consecutive quarter of positive net income, delivering $10 million, or four cents a share in profits. The company reported $48 million in cash flow, and cash of $147.3 million against $255.5 million in debt.

Key performance drivers for the retail business for the quarter were: Legalization of adult-use sales in New Jersey; new store openings and store purchases, particularly in Illinois, Maryland, Massachusetts, Minnesota, Rhode Island, and Virginia; and increased store traffic particularly in Illinois.

Green Thumb trades at a price-to-sales ratio of 1.98, which seems reasonable given its 12% year-over-year sales growth. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries, says Stifel, which has a buy rating on the stock. Illinois will increase its store footprint by more than 2.5 times. Considerable upside exists in New Jersey as product offerings expand.

A positive here is that Green Thumb is founder-run. 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. BUY

Organigram (OGI) Organigram is the number three producer of cannabis in Canada with an 8.2% market share. It is the number one vendor in dried flower, with its flagship brand Edison, and number three in edibles.

This company’s scorching revenue growth continued in the third quarter. Organigram reported $45.5 million in sales on November 28, an 83% increase from the same quarter the year before. It also represents 19% sequential growth. Adjusted gross margin rose to 23% from 12%, reflecting higher sales and improved efficiency. The company reported adjusted cash flow of $3.2 million, the third consecutive quarter of positive adjusted cash flow.

Cash fell to $98.6 million from $183.5 million. The lion’s share of that ($49 million) was for facility upgrades, including the expansion of its Moncton growing facility. It can now produce 85,000 kilograms of cannabis per year, up from 45,000 kilograms a year ago. The facility investments seem to be paying off since yield per plant increased 11%. Investments in automation reduced dependence on manual labor and enabled continued price competitiveness.

Organigram introduced 18 new products and shipped $6 million worth of hhigh-marginflower to Australia and Israel. The company continues to monitor developments in the U.S. and Europe, to look for ways to angle into those markets as legalization of recreational use evolves. It projected continued sales growth over the next year and a shift to positive cash flow but offered no details.

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 2.42. BUY

Tilray Brands (TLRY) Tilray is a cannabis and consumer packaged goods company with one of the biggest global footprints in the industry, following its 2021 merger with Aphria. 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 the 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 recently got approval from the Italian Ministry of Health to import and distribute medical cannabis.

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. Tilray also holds convertible debt and warrants in MedMen Enterprises, a U.S.-based dispensary with over 25 stores in six states, including California, Illinois and Florida. Conversion of the debt and warrants could eventually bring a significant outright ownership stake.

A risk here is that Tilray fails to produce positive free cash flow, so a dilutive capital raise is possible. On the other hand, the company projects it will turn cash flow positive by August next year, and a strategic alliance with the cannabis company Hexo (HEXO) could bring substantial cost savings over the next two years. Tilray is scheduled to report fourth-quarter results on January 9, 2023. The price-to-sales ratio is 2.33. BUY

Trulieve (TCNNF) Trulieve has long been the biggest medicinal marijuana vendor in Florida, where it has a 50% market share. It was the first licensed operator there in 2016. It now has 120 dispensaries and eight production sites. Cannabis activists are trying to get recreational use on the Florida ballot in November 2024. A win would be huge for Trulieve since it already dominates Florida. Approval could make Florida the largest legal U.S. cannabis market with 22 million residents and 130 million tourists a year.

Meanwhile, Trulieve has been expanding across the country via acquisitions. It is diversifying its presence into Pennsylvania, Maryland, and Massachusetts, among other states. It had 176 dispensaries at the end of the third quarter, including 19 in Pennsylvania and 19 in Arizona. It has three dispensaries in Maryland, which is in the process of legalizing recreational use. Sales outside of Florida, Pennsylvania, and Arizona are so small, the company does not consider these markets to be material. But Trulieve has solid prospects given its geographic hub system, with Florida the company’s Southeast hub, Pennsylvania its Northeast hub, and Arizona the Southwest hub.

Trulieve posted third-quarter year-over-year revenue gains of 34% to $301 million in November. But sales declined 6% sequentially in part because of Hurricane Ian in Florida and the closing of non-core operations. The company reported a net loss of $115 million. That turns into net income of $4 million when you exclude substantial one-time costs related to asset impairments and the closure of California dispensaries, redundant cultivation operations in Florida, and wholesale operations in Nevada. The company opened 11 new dispensaries in Arizona, Florida and West Virginia.

It ended the third quarter with $114 million in cash against $941 million in debt. Third-quarter operating cash flow was negative $22 million, a $23 million improvement over the second quarter. The company expects positive operating cash flow in the fourth quarter, and positive free cash flow next 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,” said CEO Kim Rivers. It has a price-to-sales ratio of 1.15. BUY

The next Cabot SX Cannabis Advisor issue will be published on January 25, 2023.