Cabot Cannabis Investor Issue: March 29, 2023

Many of the underlying trends in cannabis continue to be favorable even if this is not reflected in the stock prices, which are down sharply this month.

States continue to advance legalization of recreational use. Lawmakers remind us that federal regulatory reform in banking remains on the table, and will get taken up by key Congressional committees this year. Europe should begin to advance recreational use legalization within the next several weeks, starting with Germany. Cannabis sector insiders are stepping up to buy stock. Industry consulting firms continue to affirm robust sales growth projections of 13% a year through 2027. There are tentative signs that price compression is neutralizing.

“We all have to realize that the tough year of 2022 does nothing to change the long-term thesis and the opportunity that gives cannabis,” Cresco Labs CEO and co-founder Charles Bachtell said in the company’s March earnings call. “This industry is going to be one of the largest consumer products categories in the United States and in the world. Nothing about 2022 changes this.” He noted that legal and illicit cannabis sales in the U.S. already rival total beer sales.

Personally, I continue to add to positions in the sector.

Here is a roundup of the most interesting sector developments since I last wrote to you on March 8, and the developments at three of our portfolio companies that have reported since then.

Bullish Cannabis Sector Insider Buying

I regularly track insider buying across the entire stock market because it can often be a favorable signal on names to consider. There’s recently been bullish insider buying in cannabis, suggesting the group is a buy.

* At our Ayr Wellness (AYRWF), CEO David Goubert purchased 100,000 shares in February. This is a significant vote of confidence.

* At Chicago Atlantic Real Estate Finance (REFI), board chair John Mazarakis purchased $132,000 worth of stock in the middle of March at around $13.20 a share. This follows over $450,000 worth of buying by an insider cluster including CEO Anthony Cappell at $15.86 in December. Cluster buying is often a favorable signal, in insider analysis.

This is a real estate investment trust (REIT) that makes senior secured loans to state-licensed operators in the cannabis industry. The company says it is taking advantage of a financing gap in the space given that most banks are reluctant to lend to cannabis companies. “We believe that cannabis operators’ limited access to traditional bank and non-bank financing has provided attractive opportunities for us to make loans to companies that exhibit strong fundamentals,” says the company.

It cites the ongoing state-level legalization of cannabis as a bullish tailwind. REFI says it limits risk by favoring profitable operators, diversifying geographically, and limiting exposure to ground-up construction projects.

REFI pays a 13.8% yield. That’s so high it is seemingly a red flag of trouble and potential distribution cuts. However, the company just affirmed its payout levels on March 15. I personally own this stock, but I am not putting it into our portfolio at the moment because it’s fully invested in direct cannabis plays which have more sensitivity to expected progress on the regulatory front. I suggest that you take a look at this REIT and consider it as a purchase, nevertheless. If our direct plays ever move up a lot on regulatory reform, I many consider moving some profits into this name, in part as a yield play. Please note that REITs can complicate matters at tax time.

* At TerrAscend (TRSSF), executive chair Jason Wild just added another $62,000 worth of stock at $1.41 a share on March 27. This brings the total insider buying to $92,000 for the year, and it follows $321,000 worth of buying in December. This is not a portfolio name. I am mentioning it because the buying is a bullish signal for the group.

SAFE Banking Act Prospects Not Dead

Cannabis investors have all but given up hope for key banking reform that would favor companies in the space, but this is a mistake, judging by recent comments from key lawmakers.

Sen. Sherrod Brown (D-OH), who chairs the Senate banking committee, recently said that although he postponed cannabis sector banking reform hearings to focus on bank failures, this is just a temporary delay.

“The prognosis is positive,” says Brown. “I want to do SAFE Banking. It doesn’t mean long-term delay. It means a delay of a couple of weeks. I’m hopeful we can do it relatively soon. We were about to move on it. The White House wants this fixed. I think most member of the Senate do.”

The proposal to allow banks to service the cannabis sector is called the Secure and Fair Enforcement Act, or SAFE Banking Act for short.

Meanwhile, in a recent speech at an American Bankers Association (ABA) event, Sen. Steve Daines (R-MT) said the SAFE Banking Act is an important “public safety” bill. Dispensaries are prime targets for criminals because the stores operate in cash only. “I do think there’s a chance we can move it in regular order this year. This bill’s been out there a long time.” The ABA supports the SAFE Banking Act.

And Michigan attorney general Dana Nessel recently urged Congress to approve banking reform, citing robberies and break-ins at dispensaries. “Without access to traditional banking the cannabis industry is left as a ripe target for criminals,” said Nessel, who is a Democrat.

The prospects for banking reform in the Republican-controlled House of Representatives are uncertain. House Financial Services Chairman Patrick McHenry (R-NC) voted for the SAFE Banking Act during the last session, but it is unclear whether he will support it in this Congress.

“We made tremendous progress in educating our federal legislators through our end-of-year efforts, which is a fundamental step in obtaining common sense reform ahead,” Cresco’s CEO and co-founder Bachtell said in his company’s March earnings call.

Progress on European Legalization

A bill to legalize recreational use of cannabis could be introduced in Germany in a matter of weeks, says the German health minister. The news could move names of ours with European exposure, like Tilray Brands (TLRY), Curaleaf (CURLF) and the exchange traded fund (ETF) ETFMG Alternative Harvest (MJ).

Germany’s Health Minister Karl Lauterbach recently said that the country’s legalization plans got “very good feedback” from the European Commission in recent talks. “We will soon present a proposal that works, that is, that conforms to European law,” he said. The German government published draft proposals for legalization in October. Reform may be implemented in phases through mid-2024.

“Cannabis in Germany will be a success story, I’m sure. The future’s green,” said Steffen Geyer, director of Hanf Museum, a Berlin-based hemp museum. “If I can trust my sources in the government, the first change will come in May.”

Progress in Germany may set off a domino effect in Europe, with other countries following suit.

Meanwhile, Switzerland has approved plans to permit recreational use on a limited basis in Zurich, as part of a study to gauge the economic and health benefits of legalization. About two thousand Zurich residents will be allowed to buy cannabis legally, if they agree to regularly answer questions on their use and health.

Favorable Analyst Comment

Sell-side analysts are perennially bullish on names they cover, in part because the investment banking arms of their companies are vying for a piece of any debt or stock financing deals. Still, they do have influence so their views are worth considering, especially when they single out our names.

Canaccord Genuity Group analyst Matt Bottomley in a recent interview suggested the cannabis group is a buy in the current weakness, because bullish trends like ongoing legalization and sales growth remain in place, and regulatory overhangs will get resolved eventually. He singled out our Green Thumb Industries Inc (GTBIF), Trulieve Cannabis Corp (TCNNF) and Curaleaf Holdings (CURLF) as his top picks.

State Progress

* Southern states have been slow to legalize cannabis, but they are making progress. The Kentucky Senate passed a medical marijuana legalization bill in mid-March. The vote is notable given the conservative leanings of the state senate. The Kentucky House has approved similar proposals in the past. “It’s time for Kentucky to join the other 37 states in the United States that allow medical marijuana as an option for their citizens,” said Republican Sen. Stephen West, who sponsored the bill.

* The New Hampshire House voted again to legalize recreational use, in mid-March. This is a simplified version of a previously-approved bill that contained greater limitations on cannabis sales. Proponents hope the simplified version is easier to pass.

* A recent poll found that 70% of people in Florida favor recreational use legalization. The state already has legal medical use, but cannabis proponents want to put a recreational use legalization referendum on the 2024 ballot.

Support for legalization in the proposed ballot initiative cuts across party lines, but just barely. The poll found that 75% of Democrats, 57% of Republicans and 78% of independents favor recreational use legalization. Regardless of age, a majority of respondents favor legalization. The survey was conducted by the University of North Florida’s Public Opinion Research Lab. If the initiative makes it on the ballot, it has a “good chance” of garnering the required 60% approval, said UNF political science professor Michael Binder.

Florida would be a big win for the cannabis industry because of the state’s large population and tourist business. “With 22 million residents and 138 million annual tourist visits, we believe Florida will be a top legal cannabis market reaching $6 billion in annual revenue,” said Trulieve CEO Kim Rivers in the company’s fourth-quarter earnings call. Trulieve has been the primary funder of the ballot drive. Our Ayr Wellness (AYRWF), also a major company in the Florida cannabis market, says it will kick in funding to support the referendum once it is approved by Florida’s supreme court.

Court approval is by no means a given. A big challenge here is that the court has a conservative tilt. The court may be swayed by pressure from conservative politicians in the state who think a cannabis initiative would skew election results by drawing out more liberal voters. The Florida supreme court has rejected previous ballot attempts. The court reviews ballot proposals to make sure they comply with the state’s single subject rule, and do not contain misleading language. “We believe the language is in a much better place to pass the supreme court,” said Ayr CEO David Goubert in a recent interview. “But we have no assumptions on that.”

More Bullish Cannabis Sales Forecasts

U.S. legal cannabis sales will grow 14% this year, according to BDSA, the Colorado-based marijuana industry market analysis firm. BDSA also projects that global cannabis sales will post a 13.2% compound annual growth from 2022 to 2027, hitting $59.6 billion in 2027. Another research group called New Frontier just predicted legal sales could reach $71 billion by 2030. Cannabis sales growth slowed to 4.8% last year because of downward pricing pressure and the weak economy, hitting $32 billion. “None of the challenges of 2022 change the long-term thesis and opportunity that is cannabis,” Cresco Labs CEO Bachtell said in the company’s March earnings release.

Illicit Sales Crackdowns

Publicly-traded cannabis companies have long griped about competition from illegal operators who enjoy favorable cost advantages. But this may be changing.

California’s Department of Cannabis Control increased illegal cannabis plant eradication by 1,274% in 2022. And in New York, legislation proposed by the governor would expand the law enforcement powers to crack down on illegal cannabis shops and levy substantially higher fines of up to $200,000, and up to $10,000 a day for selling without a license.

Signs of Price Firming

There’s an old saying in economics: Low prices are the best cure for low prices. This means low prices reduce supply and reverse the trend.

There are early signs this is happening in the cannabis sector, where companies had to struggle through a tough 2022 thanks to sharp price declines due to oversupply. Wholesale prices regularly fell 50% for much of the year.

But now there are fledgling signs this is reversing as producers cut back on growth. In Michigan, February cannabis prices bucked the trend by rising to $86 per ounce for flower from $80 per ounce in January, according to the Michigan Cannabis Regulatory Agency (CRA).

The number of plants grown for recreational consumption fell 20.5% to just over 1.2 million since September, according to CRA data. The plant count typically falls following October harvests, but it historically recovers by the start of the new year. Not so this year.

Meanwhile, cannabis shortages in Missouri are driving prices higher. The Missouri Cannabis Trade Association said prices are up 5% to 10% across the board for various product lines. Some shops report taking even bigger price gains. Part of this may be due to vendor miscalculation of potential demand in Missouri, which only legalized recreational use two months ago. Missouri is surrounded by states that have not legalized recreational use. So its sales are getting a big boost from cross-border demand.

Two datapoints don’t make a trend. But still, signs of price stabilization are welcome in an industry that’s contended with huge price declines in the past year.

What to Do Now

When investors continue to dislike a sector that has potential, the best way to behave is to continue to accumulate on weakness. That is what I am doing. I personally continue to add to cannabis positions on any significant weakness of 2%-4% or more. I particularly like leveraged exposure, given the potential for sharp upward moves in cannabis names on signs that federal regulatory reform is back on track.

For leveraged exposure I favor our AdvisorShares MSOS 2X Daily (MSOX), which is geared to move twice as much as the group (in either direction). This leveraged exchange traded fund is preferable to using options to add leverage, because options expire. I was recently adding MSOX in the $3.60 to $4 range, and I will continue to do so on any significant weakness. Otherwise, consider any of the names in our portfolio. Building exposure to a down-and-out group is a matter of steady accumulation on weakness. I don’t know when these positions will turn meaningfully profitable, but I am certain they will, sooner or later.

Big picture, it is important to keep in mind that many of the underlying positive trends remain in place. Polls continually show voters favor legalization. States continue to make progress on this front. And while no one believes politicians anymore given the cannabis investing debacle they helped create last year with false promises on reform, the politicians continue to suggest that key banking reform will make a comeback this year. This will be a catalyst if it happens, which I believe will be the case.

“With increasing mainstream support and meaningful regulatory reform on the horizon, tremendous growth opportunities lie ahead for U.S. legal cannabis,” says Trulieve CEO Kim Rivers. “Overall, cannabis continues to become increasingly mainstream, gaining popularity across all demographics. Greater acceptance among Millennials and Gen Z consumers on top of expanding usage to displace alcohol and pharmaceutical products bodes well for long-term adoption. U.S. legal cannabis sales are expected to triple by 2030, reaching an estimated $75 billion as additional markets open and expand.” For this year, she expects “industry growth will resume as cyclical trends inevitably reverse and numerous catalysts come to fruition.”

I increased leverage on March 8, and I am increasing leverage a little more today. To do so, I am selling 500 shares of AdvisorShares Plus US Cannabis (MSOS) at $5.89 and using the proceeds to buy the 2x leveraged ETF MSOX. The sale nets $2,945, and that amount buys 738 shares of MSOS at $3.99 per share.

This reduces our MSOS position to 2,158 shares, or 10.7% of the portfolio, and increases MSOX to 3,815 shares, or 13% of the portfolio. Increasing leverage may continue to hurt us near term, but it will benefit us medium term when sentiment towards the group improves.

Company Updates

Since I last wrote to you on March 8, three of our companies reported results. As emerging companies, they are reporting losses. So I will focus on key metrics like revenue growth, profit margins, and the all-important cash positions and operating cash flow. In the current cannabis sector Hunger Games, the main objective is survival. Companies with decent financial positions will be the ones that make it. So it is important to focus on cash levels, operating cash flow, and debt maturity timelines.

Ayr Wellness (AYRWF)

This Miami-based company reported fourth-quarter sales of $124.6 million on March 9. That was an increase of 11.5% over the prior year, and 4.2% sequentially. Same-store sales (at stores open more than a year) grew 3% sequentially. Customer transactions grew 9% sequentially, which is a positive. Full year sales of $465.6 million were up 30% over 2021. That was driven by strong growth in Florida and New Jersey, offset by price compression in Massachusetts, Nevada and Arizona.

Fourth-quarter adjusted gross profit was $70.5 million and adjusted gross margin was 57%. That was the highest since the fourth quarter of 2021, and at least 450 basis points higher than any other quarter in 2022. The company reported adjusted EBITDA of $26 million. That was down slightly compared to the year before, but up 20% sequentially.

Ayr guided for no growth sequentially. But it expects to ramp revenue and cash flow during the rest of the year.

Ayr continued to expand aggressively last year. It added 14 dispensaries across its eight states, bringing the total count to 80 stores. Since announcing the quarter, the company disclosed on March 23 that it opened four new stores in Florida bringing the store count there to 57.

The company ended the quarter with $80 million in cash. But that increased by $20 million as Ayr announced March 27 that it sold its three Arizona dispensaries and grow and processing facilities held inside a company called Blue Camo. It also got out of $15 million in long-term lease liabilities, in the transaction.

Raising cash is important in a challenging sector environment where simple survival is the key. After the Arizona sale, Ayr has $100 million in cash and $323 million in net debt. About $30 million of that comes due this year, and most of it comes due by the end of 2024. This big debt overhang is one reason why Ayr trades at a minuscule 0.1 times sales.

Ayr reported slightly positive operating cash flow in the fourth quarter, for the second quarter in a row. The company says it will be cash flow positive for the year in 2023. Ayr will boost cash flow by cutting capital spending. It said it can comfortably reduce capex because it spent the past two years aggressively building out capacity.

Next, Ayr hopes to boost cash flow by increasing revenue, improving margins via cost cutting, and cutting back on promotional pricing. It will also reduce inventory and finetune supply chains to shrink working capital. CEO David Goubert is a former Neiman Marcus executive with experience in supply chain management, so this is not foreign territory to him.

Ayr’s Ohio grow facility came online and the first crop sold out fast. This facility will be fully online by 2024, says Goubert. Ohio is medical use only, but the state is important because it may potentially approve recreational use soon. “We see it as one of three markets that has a chance to turn adult in the foreseeable future. The others are Florida and Pennsylvania,” says the CEO. He thinks Pennsylvania will be the first of the three to approve adult use. Ayr is positioned for the change with nine stores and some cultivation facilities in the state.

Cresco Labs (CRLBF)

This Chicago-based company reported fourth-quarter sales of $200 million on March 16, down 8% year-over-year. Retail transactions grew by 1.2 million, or 4%. But that was offset by the price compression which has challenged the entire sector. Sales also declined because of a strategic exit from California markets. Cresco exited production facilities in California and Arizona, two states where oversupply has contributed to dramatic price declines.

The company reported adjusted EBITDA of $31 million, or 15% of revenue. This was hit by a $10 million write-down of inventory. Cresco generated $4 million in operating cash flow.

Sales for the full year came in at $843 million, an increase of 3% year over year. Retail transactions grew 15% during the year to 4.6 million. Adjusted EBITDA was $174 million, or 21% of revenue. The company generated operating cash flow of $19 million for the year, and it ended the year with $122 million in cash against $381 million in debt. The company took a big impairment charge of $141 million, as it exited California production operations.

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

Cresco offered tepid guidance.

“As we look toward the months ahead, we don’t expect the operating environment to get any easier,” said CEO and co-founder Charles Bachtell. The company guided for slightly lower sales in the first quarter, compared to the fourth quarter of last year, due to seasonality and competitor store openings near its dispensaries in Illinois and Pennsylvania. The company said the addition of 185 social equity stores in Illinois will put pressure on its own retail stores, but that will be offset by the benefits to its wholesale business. It predicts sequential growth in its wholesale and retail businesses after the first quarter.

Bachtell said the company this year will focus on building brands and cutting costs to boost cash flow and strengthen the balance sheet. It will add stores in Florida and Pennsylvania. It is also introducing new products like higher potency cannabis, higher yield strains, lozenges, infused pre-rolls, premium gummies, and resins – which are cannabis products created by flash-freezing cannabis plant extracts. It is also expanding loyalty programs which help the company collect data to improve insights on consumer behavior.

He said the company will continue to take the lead in lobbying for favorable regulatory reform at the federal level in the U.S. “We will lead through this period by continuing to improve our operations and operating efficiency, strengthen our balance sheet, and prioritizing cash generation,” he said. “Cresco Labs has the scale and the expertise to succeed.”

Medium term, Cresco predicted recreational use legalization will expand to Ohio, Pennsylvania, Maryland and Florida over the next two years, benefiting the company.

While analysts grow skeptical of the proposed merger with Columbia Care, the company maintains it is still viable, and it is scheduled to happen inside June 30. “We are optimistic that we will be able to get that across the finish line,” said Bachtell. The proposed merger is being examined by regulators, and Cresco continues to work on required asset sales needed to carry out the merger. The purchase would give Cresco access to every major adult-use market in the country.

Trulieve (TCNNF)

Trulieve reported fourth-quarter sales of $302 million, down 1% compared to the year before. Retail sales grew 2%. The company produced fourth-quarter operating cash flow of $55 million and free cash flow of $21 million. It posted $150 million in gross profits, for 50% gross margins and adjusted EBITDA of $85 million, or 28% of revenue. Customers visited stores on average 2.5 times per month, and the average purchase size was $86. The company opened five new dispensaries in Arizona, Florida and West Virginia.

For the year, Trulieve posted $1.24 billion in revenue, up 32% year over year. The company finished the year with 181 dispensaries, up 14% from 2021, and over four million square feet of cultivation and processing capacity. Trulieve operates dispensaries in eleven states. Two thirds of them are in Florida. Since the end of the year, Trulieve opened three new dispensaries in Florida and West Virginia, bringing the total to 184. It got out of retail operations in California and Nevada last year, two of the states with the worst pricing dynamics.

The company finished the year with $290 million in cash. It has a very large $648 million in debt, but the only near-term debt maturity is $130 million due in June 2024. The company projects operating cash flow of $100 million this year. It is reducing inventory, cutting capex by 50% and cutting costs by $100 million, to help hit that goal. “Our strong capital position affords Trulieve the luxury of continuing to make thoughtful investments during the cycle when many cannabis operators are fighting for survival with expensive debt maturities looming within this tighter capital market environment,” said CEO Kim Rivers.

The company expects first-quarter revenue will be down slightly. It plans to open 15 to 20 new dispensaries this year. But with Trulieve’s dominance of the Florida market, a key factor to watch is progress on the Florida adult-use ballot initiative. The supreme court in Florida has until April next year to rule on the language of the initiative, but it could rule at any time.

Curaleaf (CURLF)

On March 24, Curaleaf announced it will delay its fourth-quarter earnings release to April. Earnings were originally scheduled for March 28. Curaleaf said this is because of the complexities of converting financials to comply with U.S. accounting rules, from Canadian rules, and “the review of the treatment of various accounting matters.”

Sector Performance

I increased leverage in our portfolio on March 8 by adding the AdvisorShares MSOS 2X Daily (MSOX), and this hurt us as the sector sell-off continued. This has been a negative near term, but I continue to believe the added leverage will pay off when sector sentiment rebounds. The New Cannabis Ventures Global Cannabis Stock Index is down 12.9% year to date, compared to a 18.5% decline in our portfolio. I am personally adding leverage by purchasing the MSOX on any significant weakness of 2%-4% or more.

Portfolio

Company Profiles

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

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

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

Ayr reports $100 million in cash and $323 million in net debt. About $30 million of that comes due this year, and most of the rest comes due by the end of 2024. This debt overhang is one reason why Ayr trades at a minuscule 0.1 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, once its acquisition of Columbia Care (CCHWF) is completed. The deal will double Cresco Labs’ retail footprint and give it the number one market share in five markets. It will reach over 70% of eligible U.S. consumers. Cresco maintains the deal will close despite delays which have some analysts questioning that.

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

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

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

The company is founder-run, which can be a plus in investing. Cresco Labs has a trailing price to sales ratio of 0.56. BUY

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

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

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

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

As for the insider buying, director Jason Marc Adler purchased $4.4 million worth of stock in the $2.90 range in November and December. This is the first insider purchase in this name since August 2020. Cronos trades at 0.62 times book value. BUY

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

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

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

3. Curaleaf will benefit from progress on legalization in Germany and Europe. It has a majority stake in Germany’s Four 20 Pharma, a licensed producer and distributor of medical cannabis that has more than 10% market share in Germany. Curaleaf International is the largest vertically integrated cannabis company in Europe. It has a lot of room to expand production, and it boasts import and distribution in the U.K., Germany, Italy, Switzerland, and Portugal. I expect significant progress on legalization of recreational cannabis in Germany in 2023 and 2024. Recreational use legalization could open the floodgates to further legalization throughout Europe.

The company is founder-run, which can be a plus in investing. Curaleaf has a price/sales ratio of 1.77. BUY

ETF AdvisorShares Pure US Cannabis (MSOS): This exchange-traded fund (ETF) has large exposure to most of our portfolio names so it may seem redundant. However, I want to put it on your radar as a liquid trading vehicle for getting in and out of the group without having to make a lot of individual stock sales, and as a way to get exposure to many of our names with one purchase. It also gives us diversification beyond our names, to positions like Verano Holdings (VRNOF), 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), 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. 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 77 retail stores in 15 U.S. markets.

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

Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power. Green Thumb trades at a price to sales ratio of 1.9. BUY

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

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

British American Tobacco (BTI) is a big investor in Organigram, owning 19.4% of the company, an endorsement of its potential. The two companies collaborate to develop cannabis products. The price to sales ratio is 1.7. 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. Legalization of recreational use in Germany could happen in 2024. 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 10^th-largest craft brewery in the United States. The price to sales ratio is 2.4. BUY

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

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

The company finished the year with $290 million in cash. It has a very large $648 million in debt, but the only near-term debt maturity is $130 million due in June 2024. The company projects operating cash flow of $100 million this year. “U.S. cannabis has significant white space ahead, with many states yet to implement medical or adult use programs, and the growing appetite for substantive federal reform,” says CEO Kim Rivers. It has a price to sales ratio of 0.9. 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 123 stores and 14 cultivation and processing plants in 13 markets. One of the most attractive qualities of this company is that it has a big presence in high-growth markets like New Jersey, Illinois, Florida and Connecticut, and states that are about to legalize recreational use like Maryland and Pennsylvania.

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

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

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

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of 1.18. BUY

The next Cabot SX Cannabis Advisor issue will be published on April 26, 2023.