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Cannabis Investor
Profit from the Best Cannabis Stocks

November 10, 2022

Election results set up some key potential catalysts for our cannabis stocks, both near term and further down the road.

Above all, a Republican takeover of control of the House of Representatives increases the odds that we will see very near-term passage of favorable banking reform, known as the Secure and Fair Enforcement Act, or SAFE Banking Act.

The reason: Cannabis sector proponents now know they need to get it done during the “lame-duck” session because it will be harder down the road after Republican control of the House takes place.

“It forces the Democrats to do something,” says Jason Wilson, who follows the cannabis sector closely at ETF Managers Group (ETFMG). The firm manages the ETFMG Alternative Harvest (MJ) exchange-traded fund. “It creates some urgency to get some level of reform through while they have control.”

Both Sen. Chuck Schumer (D-NY) and Sen. Cory Booker (D-NJ) have stated they think lame-duck approval has decent odds. Note that the new Congress takes over in the first few days of January 2023. So, the timeline for this catalyst is tight.

Cowen analyst Jaret Seiberg says the real work of trying to get this done will start the week of November 14, when representatives narrow down their near-term agenda goals. He puts the odds of passage at 60%. Wilson at ETF Managers Group says SAFE banking has a “reasonable chance, especially because there are nine Republican senators who are cosponsors.”

But it is important to remember that we won’t need actual passage to see some gains in the sentiment-driven cannabis group. Regardless of whether the bill gets passed or not, news of progress, updates from Schumer, Booker and others, and statements of support from GOP senators along the way will put a nice bid under cannabis stocks. This sets up an attractive dynamic for active traders.

Bullish Referenda Votes

Voters in two out of five states favored the legalization of recreational use. Though cannabis proponents lost in three states, this was still a significant sign of progress which is bullish for the group. Here’s why.

First, Maryland voters approved a referendum to legalize marijuana by 65.5% to 35.5%. This is important for cannabis companies because Maryland is a sizeable state. The approval also puts pressure on Pennsylvania to go along since three bordering states have legalized or are in the process of doing so. Progress is also more likely now in Pennsylvania because of Democratic governor and Senate seat wins.

Missouri voters also approved a ballot measure to legalize marijuana by 53% to 47%. This is a smaller state. But the win is significant because it is a deep red state, notes Cowen analyst Vivien Azer.

She also points out that in the three states where cannabis legalization lost, the approval vote was high at well above 40%. Arkansas voters rejected a marijuana legalization ballot initiative 56% to 44%. North Dakota voters rejected by 55% to 45%. South Dakota rejected by 53% to 47%.

Elsewhere, Ohio voters in five out of six cities approved marijuana decriminalization initiatives. One rejected it. Wisconsin voters in nine counties and towns gave a thumbs up.

Another Near-Term Catalyst

A House panel will hold a hearing on state and federal marijuana reform on November 15. News flow around this hearing could be a catalyst for the cannabis group, creating a near-term trading opportunity. The House Oversight Subcommittee on Civil Rights and Civil Liberties will hold the hearing.

What to Do Now
I’ve been waiting for some cannabis sector weakness to deploy more cash into the group. But with the possible catalysts right around the corner, I’m going to start doing that today. We’ve recently had around 26% of our portfolio in cash, or $55,360. I’m taking that down by $10,000 today and putting that amount into AdvisorShares Pure US Cannabis ETF (MSOS) at around 11.54. I want to use MSOS as a trading vehicle because it is liquid and the bid-ask spread is tight. The deployed cash represents 4.7% of our overall portfolio (stock and cash value) and 18% of our cash position. Near term, I’ll look to deploy more cash, especially into any weakness.

The cannabis sector is up a lot today partly because the market is strong in response to the progress on inflation, which I have been predicting. Cannabis is a “risk-on” group. So, it is heavily influenced by swings in investor sentiment, which has improved on the inflation news.

Company Updates

Four of our companies recently reported results. Below are the highlights.

But first, here are the big-picture sector trends we can glean. Inflation is pushing up costs, and cannabis price compression continues. This had reduced profit margins at some companies. But companies posted solid enough unit sales growth to produce some decent revenue growth.

The unit sales growth confirms that cannabis is a consumer staple. In short, cannabis is a consumer staple group, but one with some very good medium-term growth potential as progress continues on the legalization front. This means the group offers the best of both worlds. Steady sales trends plus high growth potential. Pricing continues to erode but the losses may soon level off, as we see signs of this in California.

Ayr Wellness (AYRWF)
Ayr reported 24% year-over-year third-quarter revenue growth and 9% sequential growth to $119.6 million, earlier today. “We grew retail market share in six of the seven states where we operate,” said CEO and founder Jonathan Sandelman. “We maintained strong unit volumes across nearly all of our markets, demonstrating the defensibility of cannabis as a consumer staple.” The company bought two dispensaries in Illinois and opened more than 15 stores in Florida. Ayr reports losses, but adjusted gross profits rose 9.9%. Ayr projects operating income will grow 10% sequentially in the fourth quarter.

Curaleaf Holdings (CURLF)
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. The company 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 opening offset these negatives. Curaleaf losses declined to $51 million compared to $55 million in the third quarter of 2021.

The company generated $71 million in operating cash flow so far this year, and it has $198 million in cash against $599 million in debt, most of which is not due until December 2026.

“The fundamentals of our business remain solid,” said founder and executive chairman Boris Jordan. “Our early advantage in Europe is taking shape.” Recall that we will likely see significant progress on the legalization of recreational cannabis in Germany over the next few months and during 2023. This could open the floodgates to further legalization throughout Europe. Curaleaf has a 55% stake in a German producer and distributor called Four20 Pharma. Curaleaf also launched Plant Precision, a line of edibles.

The October acquisition of Tryke, which has dispensaries in Nevada and Arizona, and new store openings should continue to drive sequential growth in the fourth quarter and next year, says Cowen’s Azer.

Cantor Fitzgerald analyst Pablo Zuanic has an overweight rating and a 13 price target on the name, citing ongoing growth in New Jersey and cost cutting, among other factors.

Green Thumb Industries (GTBIF)
Green Thumb reported 3% sequential 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 traffic in the company’s 77 retail stores. Same-store sales (at stores open 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 posted $48 million in cash flow, and cash of $147.3 million against $255.5 million in debt.

A key development was the announcement of an agreement to put its RISE Express medical dispensaries at Circle K convenience stores and gas stations in Florida. Green Thumb is starting small, but the Circle K chain has 600 locations in Florida.

Cantor Fitzgerald’s Zuanic upped his 12-month price target to 36 from 32. The stock currently trades in the low 13 range.

Trulieve Cannabis (TCNNF)
Trulieve posted third-quarter year-over-year revenue gains of 34% to $301 million yesterday. The company reported a net loss of $115 million. But that turns into a 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 and ended the third quarter with $114 million in cash against $960 million in debt. “U.S. cannabis has significant white space ahead, with many states yet to implement medical or adult use programs and a growing appetite for substantive federal reform,” said CEO Kim Rivers.

I recently cited Stifel analyst Andrew Carter while sharing Stifel insights on Curaleaf and Green Thumb, but Andrew Partheniou kindly reminds me that he is the analyst covering these names for the brokerage. They are both cited as authors in Stifel reports mentioning these names.