You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
The cannabis market is clearly stuck in the bear market mode. Here is the three-year chart, which captures the big run-up in late 2020 and early 2021 followed by a collapse to new all-time lows that has continued:
The New Cannabis Ventures Global Cannabis Stock Index had a great January, but we warned readers that the rally might not hold up in early February. Later that month, we explained what the market needs to get rallying: rising prices on higher volume. In early March, we suggested that investors need to closely watch the cannabis analyst outlooks, which have been declining.
Ahead of this week’s disastrous 7.9% decline in the index, the market ran up 3.4% in the first week of May on optimism over SAFE Banking legislation. We warned readers two weeks ago that SAFE Banking won’t matter. Right or wrong, the market is now down 4.7% so far in May and 19.1% year-to-date. The index ended the week barely above its all-time closing low of 7.85 set in late April.
We believe that the overall stock market, if it goes into bear mode again, could hurt this cheap sector’s ability to rally. The S&P 500 is up year-to-date by 7.4%. Over the past year, it has rallied 4.9%. The cannabis market is clearly in the bear mode, falling over the past year by 57.2%.
We wish we could confidently predict better times for the sector, but we aren’t seeing signs yet. The volumes remain very low. Still, there are many very cheap cannabis stocks. Here are a few of the ideas that capture our attention currently:
We have written about some alternatives for Canopy Growth, which we think is still overvalued despite a 54.5% decline to an all-time closing low. We suggested that investors in late March substitute Cronos Group, Organigram or Village Farms for Canopy Growth, which has been a good call so far despite all of the prices coming down:
Our first bargain pick is Organigram, which has dropped by more than 25% since that article and 41.2% year-to-date. The stock is owned 20% by British American Tobacco, which is way down from their early 2021 purchase price. That deal was transformational for the company, allowing it to repay all debt. Today, the company is growing in a challenging market, and it trades at just 44% of tangible book value. The enterprise value of C$128 million is just 5.6X projected adjusted EBITDA for FY23, which ends in August.
The next idea is an MSO, Columbia Care, which reports its Q1 on Monday morning. The company has a pending merger with Cresco Labs that we think will go through. The deal would give shareholders .5579 shares of Cresco Labs for each share of Columbia Care. The stock is trading at a massive discount of 55% at a 0.25 ratio. Even if Cresco were to lower the deal cost in shares by 20% (a ratio of .446), Columbia Care shares would soar. If the deal weren’t to go through, we don’t see much downside to Columbia Care, as clearly there is no big arbitrage investor betting on it. The enterprise value of the company is just 0.9X projected 2023 revenue and 4.9X projected adjusted 2023 EBITDA. Longer-term investors may be interested in the ratio to 2024 projected adjusted EBITDA, and it trades at just 3.5X.
The third pick, SHF Holdings, has a very small market cap of $18 million. The company isn’t widely followed, which we think is helping to create this bargain. There is a single analyst! In late November, I shared some analysis with my subscribers at 420 Investor, suggesting that the stock, near $4 at the time, could drop, which was more right than I expected. We shared some concerns in a newsletter here eight weeks ago but the company addressed them. I got bullish on the name near $0.50, and it closed Friday at $0.43! Thursday was a big day as traders ran up the stock on record volume starting early in the pre-market after the company shared some news that we don’t think was meaningful. The valuation is incredibly low for this company that runs Safe Harbor Financial. The enterprise value is 14X the projected adjusted EBITDA for 2023, and, more importantly, it trades at just 0.4X tangible book value.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
BDSA data for March showed a 12% sequential gain across 11 states in total, which was up 1% on a per-day basis. The data we discuss is from 5 more mature western states and 6 newer eastern markets.
In April, two states that we update monthly, Illinois and Michigan, both fell sequentially by about 2%. While this is up on a per-day basis, April has 4/20! Illinois sales were up only 3% from a year ago, and out-of-state consumption fell again. Michigan sales soared by 26% from a year ago, but this was down a lot from recent growth.
The week was very busy for quarterly reporting, and we look at it by sub-sector. You can find all results in our table that sorts by cannabis-related revenue.
The largest MSO to report this week was Trulieve, which shared results that were below expectations. Sales of $289 million fell 4% sequentially and were down 9% from a year ago. Verano Holdings grew revenue by 1% sequentially to $227 million, up 12% from a year ago. Ascend Wellness saw revenue grow 2% sequentially to $114 million, up 34% from a year ago. Jushi Holdings missed expectations on revenue, which fell 9% sequentially to $70 million, but it beat the analyst forecast for adjusted EBITDA. TerrAscend Q1 revenue of $69 million rose 1% from Q4 and 43% from a year ago.
Looking at ancillary companies, Innovative Industrial Properties reported a solid Q1, with revenue rising 8% sequentially. The AFFO of $2.25 per share was better than expected. Hydrofarm revenue of $62 million, up 1% sequentially but down 44% from a year ago, was close to what was expected, while the adjusted EBITDA loss was less than what had been expected. GrowGeneration saw Q1 revenue increase 4% from Q4 to $57 million. This was down 31% from a year ago, but the company maintained its 2023 outlook. WM Technology generated revenue of $48 million in Q1, which was down 3% sequentially and 16% from a year ago.
Nova Cannabis reported revenue for its Q1 that grew 21% from a year ago to C$60 million, which was down 2% from Q4.
Several other companies reported revenue at $40 million or lower, including Cronos Group, Marimed, Schwazze and Village Farms.
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Alan & Joel