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.
We have used this newsletter recently to warn our readers that the early-in-the-year rally was suspect, and the big decline in the New Cannabis Ventures Global Cannabis Stock Index this week of 8.6% leaves it up just 4.3% year-to-date. This is worse than the 6.5% gain in the S&P 500. Our reasons for concern were the very low trading volumes and the redemptions at the largest ETF, as well as a view that weakness in the broader market could weigh upon cannabis investors.
While the index is up year-to-date, there are 5 members that have dropped more than 10%:
Village Farms has rallied from the recent low, but it has pulled back a bit. The stock, in our view, is an extreme value. The reason for the pullback was an equity offering with warrants, and the stock now trades at just 0.5X tangible book value. The company is not entirely focused on cannabis, but we believe that the cannabis business alone is worth substantially more than current valuation. The current market capitalization, $118 million, is just 4.9X projected 2024 adjusted EBITDA. This looks like the price gap above on the chart will be filled.
We have been worried about Trulieve, as its projected margins are much higher than its peers. A big part of its high margin is the large exposure to Florida, its home state and one that is vertically integrated. If the state moves towards allowing wholesale, it could pressure margins. The company is facing more competition in the state too. The stock, with an enterprise value of $1.6 billion, trades at just 3.7X projected 2023 adjusted EBITDA. Even if the margin were 20% lower than expected, the ratio, 4.6X, would be a discount to its larger peers.
Innovative Industrial Properties, a REIT, announced some issues with a few tenants in late January and plunged in price to a new recent low. That gap in price is still open, and the stock trades at just 1.3X tangible book value and a low 10.2X its projected adjusted fund from operations for 2023.
The weakness in Curaleaf hasn’t surprised us, as it declined a lot less than peers in 2022, falling 52.3%. The valuation is a big premium to its peers at 7.6X enterprise value to projected adjusted EBITDA for 2023. It is the second largest holding of AdvisorShares Pure US Cannabis ETF (NYSE Arca: MSOS) at 20.7%, and the ETF has been seeing continued redemptions. MSOS has reduced its stake in Curaleaf by 1.5% in 2023 thus far.
We are big fans of Cronos Group’s stock, which made a multi-year low. The company has a lot of cash and no debt, and its revenue has been growing and its profitability improving. The stock trades at just 0.74X tangible book value. We continue to believe that its large holder of stock, Altria, could buy the company.
We remain optimistic about cannabis stocks, and we think that these dips should generally be bought. We find a lot of superior choices to Curaleaf, and Innovative Industrial Properties doesn’t seem especially timely compared to other cannabis stocks. I include Cronos Group, Trulieve and Village Farms in my Beat the Global Cannabis Stock Index model portfolio.
TILT Holdings Helps Cannabis Businesses Build Brands
Differentiating itself by not over-expanding or exposing itself to direct price compression, TILT Holdings has stayed true to its mission under CEO Gary Santo of strengthening its manufacturing and distribution capabilities to help its brand partners enter into exciting markets that they wouldn’t easily be able to do so on their own. With recent announcements of introducing new products and brands as well as $40M in non-dilutive capital earlier this year, which along with available cash on hand, has resulted in the retirement of 94% of TILT’s legacy senior debt, positioning the company for growth in 2023 and beyond.
Get up to speed by visiting the TILT Holdings Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Is the worst of it over? It may still be too early to tell, but cannabis sales are on an upward track. According to cannabis data analytics firm BDSA, sales increased 5.3% in December compared to November 2022. In eastern markets, year-over-year growth ranged from -11.6% in Maryland to 32.0% in Michigan. In western markets, year-over-year growth ranged from -22.2% in California to -6.4% in Arizona compared to a year ago
Aurora Cannabis Q2 revenue rose 25% sequentially to C$61.7 and was up 2% year-over-year. The company attributed the growth to its international medical program as well as its Canadian recreational and medical businesses. The quarter also included the first full-quarter results from its acquisition of Bevo Agtech Inc. Medical cannabis net revenue was C$39.5 million, a 25% increase from the prior quarter and a 14% decrease from the prior year period. Consumer cannabis net revenue rose 7% from the prior quarter to C$14.6 million. “We have right-sized our business while remaining the No. 1 Canadian LP in global medical cannabis revenues and having demonstrated organic quarter-over-quarter revenue growth across all of our cannabis segments during Q2 2023,” the company stated in a news release.
Canopy Growth Q3 revenue slipped 4% sequentially to $84.8 million and fell 28% year-over-year. The company also announced that it was shedding assets in Canada and cutting some 800 jobs as part of its efforts to reduce costs. Specifically, the company is exiting cannabis flower cultivation in its Smiths Falls, Ontario facility, ceasing the sourcing of cannabis flower from the Mirabel, Quebec facility, and moving to a third-party sourcing model for cannabis beverages, edibles, vapes, and extracts. “Canopy must reach profitability to achieve our ambition of long-term North American cannabis market leadership. We are transforming our Canadian business to an asset-light model and significantly reducing the overall size of our organization. These changes are difficult but necessary to drive our business to profitability and growth,” the company said in a news release.
Ayr Wellness Inc. plans to exit Arizona with the sale of Blue Camo, LLC to AZ Goat, LLC for $20 million in cash, with additional cash proceeds within six months of closing the transaction. AZ Goat also will assume lease obligations that will result in the elimination of approximately $15 million in long-term lease liabilities for Ayr. The sale includes three Oasis-branded dispensaries, a 10,000 sq. ft. cultivation and processing facility, an 80,000 sq. ft. cultivation facility, and a joint venture developing an outdoor cultivation facility. “Ayr’s proposed sale of Arizona assets represents the latest in a series of optimizations focused on simplifying our business and prioritizing existing and future markets where we can build depth,” the company stated in a news release. Ayr also announced it entered option agreements that provide it with the ability to acquire 100% of the equity interests of two entities each provisionally licensed to operate a medical marijuana dispensary in Ohio.
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Alan & Joel