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.
Unlike the prior three quarters, where we started strongly and ended weakly, the cannabis sector isn’t doing well in Q2. April was a down month, and May has been too. Quarter-to-date, the New Cannabis Ventures Global Cannabis Stock Index, which set an all-time low this past week and then bounced, is down 5.2%. It is down 17.0% year-to-date.
During Q2, 4 of the 27 names in the index have declined by more than 20%. They have also all declined by more than the index so far in 2023:
While we shared 3 stocks that we think are bargains last week, it’s not always a good idea to buy beaten up stocks in a bear market. Organigram was one of the bargains we shared, and we find the stock extremely attractive right now. It is my biggest position in my model portfolio, Beat the Global Cannabis Stock Index. The stock is trading at just 50% of its tangible book value, and the company has a ton of cash and no debt.
Hydrofarm and Trulieve are big components of my model portfolio as well. Hydrofarm has a lot of debt, but it’s not due until 2027. The valuation seems very low, trading at an enterprise value of just $154 million, which is just 0.54X 2023 projected revenue. 6 analysts have an average 2024 projected adjusted EBITDA of $14 million, and the enterprise value is just 11X that estimate.
Trulieve has seen projected margins come down sharply, but the valuation seems very low. The enterprise value of $1.25 billion is just 3.5X the projected 2024 adjusted EBITDA compared to 10 other large MSOs that trade at an average of 4.7X.
Canopy Growth is a stock that continues to concern us despite the large decline. We wrote about it here in late February, suggesting that the company has gotten much closer to financial trouble. Four weeks later, we shared some smarter ways to invest in Canadian LPs. We shared a target of C$0.59, which is equivalent to US$0.44, based on the enterprise value trading in late March 2024 at 2X projected revenue. The estimate has declined somewhat since that piece almost three months ago. The company is struggling with high and rising debt and an unprofitable business. While it trades below tangible book value at 0.67X, we find it a lot riskier than alternatives like Organigram.
Cannabis stocks seem pretty cheap to us, but we aren’t sure when investor interest will pick up. Of the four most beaten up stocks in the index, we would avoid Canopy Growth and consider Hydrofarm, Organigram and Trulieve.
This week’s newsletter is sponsored by Carbon Chemistry
Carbon Chemistry distributes materials used in cannabinoid production, purification, and distillation. The company’s mission is to provide proven, hand-selected products and trusted materials to manufacturers that ultimately advance their capabilities in cannabis oil production – improving the ease of their process. Carbon Chemistry is here to help your company create quality edibles, drinkables, tinctures, wax, crumble, live resin, diamonds and sauce, and vape cartridges.
To learn more about Carbon Chemistry, a client of New Cannabis Ventures, visit the company’s page that we maintain on its behalf and click Get More Info.
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Alan & Joel