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 resurrection will happen, but not immediately! Times are tough for both operators in the cannabis industry and for its investors. After a terrible March that left the New Cannabis Ventures Global Cannabis Stock Index down 12.5% in Q1, the index plunged again this week, falling 3.9%. It’s now down 15.9% in 2023, while the S&P 500 has rallied 6.9%. With a decline to a new all-time low this week, the index seems left for dead. It is down over 91% since the peak closing price in early 2021.
After selling off sharply ahead of the pandemic hitting the U.S. and then afterwards, cannabis stocks soared for two reasons. First, demand accelerated in late 2020. Perhaps more importantly, the Democrats got complete control of the government late in the year, winning the Presidency and both Houses of Congress. Investors got overly bullish in early 2021, as that control wasn’t real. No progress at all has been made at the federal level for the regulation of cannabis, still a Schedule 1 drug and subject to onerous taxation for the state-legal operators. The subsequent sell-off has been about a recognition that the prior hopes for change didn’t happen and aren’t likely to happen imminently. The sector is almost entirely supported by retail investors. There are few buyers currently.
In this newsletter, we have shared our perspective over the past nine months or so that cannabis stocks seem very cheap. We had been loudly optimistic in the second half of 2022, but September and then December action crushed our positive outlook. In 2023, we have warned readers of some challenges and have been more cautious. Yes, they are cheap, but who is going to step up and buy them?
We continue to be optimistic that positive changes could take place: the elimination of 280E taxes and uplisting to higher exchanges. We can’t predict that either of these will happen soon, but when they do, the sector should be boosted. In the meantime, though, volumes remain very low, and the most popular ETF, AdvisorShares Pure US Cannabis ETF, is seeing redemptions of its shares. This past week was stable, but the ETF has lost over 5% of its shares to redemptions thus far in 2023. The ETF is very highly concentrated, with 77.7% in the top 5 MSOs and 85.6% in the top 6. If there are more redemptions, the ETF will need to sell MSOs at what seems like a very low price with limited bids. This could cause the market a problem!
As 2023 plays out, revenue numbers should be better. In late 2022, estimates fell. We warned five weeks ago that the analyst outlooks are very important right now. Unfortunately, most of the 2023 and 2024 estimates fell. The good news, though, is that the outlooks seem modest. With very low valuations and non-optimistic outlooks, good results could really move the stocks. The current enterprise value to projected adjusted EBITDA for 2024 ranges from 2.6X to 5.5X for the top 9 MSOs by revenue, with an average of just 4.0X. Here are the projected growth of revenue and adjusted EBITDA for those companies, according to Sentieo:
Valuations, again, are very low relative to their history and relative to other stocks generally. As cheap as they appear to be with decent growth still expected ahead, they don’t pay dividends and face potential debt repayment issues if the capital markets remain hard to approach for them. Further, there are no buyers at all, it seems, especially mergers. When investors see a better potential exit, perhaps they will get more excited.
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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:
In the first of three exclusive pieces this week, we wrote about how three sub-sectors of the cannabis industry all performed worse than the Global Cannabis Stock Index during March. The GCSI lost 15.2%, but the American cannabis operators, the Canadian LPs and the Ancillary Cannabis Index all fell by more.
Our summary of BDSA data for February illustrated how cannabis sales growth continued to slow in most states. In the more mature western markets, only Arizona grew compared to a year ago. The annual rate of growth was less negative, though, in Colorado, Nevada and Oregon. In the newer eastern markets, Maryland fell sharply from a year ago, while Michigan and Florida were sharply higher.
We also wrote a summary of the Illinois cannabis sales in March. They increased 11.3% sequentially, which was up slightly on a per-day basis. Sales of $163.8 million were up 0.5% from a year ago.
Greenlane released its Q4 financials on Monday. Revenue fell 23% sequentially to $22 million, with revenue for all of 2022 declining 17% to $137 million. New CEO Craig Snyder discussed “an aggressive transformative strategy to actively put the business on a path to profitability.” He cited 5-10% growth in revenue sequentially for Q1.
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Alan & Joel