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.
With the big rebound over the past two weeks, the New Cannabis Ventures Global Cannabis Stock Index has lifted 22% off of the recent lows set on March 14th, leaving the index down 9.2% thus far in 2022. The sector has faced many challenges, including a sharp slowdown in sales in January (that appears to have been short-term in nature), rising inflation, rising interest rates as the Federal Reserve moves to counter the inflationary pressure, continued supply chain disruptions, delays in New Jersey launching its adult-use program, increased competition in several markets that has pressured margins, broad geopolitical issues and weaker stocks in general. It’s no wonder cannabis stocks are down!
Seasoned investors understand the concept of the stock market “climbing a wall of worry,” so all of this negativity may actually prove to be a good thing. We aren’t here to tell investors whether or not they should invest in cannabis stocks, but we do want to discuss a strategy that we have been pursuing in our model portfolios at our premium subscription service 420 Investor, which we have been offering since 2013. It is our view that investors aren’t giving enough credit to companies with strong balance sheets. More specifically, we have been focused during these times of heightened risks on identifying debt-free companies with substantial cash balances.
Companies that have high cash balances may be undervalued if investors don’t take into account the cash on the balance sheet. Many investors will look at enterprise value, which takes the market cap and then adds debt and subtracts cash, to assess valuation. A debt-free company with a lot of cash will look favorable under this scenario, as the enterprise value will be less than the market cap.
Beyond the exercise of factoring in cash to the valuation process, we think investors should consider that debt-free balance sheets with substantial cash offer additional benefits during challenging times. Having cash allows the company to potentially take advantage of the sale of distressed assets. The strong balance sheet will appeal to other merger partners as well, and it may help nail down other types of strategic partnerships or customer wins. Further, having high cash balances unencumbered by debt allows the company to invest in capital projects that competitors may not be able to finance. Finally, cash can be used to repurchase shares potentially.
Companies across a variety of sub-sectors in the market have significant cash with no debt. We think it’s important to understand demands on the cash, and investors should be aware of not just current cash levels but also projected cash levels. Pending or future M&A, potential earnout payments and negative operating cash flows can reduce the cash levels.
The ancillary sub-sector has several examples of companies with high levels of cash and no debt. An extreme example is CEA Industries, which was formerly known as Surna. The company recapitalized in February, selling units at $4.13. The current market cap of the company is just $20 million, which is less than the $22 million pro forma cash as of the end of September and slightly above the $19 million pro forma equity.
GrowGeneration is likely a more familiar name. The debt-free company, which has a market cap of about $620 million, ended the year with $81 million cash. In 2021, it generated operating cash flow of $5 million.
urban-gro is another ancillary name with substantial cash. New Cannabis Ventures provides a sponsored Investor Dashboard for the company. As of the end of September, its cash balance exceeded $40 million. Subsequently, it has made a $2.5 million strategic investment. It also has a share repurchase program and may have spent some of the cash buying back stock. The company generated slightly positive operating cash flow in the first three quarters of the year. The current market cap is approximately $137 million.
WM Technology, the parent of Weedmaps, ended 2021 with $67.8 million cash and no debt. During the year, its operations generated $23 million. The company has a market cap currently of $1.3 billion.
American Cannabis Operators
The MSOs typically have debt, but an exception is Planet 13 Holdings, which has repeatedly expressed a disdain for debt in the interviews we have conducted with the company. At the end of September, its last financial report, the company sported a cash balance of $73 million. Taking into account the shares issued recently to complete an acquisition, the market cap is currently about $600 million.
The Canadian market has been tough for the publicly traded LPs, which have struggled with declining market share. Many of the companies have taken on substantial debt. We wrote several weeks ago about how we expect Canopy Growth and Tilray to possibly sell equity to address their looming debt maturities.
Two LPs that have fortress balance sheets are Cronos Group and Organigram, and it seems like investors don’t credit them properly. At the recent bottoms, these stocks were trading very close to tangible book value. At present, Cronos Group, which has operating losses that investors should factor into their analysis, has a market cap of $1.5 billion. Its cash and marketable securities balance at year-end was $1 billion. With strategic investor Altria running out of time on its out-of-the-money warrants, we continue to view the low price relative to the high cash balance as a favorable consideration for their potential acquisition of the rest of the company.
Organigram, which has a strategic investor in British American Tobacco from early 2021, ended its Q1 in November with cash and short-term investments of C$168 million and no debt. Some of that cash is earmarked for capital investment, and the company made a small investment as well as spent C$10 million as part of the Laurentian acquisition. The company has projected adjusted EBITDA to be breakeven in this current quarter ending in May, so there should be much less cash use in its operations. The market cap of the company is roughly C$700 million.
We have been emphasizing the importance of strong balance sheets for many years, but the current environment argues for closer scrutiny more than ever. In addition to the implications for valuation, we have shared several other important advantages to companies that have strong balance sheets, including the ability to do M&A, attract strategic partners and customers, fund capital projects and even potentially repurchase stock.
We aren’t sure how sustainable the recent rally may prove to be, but we are hopeful that the 13-month decline has ended. We are including some of these cash-rich, debt-free companies in our two longer-term focused model portfolios at 420 Investor, which have a goal to beat the Global Cannabis Stock Index, though we certainly aren’t limiting ourselves to these potentially defensive names.
For many years, 420 Investor has delivered subscribers market-beating ideas. In 2022, the two long-only, fully-invested model portfolios are up 7.3% and 9.4%, respectively, while the Global Cannabis Stock Index has declined 9.2%
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- Agrify Q4 Revenue Increases 60% Sequentially to $25.3 Million
- Aurora Cannabis to Acquire TerraFarma for $38 Million Before Earnouts
- Charlotte’s Web Q4 Revenue Increases 5% Sequentially to $24.8 Million
- Columbia Care Q4 Revenue Increases 5% to $139 Million
- Cresco Labs to Acquire Columbia Care
- Exclusive: Gold Flora Ramps Up Vertically Integrated Footprint in California with Retail M&A
- Jushi Q4 Revenue Increases 22% Sequentially to $65.9 Million
- Nova Cannabis Q4 Revenue Increases 23% Sequentially to C$47.6 Million
- Exclusive: Trulieve Has a Stake in This Profitable California Cannabis Company Generating $100 Million Revenue
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Alan & Joe