May the buyouts begin. Poor sentiment has pushed the values of cannabis companies so low, the strong are now buying the weak. Like the recent cannabis company insider buying, this is a signal that valuations may be close to bottoming here.
However, realistically, it could be a while before the sector recovers since we are dependent on politicians for progress.
The bottom line: You want to emphasize owning the financially strongest companies now, for two reasons.
2 Reasons to Own Financially Strong Cannabis Companies
1. Financially sound cannabis companies are the ones that can power through without having to do onerously dilutive financings at low stock valuations or high interest rates. The challenge here for the weak is that politicians hold the keys to all the important potential industry reforms: rescheduling, banking reform, and decriminalization or even legalization. And politicians are slow to act.
The good news is that cannabis reform does seem inevitable. There is strong cultural momentum towards cannabis reform because of popular support for this change. A majority of Americans favor cannabis reform and legalization even on both sides of the aisle. This suggests that sooner or later politicians will respond and make favorable changes. President-elect Donald Trump campaigned in support of all three of the key reforms. He likes to say, “Promises made, promises kept.” It’s showtime. I think reform will happen. But it is going to take a while.
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2. Financially sound cannabis companies are the ones that have the capability to buy the weak. Astute purchases will position the stronger companies for better performance on the other side of the current dark times for cannabis.
Here’s a good example. Canadian cannabis company OrganiGram (OGI) on December 6 announced the purchase of competitor Motif Labs. The combination turns OrganiGram into the leading company in the Canadian recreational cannabis market by market share. It also makes OrganiGram the number one company in vapes in Canada. Together, the companies will have a market share of 12.4%.
Motif controls popular brands called Boxhot and Debunk, and it is strong in vapes (21% share) and infused pre-rolls (9.4% share). By market share, Motif is #1 in vapes and #3 in infused pre-rolls. Motif posted $79 million in sales last year, up from $35 million in 2022.
Motif has expertise in CO2 and hydrocarbon extraction of psychoactive cannabis distillates for use in vapes. Organigram says the purchase means it can expand Motif’s distribution to new markets in Quebec and along the Atlantic coast of Canada. Organigram says the purchase gives it a strategically located distribution hub in Southwestern Ontario. The company expects about $10 million in cost cutting over the next two years. Organigram is paying $90 million for Motif, or $50 million in cash and $40 million in stock.
Now here’s an example of one of the most financially sound companies in the group.
Green Thumb Industries (GTBIF)
This is the blue-chip name in cannabis. Based in Chicago, Green Thumb has over a hundred stores and twenty production plants in fourteen states. It sells popular brands like Dogwalkers, and RHYTHM through its RISE dispensaries.
CEO Ben Kovler takes a conservative approach to capital allocation, growth and expenses. This is why Green Thumb is one of the few cannabis companies that actually makes money. It earned four cents a share in the third quarter.
It’s also growing revenue, despite industry headwinds. In the third quarter, it posted 4% sales growth to $28.8 million. In the first nine months of the year, the company posted $151.8 million in operating cash flow.
One way you can tell Kovler is a conservative manager is that unlike many of the larger cannabis companies, he’s continued to have his company pay its full share of federal taxes. Many competitors have started to ignore the IRS ban on expense deduction, hoping that the IRS policy gets changed by rescheduling. This is risky because, meanwhile, the IRS formally disagrees with this approach.
Here’s another way you can tell Kovler is a conservative manager. Green Thumb has enough financial strength to make it the rare cannabis company that can exploit the dramatic sector stock price declines by buying back shares. The company has a $50 million stock buyback plan in place.
In the third quarter, the company extended its debt maturities by inking a $150 million five-year credit facility. It negotiated an interest rate of 5% which is low for the sector – another sign of financial strength. Green Thumb ended the third quarter with cash of $174 million, against debt of $255.6 million. It has the financial strength to make it through the hard times while politicians dawdle, and prosper on the other side.
For more on other financially sound cannabis companies to consider owning, subscribe to Cabot Cannabis Investor here.
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