Cabot Cannabis Investor Issue: February 28, 2024

In my last update on February 14, I suggested cannabis stocks had fallen enough to be buyable ahead of the expected rescheduling catalyst. That was an opportune entry point.

As of the close February 23, the AdvisorShares Pure U.S. Cannabis (MSOS) and the leveraged version, AdvisorShares MSOS 2X Daily (MSOX), were up 12% and 20%, respectively.

Then investors got impatient again with the lack of progress on catalysts. As of the close February 27, 2024, volatile cannabis stocks had given back most of these gains. The MSOS was up 2.4% and the MSOX was up 1.7%. I think cannabis stocks have weakened enough to consider adding again (more on this below).

Despite the setback, we are outperforming year to date. Our Cabot Cannabis Investor portfolio is up 25.8% this year. That’s nearly four times the 7% gain for the S&P 500. It is more than three times the 8% gains in The New Cannabis Ventures Global Cannabis Stock Index.

Our Cannabis Plus Insider Portfolio is up 36.9% since I launched it on March 29 last year. That’s more than twice the 16% gain in the Russell 2000 index over the same time. My Cannabis Plus Insider Portfolio invests in cannabis-related companies that have the right kind of insider buying, and do not touch the plant.

The Near-Term Outlook

Cannabis stocks have been strong this year because the Health and Human Services Department (HHS) released documents supporting the major federal-level cannabis reform that it wants to see.

An HHS proposal asks the Drug Enforcement Agency (DEA) to soften its stance on cannabis by downgrading it to Schedule III from Schedule I under the Nixon-era Controlled Substances Act (CSA). The change would help cannabis companies by boosting cash flow enormously.

The reform would lift cash flow by exempting companies from an Internal Revenue Service rule (called 280E). This bars the deduction of operating expenses against Schedule I drug revenue.

What’s Next

The next step in rescheduling will come in the form of a proposed rescheduling rule from the DEA. The timing is critical. It has to happen by March or April, for the Biden administration to reap election-year boasting rights – obviously part of the plan here. When the DEA drops the proposed rule, that will be another sign of rescheduling progress, and so it will be another cannabis sector group catalyst. But the rule needs to come out by March or April to allow enough time for comments and hearings needed to approve rescheduling before election day, or at least inside the current administration.

There has also been chatter recently that the full Senate may take up the SAFER Banking Act, which would allow banks to serve cannabis companies. This too would be a catalyst, though progress here is a bit more uncertain, in my view.

Another near-term catalyst might come on April 1. If the Florida Supreme Court does not rule on the language of a proposed recreational-use legalization referendum by then, it automatically gets approved. It would then appear on the November ballot.

The bottom line: We’re all waiting for the major rescheduling catalyst expected by many to land by the middle of April. We may get bullish news from Florida by April 1. There’s also an outside chance we might see progress on SAFER banking in the Senate.

What to Do Now

With the weakness this week, cannabis stocks have fallen enough to consider entries again. They could fall even more, without catalyst news, so plan any fresh money deployment in phases. I suggest considering any of our portfolio names below, or the MSOS and MSOX ETFs if you want to keep it simple. Because cannabis stocks are so volatile and they might be much higher at the time you read this, let me define “attractive” entry points. I’d suggest considering a commencement of purchasing any cannabis stocks or ETFs when the MSOX is in the 5.15 to 5.20 range, and MSOS is in the 8.50 to 8.90 range.

Portfolio names are: Ayr Wellness (AYRWF), Cresco Labs (CRLBF), Curaleaf (CURLF), Cronos (CRON), AdvisorShares Pure U.S. Cannabis (MSOS), AdvisorShares MSOS 2X Daily (MSOX), ETFMG Alternative Harvest (MJ), Green Thumb (GTBIF), Organigram (OGI), Tilray Brands (TLRY), Trulieve (TCNNF) and Verano (VRNOF). For simplicity, consider getting exposure via MSOS or the leveraged version MSOX.

In a volatile sector like this, I prefer to add on weakness rather than strength. When or if we do get major rescheduling news from the DEA (proposed rule publication), that will create a rally in which to trim positions and de-lever a bit. De-lever in this instance means trimming MSOX and putting the funds into cash or the MSOS.

One of the reasons we outperform so much is that on several occasions I have taken advantage of sector weakness to lever up the portfolio (shift from MSOS and some stocks, to MSOX). Likewise, there will come a time to de-lever. I will let you know.

Cannabis News from Around the World

Part of my core thesis for being bullish on cannabis stocks is that there continues to be tremendous cultural momentum toward cannabis reform around the world. I’m convinced cannabis stocks will not remain ignored forever.

We see evidence of this powerful cultural momentum in the changes in laws to legalize cannabis, big tobacco investments in the space, robust cannabis sales growth in states that legalize, increased cultural acceptance in the form of relaxed drug testing standards in sports leagues and the workplace, and poll results that show a growing majority of people support legalization regardless of age and party affiliation.

These trends tell us cannabis stocks are a strong contrarian buy that will turn very profitable for patient investors with a medium-term horizon. The sector is so volatile, it is easy to get shaken out of names by heightened emotional reaction to drawdowns. So, it is important to catalogue evidence of this cultural momentum. That is the purpose of this section of Cabot Cannabis Investor.

“Flyover” State Progress

While Washington, D.C. continues to mull the big cannabis catalyst on the near-term horizon – rescheduling – we continue to see incremental block-and-tackle progress for the sector around the world.

It’s worth noting that a lot of this is happening in the generally more conservative “heartland” America, and not just in the more liberal coastal states.

Here’s a roundup of the important developments in what I call the “cultural momentum” supporting wider cannabis acceptance and legalization.

* Nevada is pioneering what will likely be a major trend in marijuana consumption in the comping years: Cannabis lounges.

In late February the state saw its first-ever cannabis lounge open near the neon-soaked Las Vegas Strip which is lined with upscale hotels. Called “Smoke and Mirrors,” the lounge offers a variety of cannabis products, including non-alcoholic THC-infused beverages. The lounge can’t sell alcohol or nicotine products, but it can serve food. Fittingly, given the condition of dry mouth that can result from smoking cannabis, regulators require that the cannabis lounge must provide free water. It will also feature entertainment. Guns are prohibited. Surveillance is required.

The lounge is operated by a company called Thrive. “We’ve marked a lot of ‘firsts’ in Nevada and we’re honored to yet again be at the forefront of Nevada’s cannabis industry by officially launching the first regulated Cannabis Lounge in the state,” said Thrive CEO Mitch Britten. “With ‘Smoke and Mirrors,’ we have created an unparalleled destination for cannabis enthusiasts to enjoy a diverse range of premium products in a really engaging atmosphere.” The lounges might be popular among tourists because in Nevada it’s illegal to consume cannabis in public and in hotel rooms.

The Nevada Cannabis Control Board (CCB) has approved around twenty consumption lounge licenses. Cannabis lounges are the “next frontier” for the industry, proclaims Tyler Klimas, the CCB executive director until late 2023.

The lounges got the greenlight under a cannabis reform law approved by Gov. Joe Lombardo (R) last year. This isn’t the first cannabis lounge in the state. Back in 2019 a cannabis lounge, which is now called the SkyHigh Lounge, was opened on sovereign tribal land, which doesn’t come under CCB jurisdiction. Recreational cannabis use was approved by Nevada voters in 2016.

* The New Hampshire House of Representatives in late February approved a bill to legalize recreational-use marijuana. The House has approved cannabis legalization several times, but it has always failed in the Senate. There’s some reason to think this time might be different. That’s because last year, Gov. Chris Sununu (R) reversed his long-standing opposition to recreational-use legalization. He now supports it.

Sununu changed his mind in part because of polls that show a majority of Granite Staters favor legalizing cannabis sales. “Knowing that a majority of our residents support legalization, it is reasonable to assume change is inevitable,” Sununu said last year when he reversed course. “To ignore this reality would be shortsighted and harmful. I stand ready to sign a legalization bill that puts the State of New Hampshire in the driver’s seat, focusing on harm reduction, not profits.” New Hampshire is the only New England state that has not yet legalized recreational use.

* House of Representatives and Senate panels in Virginia have approved a compromise bill to legalize retail cannabis sales. The next step would be for the full chambers to pass the legislation and send it to Gov. Glenn Youngkin (R). Both chambers are controlled by Democrats, so full approval is likely. However, Youngkin seems reluctant to sign the legislation into law. The bills would delay retail store openings until May 2025 at the earliest. Use and possession of cannabis are legal in Virginia, but sales are banned.

* A group of about two hundred current and former police chiefs, prosecutors, attorneys general and corrections officials is urging President Joe Biden to reschedule cannabis under the Controlled Substances Act (CSA). In a letter to Biden calling for the change, the group called Law Enforcement Leaders to Reduce Crime and Incarceration cites the shift in public opinion towards favoring cannabis law reform, and widespread state legalization.

“We are concerned about how the direct conflict between state and federal laws that currently exists regarding the handling of cannabis makes it difficult for law enforcement to respond effectively to pressing public safety challenges,” says group’s letter to the President. “We believe that reclassification under Schedule III would be an important step to help both federal and state law enforcement better prioritize limited public safety resources. Such a move would advance public safety and promote more efficient and effective use of law enforcement resources across the country.”

The U.S. Department of Health and Human Services (HHS) has recommended the rescheduling change that would move cannabis to Schedule III from Schedule I under the CSA. Now it’s up to the Drug Enforcement Administration (DEA) to publish a proposed rule on rescheduling, assuming it goes along. That’s likely, given its record of aligning with HHS requests in the past. DEA publication of the rule will be a major catalyst for the sector. Some industry analysts expect it to happen by the middle of April.

* The attorney general in Arkansas has approved the language in a November ballot initiative that would expand the state’s medical marijuana program, and clear a path towards legalization of recreational use. Now it’s up to cannabis advocates to collect about 91,000 supporting signatures by July 5. The referendum is called the Arkansas Medical Marijuana Amendment of 2024. It would allow more health care professionals to prescribe cannabis, expand the number of conditions cannabis can be used to treat, and accept medical patients from other states. It would also legalize recreational use if the federal government removes marijuana from the controlled substance list.

* A New poll suggests that 70% of Nebraskans want the state to legalize medical marijuana. The poll was conducted for Neilan Strategy Group. The results are in line with a 2022 poll which found 80% of registered voters favor medical-use legalization. That poll was done by Nebraskans for Medical Marijuana which is collecting signatures to put medical cannabis legalization to voters in a referendum this year. The group collected enough signatures in 2020. But its referendum was rejected by the Nebraska Supreme Court. It found the proposed referendum asked voters to consider more than one issue, which violates state rules. They’re now giving it another try.

* New York state may finally be getting its act together on cannabis distribution. Following lengthy delays caused by complex regulation and high fees, the state’s Cannabis Control Board (CCB) recently approved more than a hundred cannabis business licenses for retailers, cultivators, distributors and processors. The CCB also introduced proposed rules on at-home cultivation. The new licenses were the first ones ever issued to applicants with no prior cannabis-related convictions. That part of the eligibility criteria under the state’s Conditional Adult-Use Retail Dispensaries (CAURD) program is one of the reasons why a roll out of state-approved shops has been slow to develop.

* The South Carolina Senate earlier this month approved a bill that would legalize medical use of cannabis. The bill, called the Compassionate Care Act, now goes to the state’s House of Representatives. Gov. Henry McMaster (R) has indicated he may approve medical use legalization. A 2023 poll found that 76% of South Carolinians support medical use legalizing and 56% approves of recreational use legalization. U.S. Rep. Nancy Mace (R-SC) has been an outspoken proponent of cannabis law reform. South Carolina would become the 39th state in the nation to legalize cannabis for medicinal use.

* Missourians bought more than $1.4 billion worth of cannabis in the government-sanctioned market during the state’s first year of legalized recreational-use sales. Not surprisingly, most of that, or $1.13 billion, was recreational-use cannabis as opposed to medical-use. The state began legal recreational-use sales in February 2023. It launched medical-use sales in October 2020. Since then, Missourians have spent more than $2 billion on cannabis products in the legal market.

International News

* The national parliament in Germany, the Bundestag, has approved a bill to legalize cannabis. The bill, approved by a 407-226 vote, will also legalize home cultivation and allow “social clubs” to distribute marijuana to members. Germany is “fundamentally changing our cannabis control policy in order to combat the black market,” said Health Minister Karl Lauterbach.

The bill now goes to the Bundesrat, which represents German states. It can’t block the reform. But it could stall implementation, for example by sending it to a committee to mull criminal justice angles which the Bundesrat might do. A recent YouGov poll found that 47% of Germans back legalization and 43% oppose it, while 11% are undecided. Our Curaleaf (CURLF) has retail and distribution exposure in Germany. Our Tilray (TLRY) has a cultivation site there. And our Cronos (CRON) sells its Peace Naturals brand in Germany.

* The president of Ukraine, Volodymyr Zelensky, has signed a bill legalizing medical cannabis. Regulators are setting up import rules. Sales could start this year.

* Canadian cannabis sales growth remains robust, but it is slowing down. Recreational-use cannabis sales grew 12.2% last year to hit $5.07 billion Canadian ($3.8 billion U.S.). That’s a slowdown from the 17.9% increase in 2022. But it is still impressive given the ongoing dramatic deflation in the cannabis sector in Canada. Toronto Metropolitan University professor Brad Poulos predicts 10% sales growth this year.

Company News

This section offers a roundup of developments at portfolio companies since the last Cabot Cannabis Investor update was published. One of the key trends to note is that our companies continue to open stores in states that recently legalized recreational use, or are about to make this change. You want to own shares of companies that are doing this.

Cresco Labs (CRLBF)

Cresco Labs opened a Sunnyside dispensary in Gettysburg, Pennsylvania in late February. That takes the Keystone state store count to 15. It has 72 dispensaries nationwide. The Pennsylvania store opening is part of a strategy we see across our portfolio names, of opening stores in states that look poised to legalize recreational-use sales – like this state and Florida. The new Pennsylvania store may benefit from tourist traffic since the Gettysburg National Military Park averages one million visitors per year. Cresco has the number one branded market share position in the state.

Curaleaf (CURLF)

Curaleaf in February relocated its Curaleaf Phoenix Airport dispensary to a newly renovated retail location. The Curaleaf Phoenix Airport store is the closest dispensary to 44th St., a major road to the Sky Harbor Airport.

Tilray Brands (TLRY)

Tilray Brands in late February rolled out two new cannabis-infused cold brew teas under its Solei brand. Called Peach Cranberry and Wildberry Hibiscus, the teas each contain 5mg of THC. They’re made from black tea and fruit juice. The new teas join Solei’s line up of infused drinks which include Mango Passionfruit and Dragonfruit Watermelon Sparkling CBD.

Trulieve Cannabis (TCNNF)

Trulieve opened a new Florida dispensary in Pinellas Park in late February. The opening is part of a strategy we see across our portfolio of launching new stores in states that look poised to expand into legalized recreational-use sales, like Florida and Pennsylvania.

Verano (VRNOF)

Verano opened a new store in Pennsylvania called Zen Leaf Norristown in Montgomery County, a suburb of Philadelphia. This is Verano’s 18^th store in the state. In a sign of the times, the dispensary is a reflection of the exchange of one form of green for another as our economy goes increasingly cashless. The store is located in a former bank. The opening is part of a strategy of positioning in states that look poised to expand into legalized recreational use, like Pennsylvania and Florida. Verano has 138 dispensaries and 14 cultivation and processing sites in 13 states.

Cannabis Plus Insider Portfolio News

This section offers updates on our Cannabis Plus Insider Portfolio names. These are companies that have exposure to the cannabis sector without actually touching the plant. They also must have favorable insider buying, according to my system for analyzing insider activity.

AFC Gamma (AFCG)

Our cannabis real estate finance company AFC Gamma is spinning off its commercial real estate (CRE) portfolio into a new company that will be called Sunrise Realty Trust (SUNS).

There are two reasons to consider holding the spun-off entity. One is that companies usually spin off divisions at a discount. It often makes sense to retain spin-offs, or buy them when they first come out, on the expectation that the discount will close.

The second reason is that investor sentiment towards CRE is too negative in my view. I’ve talked with fund managers with exposure to the space who say bankruptcies are unlikely because creditors would rather adjust loan terms slightly to accommodate any challenged creditors, rather than fight it out in bankruptcy court. Part of the underlying logic here is that most creditors are viable enough, even if they are marginally strained.

Another factor favoring CRE is that we increasingly see companies tell workers to get back into the office. This has a regional and sector bent to it though. Financial companies (concentrated in New York City) are getting employees back into the office. Tech companies (concentrated in San Francisco) remain more comfortable with work at home. So, any CRE damage might be more likely to appear at companies with exposure in San Francisco.

I’ve noted in another publication where I closely track insider activity, that last week insiders showed a preference for the shares of two companies with CRE exposure, a bullish signal for the group.

To sum up: The spun-off CRE company will probably be worth holding.

There are two good reasons to sell it, however. The spun-off company, Sunrise Realty Trust, will be a real estate investment trust (REIT). REITs can create complexity at tax time. Many people avoid them for this reason. The other is that the REIT won’t have a cannabis angle. So it won’t fit in with the sector I cover in this letter.

The separation is expected to happen in the middle of 2024.

Sector Performance

Our main cannabis portfolio continues to vastly outperform the New Cannabis Ventures Global Cannabis Stock Index, by more than three times. Our Cabot Cannabis Investor portfolio is up 25.8% this year. The New Cannabis Ventures Global Cannabis Stock Index has advanced 8%.

We achieved this outperformance by being in the right stocks and using leverage. Our portfolio is leveraged because of the large position in AdvisorShares MSOS 2X Daily (MSOX). It is a top-five position. The leverage helps capture more upside as we see progress on rescheduling cannabis, and progress towards approval of recreational use in more large states like Pennsylvania and Florida.

Once a few of these pieces of the puzzle are firmly in place, I will roll back leverage by trimming MSOX in favor of cannabis stocks or the AdvisorShares Pure U.S. Cannabis (MSOS) ETF. If you are a highly active trader, it would make sense to deleverage into rallies in the same manner along the way, and then hope for a pullback to re-lever.

Our Cannabis Plus Insider Portfolio is up 36.9% since I launched it on March 29 last year. That’s more than twice the 16% gain in the Russell 2000 index over the same time.

The portfolio is well positioned to outperform because investments in Chicago Atlantic Real Estate Finance (REFI) and AFC Gamma (AFCG) pay attractive yields of 11.75% and 17.14%. The dividends were recently confirmed even though they look suspiciously high. Portfolio prices are as of the close, February 27.

*Includes dividends by adjusting down the entry price to incorporate dividend payouts

Company Profiles

Ayr Wellness (AYRWF) This is a vertically integrated multistate operator based in Miami. It has over 85 dispensaries. It operates in Florida, Illinois, Massachusetts, Pennsylvania, New Jersey, Nevada, Ohio, and Connecticut. Ayr has 18 grow and production sites, around a dozen national brands, and a proprietary library of over 160 cannabis strains.

Ayr recently built out its brand development strength with the appointment of David Goubert as president and CEO. Goubert previously served as president and chief customer officer at Neiman Marcus Group, and he was at LVMH for 20 years before that.

Ayr is currently launching brands from its national portfolio in New Jersey, including Ayr’s Lost in Translation flower, Kynd flower, Road Tripper flower, STIX pre-rolls, Entourage vapes, Secret Orchard vapes, and Wicked soft lozenges.

Ayr reports $73 million in cash and $633 million in net debt. This debt overhang is one reason why Ayr trades at 0.33 times sales. The company is founder-run, which can be a plus in investing. BUY

Cresco Labs (CRLBF) Chicago-based Cresco has the #1 market share position in Illinois, Pennsylvania and Massachusetts. The company has the top-selling branded portfolio of cannabis products in the industry. It has the top of branded flower and branded concentrates, and the third best portfolio of branded vapes.

Cresco offers exposure to many attractive U.S. markets with an emphasis on Illinois. It is also in Pennsylvania, Ohio, New York, Massachusetts, Michigan, Florida, Missouri, and Maryland. Most of those are states that recently expanded into recreational use sales, or are expected to over the next two years.

The company is founder-run, which can be a plus in investing. Cresco Labs has a price to sales ratio of 0.77. BUY

Cronos Group (CRON) Cronos is mainly a foreign operator with exposure to Canada and Israel. It’s in turnaround mode, and often insiders buying their own turnaround is a good combination.

Cronos has respectable brand strength in Canada. It sells gummies, infused pre-rolls and vapes under the Spinach, Blue-Raspberry Watermelon and Tropical Diesel brands. Spinach products command 15.3% market share in the Canadian edibles category, and 19.8% share in gummies, according to Hifyre.

In Israel, Cronos sells dried flower, pre-rolls and cannabis oils in the medical market. In the U.S., Cronos sells hemp-derived supplements and cosmetic products under the brands. The company has a partnership with Cansativa Group which allows Cronos to sell its Peace Naturals brand in Germany, where the cannabis market should grow dramatically over the next several years because of liberalization of restrictions on sales. Cronos has a 10% stake in Cronos Australia, a publicly traded company.

Cronos has $839 million in cash, or about $2.20 per share, against minimal debt of $2.7 million. Some of that cash could be deployed in acquisitions, possibly to expand in the U.S. adult-use market.

There’s been some big insider buying at Cronos Group and I think it makes sense to follow the insider into this name. Director Jason Adler has purchased large amounts in the $1.71 to $3.10 range. Cronos trades at 0.76 times book value. BUY

Curaleaf (CURLF) Massachusetts-based Curaleaf was the industry leader last year. It operates 152 dispensaries and 22 grow sites in 19 states and its European operations. It has one of the strongest brand portfolios in the U.S. led by Select, the number one selling vape brand in its markets. Here are three factors that support growth.

1. Curaleaf is an R&D powerhouse. A team of scientists is currently developing about 180 products.

2. Curaleaf is an industry consolidator. The company’s executive chairman has a lot of experience rolling up fragmented and distressed industries. M&A is supported by a healthy balance sheet and good access to capital. Given how much the cannabis group has fallen in the past year, there are probably a lot of good bargains out there.

3. Curaleaf will benefit from progress on legalization in Germany and Europe. It has a majority stake in Germany’s Four 20 Pharma, a licensed producer and distributor of medical cannabis that has more than 15%-20% market share in Germany. Curaleaf International is the largest vertically integrated cannabis company in Europe. It has a lot of room to expand production, and it boasts import and distribution in the U.K., Germany, Italy, Switzerland, and Portugal. Recreational use legalization in Germany is advancing, and it could open the floodgates to further legalization throughout Europe. Curaleaf has a 50% market share in the U.K.

The company is founder-run, which can be a plus in investing. Curaleaf has a price/sales ratio of 2.64. BUY

AdvisorShares Pure U.S. Cannabis ETF (MSOS) This exchange traded fund (ETF) has large exposure to most of our portfolio names so it may seem redundant. However, I want to put it on your radar as a liquid trading vehicle for getting in and out of the group without having to make a lot of individual stock sales, and as way to get exposure to many of our names with one purchase. It also gives us diversification beyond our names, to positions like Jushi Holdings (JUSHF) and Innovative Industrial Properties (IIPR), among others. Consider accumulating this ETF on weakness of 2% or more. BUY

AdvisorShares MSOS 2x Daily ETF (MSOX) This is the leveraged version of the ETF MSOS. It theoretically goes up (and down) by twice as much as MSOS, though the relationship does not always hold exactly. Consider accumulating on weakness of 2%-4% or more. BUY

ETFMG Alternative Harvest (MJ) This ETF has outsized foreign exposure, which means it could benefit more than other marijuana exchange traded funds if we see progress on legalization in Germany and Europe. That could happen in the form of draft legislation and decriminalization of recreational use in 2023. “Legalization in Germany could be a tipping point for global expansion,” according to cannabis experts at ETFMG. This would put additional pressure on other European Union members to move forward with legalization. It could also encourage reform of the 1961 U.N. Single Convention on Narcotics which prohibits the cultivation and sale of recreational cannabis. “Such a result would be momentous and would open the doors to a global market,” says ETFMG. Owning this ETF broadens our industry exposure to names outside our portfolio, like Canopy Growth (CGC; WEED.TO), SNDL (SNDL), and GrowGeneration (GRWG), among others. BUY

Green Thumb (GTBIF) Chicago-based Green Thumb is our portfolio’s largest position. Green Thumb was the third-largest cannabis company in the U.S. last year, with operations in 15 markets. It has been the most profitable multistate operator of all the big ones -- a sign of good management.

Green Thumb branded cannabis products include &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a national retail cannabis stores called RISE. It has 84 retail stores and 18 manufacturing facilities in 15 U.S. markets.

Green Thumb is expanding its medical footprint in Florida through a lease agreement with the convenience store chain Circle K. This could be a big deal, since the Circle K chain has 600 locations in Florida. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries.

Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power. Green Thumb trades at a price to sales ratio of 3.16. BUY

Organigram (OGI) Organigram holds the #2 position among Canadian licensed producers. It also sells high-margin flower in Israel and Australia. It signed a deal in May to supply a German medical cannabis operator called Sanity Group. Germany should see robust growth over the next few years as it loosens rules on medical cannabis use. The CEO has alluded to “creative ways” to get into the U.S. cannabis market, but does not offer details.

OGI expects to generate positive free cash flows by the end of calendar 2023. OGI also guided for higher revenue this year. It expects improved profit margins because of increase international sales which produce higher profits, and increased sales of higher margin finished products like those in its Holy Mountain line up.

The company has the #1 market share position in hash globally driven by popular products like Tremblant, Holy Mountain and SHRED. It has the #1 market share position in gummies.

British American Tobacco (BTI) is a big investor in Organigram, an endorsement of its potential. The two companies collaborate to develop cannabis products. The price to sales ratio is 1.01. BUY

Tilray Brands (TLRY) Tilray is a cannabis and consumer packaged goods company with one of the biggest global footprints in the industry. CEO Irwin Simon founded The Hain Celestial Group, a natural food company, which is in the business of brand development. This is a key factor for cannabis companies, too. So, the Hain Celestial experience may bode well for shareholders.

Tilray is a big recreational and medicinal cannabis supplier in Canada. It is ranked #1 there by sales for cannabis flower, oils, concentrates, and THC beverages; #2 in pre-rolls, #4 in vape, and among the top 10 in all other categories. It also offers medical cannabis in 20 countries on five continents through its subsidiaries and agreements with pharma distributors. It has operations in Canada, the United States, Europe, Australia and Latin America. It sells craft beer and CBD products in the United States.

Tilray seems like a good play on expected legalization of recreational use in Europe over the next few years, because it has been making significant investments there. It has a medicinal marijuana distribution network in Germany. It has production facilities in Portugal and Germany, the largest medical cannabis market in Europe.

Tilray sells hemp food products through its Fresh Hemp Foods division, and it has a craft alcohol business called SW Brewing, the tenth-largest craft brewery in the United States. The price to sales ratio is 1.69. BUY

Trulieve (TCNNF) Trulieve has long been the biggest medicinal marijuana vendor in Florida, where it has 50% market share. It has over 185 dispensaries and two thirds are in Florida. Cannabis activists are trying to get recreational use on the Florida ballot in November 2024. A win would be huge for Trulieve. Approval could make Florida the largest legal U.S. cannabis market with 22 million residents and 138 million tourists a year.

Meanwhile, Trulieve has been expanding across the country via acquisitions. It is diversifying its presence into Pennsylvania, Maryland, Georgia, Ohio and Massachusetts, among other states.

The company reports $192 million in cash against $903 million in debt. The company projects operating cash flow of $100 million this year. “U.S. cannabis has significant white space ahead, with many states yet to implement medical or adult-use programs, and the growing appetite for substantive federal reform,” says CEO Kim Rivers. It has a price to sales ratio of 1.63. BUY

Verano (VRNOF) Chicago-based Verano is one of the top five publicly traded multi-state operators in the U.S. by sales. The company has over 130 stores and fourteen cultivation and processing plants in 13 markets. One of the most attractive qualities of this company is that it has a big presence in high-growth markets like New Jersey, Illinois, Florida and Connecticut, and states that are about to legalize recreational use like Maryland, and states that may soon legalize recreational like Florida, Ohio and Pennsylvania. The company’s strategy has been to position with medical dispensaries in states most likely to soon go recreational.

Verano also has consistent operating cash flow at a time when financial strength is important due to pricing pressure in the sector.

The company’s portfolio of brands includes Encore, Avexia, MÜV and its signature Verano line of product. To capitalize on the consumer’s trading down to value brands, Verano moved up the rollout of a new budget line called Savvy last year. It operates dispensary concepts called Zen Leaf and MÜV. It also has a licensing agreement with Mike Tyson’s Tyson 2.0 cannabis company.

The company has been dialing back capital spending and cutting overhead to bolster its balance sheet. But it has some of the strongest operating cash flow in the business. The company reports cash of $129 million against debt of $517 million.

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of 2.2. BUY

The next Cabot Cannabis Investor Issue will be published on March 27, 2024.

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