Cabot Cannabis Investor Issue: June 26, 2024

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Cannabis stocks are unloved and in the doldrums.

Typically, in the stock market, that’s the best time to buy.

Neglected stocks offer the best value, as long as there are potential catalysts on the horizon.

I believe that is the case with cannabis. You’ll just have to be patient. I think it is worth being patient for the possibility of 30%-50% gains when a catalyst strikes. There is no guarantee this will happen, but as I discuss below, the odds are good.

So, I continue to suggest accumulation of cannabis stocks down here. I’m leveraging the portfolio more (see below) to take advantage of the expected rebound ahead in cannabis names. (More on specific names and exchange-traded funds, below.)

Here are the three big, expected catalysts that could happen either by the election or by the end of the year.

1. Rescheduling

This one has gotten quite complicated, one reason cannabis stocks are in the doldrums. I’ll boil it down for you the best I can by offering three scenarios, the good, the bad and the ugly. I’m also adding an unlikely wild card outcome.

To review, the background here is that President Joe Biden is losing support, including among young voters. One way to combat this is to show progress on cannabis reform. The vast majority of younger voters support reform, including outright legalization.

In this spirit, Biden asked his Department of Health and Human Services (HHS) to review rescheduling of cannabis under the Controlled Substances Act (CSA). The HHS then sent a detailed report to the Department of Justice (DOJ) and its Drug Enforcement Administration (DEA) asking them to reschedule cannabis. (The DEA is inside the DOJ.) HHS asked them to move cannabis to Schedule III from Schedule I under the CSA.

This would not legalize cannabis. But it would increase cash flow at cannabis companies greatly by neutralizing an Internal Revenue Service rule called 280E. This prevents cannabis companies from deducting operating expenses, because cannabis is a Schedule I drug. It would also make it easier to research cannabis for medical purposes.

Where Things Stand Now and What’s Next

Back on May 21, the DEA published a proposed rescheduling rule. The mandatory 60-day comment period ends July 22. Here are four ways this could play out, and the odds of each, in my view.

a) Relatively quick success. The big risk in this process is that the DEA calls for a hearing on the change by the administrative law judge (ALJ) inside the DOJ. This would be a huge setback for cannabis investors, since ALJ hearings can drag on for months, if not years.

Many groups who oppose cannabis reform have filed comments requesting a hearing. They include Smart Approaches to Marijuana (SAM), state attorneys general, a group of former DEA officials, the Tennessee Bureau of Investigation, and the International Academy on the Science and Impact of Cannabis.

But because this is a political issue with near-term election implications, I believe the DEA will decide to skip the hearing.

Opponents claim, among other things, that a hearing is necessary to discuss scientific studies on the benefits and risks of cannabis. But these data can be submitted in comments and do not necessarily require testimony and cross examination in a hearing, an attorney close to the process tells me.

Indeed, so far there do not appear to be issues raised in comments that require a hearing vs. simple publication of evidence in the proposed rule comments, the attorney says. “It is rare for hearings to happen,” says the attorney.

I give this no-hearing/quick progress outcome 65% odds. In this scenario, we see a rescheduling rule (significant catalyst) during September or October or possibly earlier.

b) Drawn-out success. There are no rules on how soon after comments close the DEA or the DOJ have to publish a final rule. Note that both have the power to do this, under the CSA. This is important because of some signs that factions inside the DEA resist the change.

It will definitely take some time after comments close to publish a final rule, given the volume of comments. We are currently only halfway through the comment period and the DEA has received 27,000 comments. That is a lot to go through.

Plus, both proponents and opponents of reform will wait until the very last minute to file their most important and substantive comments. This tactic limits the amount of time adversaries have to contest their points in comments.

All of this implies that it could take many months or more, after comments close, for a decision on a proposed rule to materialize.

However, as drug regulatory attorney Howard Sklamberg has told me, the agencies can hire outside help to go through comments. A lot of the comments are not really that substantive, anyway. “There is obvious pressure to get a final rule out before the election,” one attorney close to the process tells me.

So, I give the drawn-out success outcome, meaning six months or more, just 15% odds. I believe it is possible a final rule could be published as soon as September, when early voting starts. No one knows for sure because rescheduling is happening at a faster pace than ever before. But the September-October timeframe seems plausible.

Note that if a rule is published, opponents of the change will file legal appeals. A court could stay the rule promptly. But this is unlikely, one regulatory attorney tells me.

c) Zero near-term joy. As I wrote above, one of the worst outcomes for cannabis investors would be a DEA or DOJ decision to hold hearings on the proposed rule change. Hearings can drag out for a year or more. So, rescheduling would get kicked very far down the road in this scenario.

A complicating factor, in terms of forecasting timelines, is that there are no rules on when the DEA or DOJ would have to decide whether to hold a hearing. But a decision would be likely by the end of August. Note that the agencies do not have to announce that they decided not to hold a hearing, adding to the uncertainty in the mix here.

I give the hearing option (zero near-term success) 15% odds.

d) The zero joy scenario. A wild card option would be that the DEA or DOJ simply decide not to reschedule cannabis. Given the interest from the top (the president) in rescheduling, I give this only 5% odds.

The bottom line: As you can see, rescheduling is very complex, so trying to predict outcomes is complicated as well. This is one of the main reasons why cannabis stocks are in the doldrums. I have only shared the highlights, and my best guess on probable scenarios. I believe election-year pressure to show success to win votes will compress the timelines and result in a final rescheduling rule before the election. My best guess is a final rule (big catalyst) could be published in September or October. Again, we are in new territory here in terms of the speed with which this is already happening. So projecting timelines with accuracy is challenging.

2. Florida Vote on Recreational-Use Sales

Florida voters get to decide on legalizing recreational-use sales in a November referendum. Over 60% of voters need to approve the measure for it to become law. Polls suggest the vote will be close. However, that could soon change given that the lobbying group supporting the legalization of recreational-use cannabis sales in Florida has raised a massive war chest of over $40 million (more details below). Approval would boost cannabis stocks considerably given the potential size of the Florida market. A positive vote would also confirm the cultural shift in the U.S. towards cannabis legalization, which puts pressure on politicians to support federal-level cannabis reform.

I give the referendum 85% odds of approval.

3. Favorable Banking Reform

A measure to allow banks to serve cannabis companies has been kicking around the U.S. Congress for years. Most recently, the Senate Banking Committee approved a bill supporting the change. Several prominent lawmakers like Senate majority leader Chuck Schumer (D-NY) continue to voice support. But they show little progress. It’s possible the reform could be included in a year-end budget bill, at the latest. I give this outcome 50% odds.

What to Do Now

Because cannabis stocks are so hated and it is reasonable to expect catalysts ahead, I believe it makes sense to accumulate cannabis stocks here and then patiently wait for catalysts to hit in the September-November timeframe, or earlier. Consider taking both trading positions and multiyear positions now.

Then if a catalyst creates a 15%-40% kind of rally, consider exiting trading positions and selling covered calls against multiyear positions. Consider selling calls about a month out in time and starting at two to three points above the current price, and up.

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 a catalyst, 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.

I am increasing leverage in our model portfolio by selling a third of our MSOS position (500 shares) and rolling the funds into the 2x leveraged version of the ETF, or MSOX, at yesterday’s closing prices.

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.

* The lobbying group supporting the legalization of recreational-use cannabis sales in Florida has raised a massive war chest of over $40 million. Known as Smart & Safe Florida, the group will use the money to try to persuade voters to approve a November referendum that calls for the legalization of rec-use cannabis sales. Not surprisingly, the lobbying group is supported mostly by cannabis companies that stand to benefit because of their big presence in Florida, in particular our Trulieve (TCNNF).

A lobbying group called the Florida Freedom Fund created by Florida Gov. Ron DeSantis (R) will challenge the measure to legalize rec-use sales. The Florida Republican Party also opposes legalization of rec-use sales.

A nonpartisan group called Florida Financial Impact Estimating Conference has said legalization of rec-use sales would generate $196 million to $431 million a year in state and local taxes.

* Facing pressure in the form of tax revenue lost to surrounding states that have approved recreational-use cannabis sales, a group of Pennsylvania lawmakers say they have enough support to advance a bill to legalize rec-use cannabis in the Keystone state. Reps. Aaron Kaufer (R), Emily Kinkead (D), and Sen. Sharif Street (D) made the comments at a recent press conference.

“It’s time for us to move these bills,” said Street. “It’s time for the House and Senate to move together. We now have bills that aren’t too far apart in both chambers.” A recent study suggested that Pennsylvania would see up to $2.8 billion in rec-use sales in the first year of legalization, generate as much as $720 million in tax revenue and create upwards of 45,000 jobs. Gov. Josh Shapiro (D) supports legalization. Pennsylvania already allows medical use sales.

* Cannabis activists in Texas have collected nearly 50,000 signatures to put a cannabis decriminalization initiative on the ballot in Dallas this November. The group behind the signature campaign, Ground Game Texas, has gotten decriminalization measures on the ballot in several cities in Texas. The Dallas measure would prevent police from issuing misdemeanor citations for cannabis possession. Similar measures have been enacted in Austin, Denton, Elgin, Harker Heights, Killeen and San Marcos.

A Texas district court judge recently dismissed a lawsuit from the Republican state attorney general seeking to overturn the decriminalization initiative in Austin. Three in five Texans support legalization of cannabis, according to a recent poll.

* The American Medical Association (AMA) voted in favor of decriminalization of various drugs, including cannabis.

* New York has stepped up enforcement against illegal cannabis stores, and the efforts may help our portfolio names with a presence in the state. A New York City task force launched in early May shut down 311 unlicensed cannabis shops through June 3. The move is driving consumers to licensed stores, which should benefit publicly traded cannabis companies in the state like our Curaleaf (CURLF). The task force seized $10.4 million worth of product and issued $23.4 million in fines. An additional 325 shops were put on notice.

New York Gov. Kathy Hochul (D) said legal sales of cannabis advanced 27% from early May through early June. She said the 24 stores in enforcement areas took in over a million dollars in additional revenue, or $35,000 per store in just one month. She said state sales recently surpassed $200 million so far this year compared to about $160 million in 2023. One licensed operator said sales increased $500 to $700 a day after nearby stores were closed.

* Here’s more evidence that cannabis usage is expanding sharply across the country, which puts pressure on politicians to support cannabis reform.

While California has a reputation as a cannabis-friendly state, Michigan surpasses California as the top cannabis market in the U.S. by sales volume, says BDSA and Headset, two firms that track sales trends.

BDSA says Michigan sold 56.8 million units of cannabis products in April, compared with 44.6 million in California. Headset says Michigan sold 24.2 million units, or individual products, in May compared to 17.3 million in California. Both firms obviously define “unit sales” differently. But they reached the same conclusion.

The difference is remarkable given that Michigan’s population is one-fourth the size of California’s. Michigan legalized recreational use five years ago.

The investment takeaway is that the popularity of cannabis continues to expand sharply across the country. This puts pressure on politicians to support cannabis reform like SAFER banking, which lets banks serve cannabis companies, rescheduling and even legalization at the federal level.

By dollar amount, California still leads the way with $5.1 billion in recreational cannabis sales in 2023, compared to $3 billion in Michigan. The difference in unit vs. dollar sales stems from product price differentials in Michigan and California, where cannabis is more expensive. Michigan has the highest per capita sales in the U.S. at $132.41, according to Headset, compared to $44.21 in California.

* Here’s more evidence that supports the case for legalization. Cannabis use among young people in Colorado continued to decline since legalization of recreational use, dispelling the idea that legalization promotes consumption. High schoolers who used in the past 30 days was at 12.8% in 2023, down from 13.3% in 2021, says the latest biannual Healthy Kids Colorado Survey. In 2013, the year before legalization, the rate of use among high schoolers was at 19.7%. The number of young people who said cannabis was easy to get fell to 40.4%, down from 54.9% the year before legalization.

* Ohio regulators have approved over five dozen of licenses that allow medical-cannabis companies to move into recreational-use sales. The move signals that recreational-use sales could start soon. Voters approved rec-use sales in a referendum last November. The development ups pressure on neighboring Pennsylvania to legalize rec-use sales or continue to forgo cannabis tax revenue.

* North Dakota cannabis activists say they are close to collecting enough signatures to get a cannabis legalization initiative on the November ballot.

* Nearly two-thirds of New Hampshire residents support a cannabis legalization bill that state House lawmakers recently shot down, according to a new poll. The poll was conducted by the University of New Hampshire’s States of Opinion Project.

* The North Carolina Senate recently approved a bill that would legalize medical cannabis sales. It now has to make it through the House, which has been resisting the change.

* Louisiana Gov. Jeff Landry (R) has signed a bill that decriminalizes cannabis paraphernalia. Cannabis possession has been decriminalized, but lawmakers have rejected outright legalization.

Company News

The key takeaways here are that our portfolio names continue to expand into markets ahead of changes that will spur sales growth, like Florida and Europe.

Cronos (CRON)

Our Cronos is investing another $51 million in the cannabis cultivation company GrowCo to support GrowCo’s capacity expansion at its in Leamington, Ontario site. GrowCo product will be used to supply markets around the world that Cronos serves including Canada, Israel, Germany, the United Kingdom, and Australia. Cronos will have the option to purchase up to 70% of production.

GrowCo’s board will expand to five members and Cronos will have three seats. Cronos already owned 50% of the company. Cronos says the joint venture’s results will appear in its financials starting in the third quarter. Cronos says GrowCo has strong gross margins and will be accretive to its own financials.

“This investment enables GrowCo to increase its production of high-quality cannabis which supports our ambition to expand across the markets we operate in, and add new international growth opportunities where they arise,” said Cronos CEO Mike Gorenstein. Cronos’ Spinach is the number one flower brand in Canada, and its Peace Naturals brand has seen solid demand strength abroad. “This investment sets us up well to meet the increasing demand and seize the right opportunities as they arise,” says Gorenstein.

Curaleaf (CURLF)

Curaleaf has launched a line of edible products and drinks that use hemp-derived THC. The products will be sold under its Select and Zero Proof brands, and third-party brands. Products will be sold from its new hemp product website, TheHempCompany.com. Curleaf expects to sell through other partnerships including one with DoorDash (DASH). The products will be available in 25 states and the District of Columbia.

Green Thumb (GTBIF)

Green Thumb will open a Rise cannabis store in Florida in late July, taking its total store count in the state to 17. One of the qualities I look for in cannabis companies is positioning in states ahead of expected legalization or expected expansion to recreational use from medical use. Florida voters may approve recreational-use sales in a referendum this November. Green Thumb, which sells cannabis under the RHYTHM and Dogwalkers brands, now has 94 stores nationwide.

Organigram (OGI)

Orginigram’s investment arm Jupiter is putting a little over $15 million into a German cannabis company called Sanity Group. Organigram also inked a deal to supply cannabis to Sanity.

This is a bullish development. Here is in the U.S. there’s excessive focus on the North American market. I believe it is important to invest in companies with exposure to the expected legalization wave in Europe.

Among the larger and more influential European countries, Germany is taking the lead. It recently removed cannabis from its narcotics list, which makes it much easier for doctors to prescribe marijuana, spurring a big uptick in sales in the legal market.

The Berlin-based Sanity has a distribution network of over 2,000 pharmacies partnered with about 5,000 doctors in Germany. Sanity has about a 10% share of the German medical cannabis market. Its brand called avaay has grown rapidly since cannabis was removed from the narcotics list earlier this year. Sanity is also trying to expand into Switzerland. Organigram is in the process of getting its Moncton grow facility, in Canada, certified for sales in Europe. It expects the change by the end of the year.

BDSA estimates cannabis sales in Germany will hit $1.5 billion this year and grow to $3.7 billion by 2027. Medical cannabis prescriptions have grown by over 30% since Germany took cannabis off its narcotics list on April 1, 2024.

Verano (VRNOF)

Verano opened two MÜV cannabis stores in Florida, taking its statewide total to 77. Aggressive expansion in the state is a bet that Florida voters will approve recreational-use sales in a referendum in November. Verano has 142 stores in thirteen states.

Verano’s board also recently authorized a $50 million share repurchase plan. I take this as a sign that cannabis stocks look cheap, in the current pullback. “The authorization of our first-ever share repurchase program provides an additional outlet for capital deployment alongside other measures such as capital expenditures, strengthening our balance sheet, and potential M&A as we position Verano for long-term growth and success,” said CEO George Archos.

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.

Cannabis sector lenders AFC Gamma (AFCG) and Chicago Atlantic Real Estate Finance (REFI) in mid-June confirmed dividends of 47 cents and 48 cents per share, which produce rich dividend yields of 16.5% and 12% respectively at current stock prices.

Sector Performance

Because our main cannabis portfolio is leveraged, we lag in severe sector downturns. That is the case now. Our Cabot Cannabis Investor portfolio cannabis portfolio was up 4.8% this year as of the June 25 close. That was 1.5 percentage points below the 6.28% gain for the New Cannabis Ventures Global Cannabis Stock Index.

Our portfolio is leveraged because of the large position in AdvisorShares MSOS 2X Daily (MSOX). It is a top-five position. The leverage hurts us when the sector is weak. Likewise, it 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 Cabot Cannabis Plus Insider Portfolio is up 39.6% since I launched it on March 29 last year. That’s more than twice the 16.6% 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 12% and 16.5%. The dividends were recently confirmed even though they look suspiciously high. Our portfolio offers an average dividend yield of 14.25%.

Portfolio

Canna Plus Insider Portfolio

*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 90 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. Like many names in our portfolio, Ayr is strategically positioned in states that look poised to approve recreational-use sales. It has over 60 stores in Florida, for example.

Ayr has 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 $71 million in cash and $607 million in net debt. This debt overhang is one reason why Ayr trades at 0.38 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 0.69. BUY

Cronos Group (CRON) Cronos is mainly a foreign operator with exposure to Canada, Germany, Australia and Israel.

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. 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 $855 million in cash, or about $2.24 per share, against minimal debt of $2.26 million. Some of that cash could be deployed in acquisitions, possibly to expand in the U.S. adult-use market.

Cronos trades at 0.81 times book value. BUY

Curaleaf (CURLF) Massachusetts-based Curaleaf was the industry leader last year. It operates 145 dispensaries and several grow sites in 17 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. Like many of the names in our portfolio, Curaleaf is well positioned to benefit from the opening up of rec-use sales in New York, Ohio, Florida, Pennsylvania near term.

3. Curaleaf will benefit from progress on liberalization of cannabis laws in Germany and elsewhere in 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 2.15. 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. 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. Green Thumb has 91 dispensaries across fourteen states. Green Thumb continued to strategically position itself in markets that look poised to expand to recreational uses sales, like Florida and Pennsylvania.

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 2.68. BUY

Organigram (OGI) Organigram holds the #2 position among Canadian licensed producers. It also sells high-margin flower in Israel, Australia and Germany. 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.

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 1.02. 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 1.56. BUY

Trulieve (TCNNF) Trulieve has long been the biggest medicinal marijuana vendor in Florida, where it has 50% market share. It has over 190 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. It is diversifying its presence into Pennsylvania, Maryland, Georgia, Ohio and Massachusetts, among other states.

The company reports $320 million in cash against $795 million in debt. “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. Verano has nearly 140 dispensaries and 14 production facilities in 13 states. 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 may soon legalize recreational like Florida and Pennsylvania. The company’s strategy has been to position with medical dispensaries in states most likely to soon go recreational.

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 reports cash of $194 million against debt of $541 million.

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of 1.35. BUY

The next Cabot Cannabis Investor Issue will be published on July 31, 2024.

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