Cabot Cannabis Investor Issue: March 27, 2024

Our main Cabot Cannabis Investor portfolio has vastly outperformed this year, with a 38% gain as of the March 26 close. That was 15 percentage points better than the 22.8% gain for the New Cannabis Ventures Global Cannabis Stock Index. We’ve done 31 percentage points better than the 7.1% gains this year in the S&P 500.

Our Cabot Cannabis Plus Insider Portfolio is up 42.6% since I launched it on March 29 last year. That’s more than twice the 16.8% gain in the Russell 2000 index over the same time.

We outperformed mainly by owning the best cannabis stocks, and also by the use of a little bit of leverage. We can also thank Vice President Kamala Harris who sparked some March madness in cannabis stocks that sent the AdvisorShares Pure U.S. Cannabis (MSOS) soaring over 20%.

Now what?

The Harris rally has not yet fully played out, and three more catalysts could keep the momentum going, as well.

First, let’s take a look at the potential developments ahead in the Harris rally. The group caught a bid because Vice President Harris urged the Drug Enforcement Agency (DEA) to get cracking on Biden administration reforms – in a public summit, with the rapper Fat Joe, on cannabis conviction pardons.

The context is that the Health and Human Services Department (HHS) has asked the 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 by neutralizing an Internal Revenue Service rule that bars the deduction of operating expenses against Schedule I drug revenue.

Now, cannabis investors await the next step at the federal level – which will come in the form of a proposed rescheduling rule from the DEA. This could land any day now.

But it is not the only news that will attract investors to cannabis names. Three other catalysts will help the group, starting next week.

1. European progress

Beginning April 1, cannabis will be decriminalized in Germany. People over 18 will be allowed to possess 25 grams of cannabis and grow up to three plants. Starting July 1, so-called “cannabis clubs” will be allowed to supply members.

But the big reform, for cannabis companies, lies elsewhere: The country is also removing cannabis from its narcotics list. This will boost the medical market by freeing up doctors to prescribe more cannabis. Previously, they had limited cannabis prescriptions to create more room to prescribe other drugs on the narcotics list.

Curaleaf (CURLF) founder and chairman Boris Jordan estimates this change could spark fivefold growth in the medical cannabis market. Demand in Germany will be supported by insurance reimbursement for users. Big picture, the change in Germany increases the momentum for reform and cannabis market development in other European countries – like France, Poland, Czechoslovakia and the U.K.

2. The Florida cannabis referendum

The Florida Supreme Court has until April 1 to rule on the language of a proposed recreational-use legalization referendum. If the court does nothing, the referendum gets automatically approved. Then the measure will appear on the November ballot. It has to get 60% voter support. Survey research suggests there’s adequate voter support. Curaleaf’s Jordan thinks the move could double the size of the Florida cannabis market. If voters approve the change, recreational use cannabis would kick in during July 2025. If the referendum gets the green light on April 1, that will attract investor interest in cannabis names, potentially driving them higher.

3. Cannabis banking reform

A new poll from the American Bankers Association (ABA) finds that 63% of Americans support federal reform that would allow banks to serve cannabis companies. The change could help worker safety at dispensaries – which are crime magnets because they have to operate in cash only.

“Americans have made it clear that Congress should resolve the ongoing conflict between state and federal law on cannabis banking issues by passing legislation that will enhance public safety, tax collection and transparency,” says ABA President Rob Nichols.

Lawmakers are in a holiday recess. But analysts and lobbyists speculate the full Senate may take up the SAFER Banking Act, which would allow banks to serve cannabis companies when lawmakers return to Washington, D.C. “There are good prospects of this legislation being passed in the next few months,” says Jefferies cannabis sector analyst Owen Bennett.

The bottom line: Several potential catalysts are on the near-term horizon. The proposed rule from the DEA would be the biggest one.

What to Do Now

Given the preponderance of potential near-term catalysts, I suggest considering any of our portfolio names below, or the MSOS and AdvisorShares MSOS 2X Daily (MSOX) ETFs if you want to keep it simple.

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.

* Many happy returns: Several of our cannabis companies are following the lead of Trulieve (TCNNF) and filing amended tax returns to claim refunds on federal taxes. It’s not clear what logic they are using. Trulieve says its tactics are a trade secret. But they got tax money back, so other cannabis companies are giving it a go.

At issue is Internal Revenue Service rule 280E which bars companies from deducting operating expenses against revenue from the sale of drugs under Schedule I of the Controlled Substances act.

“We’ve been working very closely with our tax council regarding our legal interpretation of 280E,” said AYR Wellness (AYRWF) CFO Brad Asher in the company’s earnings call earlier this month. “Based on this work, we anticipate updating our tax position to reflect the non-applicability of 280E, and we’ll be in a position to file amended tax returns for the years 2020 through 2022 before the end of this month.” He expects a $50 million refund on taxes paid during 2020-2022. “We expect the industry will continue to see more operators pursuing sort of variations of this tax strategy,” he said.

Cresco Labs (CRLBF) plans a similar tactic. “We are actively assessing our tax position and evaluating options for our current and past tax filings,” said Cresco CFO Dennis Olis in his company’s March earnings call. “This has the potential to have a material impact on our already strong cash performance we expect in 2024.” Our Verano (VRNOF) also said it will be filing for tax refunds this year.

Outside of our portfolio names, TerrAscend (TSNDF) says it will submit amended federal tax returns to the IRS for 2020, 2021, and 2022. The company expects to receive $26 million of federal and state refunds for 2020 and 2021.

Proposed rescheduling of cannabis under the CSA to Schedule III would eviscerate the impact of 280E. Mike Regan of Excelsior Equities predicts that would produce tax savings of more than $2 billion sector-wide, and about $900 million in savings among the top publicly traded cannabis companies. Assuming the money is not spent (an unlikely outcome), the gains would represent a 75% increase in profits, he said.

* Price compression: While cannabis disinflation is probably not over yet, several companies reported price stabilization in the fourth quarter. Connecticut confirms the trend. The Connecticut Department of Consumer Protection recently reported that the average price per gram of cannabis rose to $12.28 in February from $9.51 in August 2023. This might partly explain why state sales fell to $23.6 million in February, down from $27.5 million in December. However, the Massachusetts Cannabis Control Commission recently reported the price per gram of legal marijuana continues to fall to record lows, or $5.32 per gram in February.

* What she’s having: The Journal of Sexual Medicine recently published a study which found that cannabis can help treat female orgasmic disorder (FOD). About 73% of participants in the study reported cannabis use before sex increased orgasm frequency and 67% said it improved orgasm satisfaction. Illinois is in the process of adding FOD as a qualifying condition for medical cannabis, and Ohio, New Mexico and Connecticut are considering the same change.

* More pardons: Massachusetts Gov. Maura Healey plans to pardon everyone in Massachusetts convicted of marijuana possession. The move would clear the records of hundreds of thousands of convictions. Healey said pardons are a way to make up for how drug laws were disproportionately enforced in communities of color. Massachusetts has an expungement program but residents say it is tough to navigate.

* Bad influence? The journal Addictive Behaviors recently published a study that concluded the legalization of cannabis sales does not increase cannabis use among young people. The study compared cannabis use among middle school students in Nevada, which permitted retail sales of marijuana products, and New Mexico, which did not. Other studies have recently concluded that cannabis use among teens has been declining in the past decade.

* Hawaiian progress on legalization: Three Hawaiian House of Representatives panels have approved a Senate bill that would legalize recreational use of cannabis. The proposal would allow adults to possess cannabis, and it would set up regulations governing sales. The proposal was approved by the Judiciary and Hawaiian Affairs Committee, the Agriculture and Food Systems Committee, and the House Consumer Protection and Commerce Committee. The Senate passed the bill earlier in March.

* SAFER Banking reform still in the mix: Senate Banking Committee Chair Sherrod Brown (D-OH) recently said cannabis banking reform is a high priority. His committee has approved the Secure and Fair Enforcement Regulation (SAFER) Banking Act which would allow more banks to do business with cannabis companies. Treasury Secretary Janet Yellen recently told lawmakers at a committee hearing she favors approval of the banking reform. Senator Chuck Schumer (D-NY) also recently said the bill is a high priority. Approval of the bill, or even significant progress, would be a major catalyst for cannabis stocks.

* Robust cannabis sales growth ahead: The legal market for cannabis will grow 16% a year over the next nine years to hit $86.3 billion in annual sales by 2033, up from $19.4 billion in 2023, according to a recent report published by Market.US, a research firm. The research group Whitney Economics recently forecasted similar trends. It says U.S. cannabis sales will hit $31.4 billion this year, up 9% or $2.6 billion from 2023. The group predicts $67 billion in annual sales by 2030, and $87 billion by 2035.

Company News

This section offers a roundup of developments at portfolio companies since the last Cabot Cannabis Investor issue 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.

AYR Wellness (AYRWF)

AYR Wellness posted modest 0.4% revenue growth in the fourth quarter to $114.8 million on March 13. Gross profits slipped 6%. AYR reported a loss for the quarter of $28.2 million or 37 cents per share. For the full year 2023, sales grew 10% to $463.6 million and gross profits advanced 15.7% to $202.4 million.

The company forecast flat to modest revenue growth for the first quarter. But results for 2024-25 may improve nicely because the company has a lot of medical-use dispensaries in three states that look poised to launch recreational use soon: Ohio, Florida and Pennsylvania.

Rec-use sales should begin in Ohio by the end of the year at the latest. AYR CEO David Goubert thinks it could begin as early as September. AYR opened three new stores in Ohio in the fourth quarter.

Floridians may get to approve recreational-use legalization in November. If they approve a referendum on the topic, rec-use sales could start in the summer of 2025. AYR opened two new dispensaries in Florida during the fourth quarter, bringing AYR’s total footprint to 64 dispensaries in the state.

Pennsylvania, now virtually surrounded by states that have legalized rec use, looks poised to approve rec use by the end of 2025.

“We are positioning our assets in Florida, Pennsylvania and Ohio to take full advantage of anticipated adult-use transitions,” said CEO Goubert. “We will not need to materially increase our fixed cost base in these states and expect to generate meaningful operating leverage as revenue growth accelerates in these markets.” Currently, only 15 of AYR’s 91 dispensaries operate in rec-use markets. That could jump meaningfully to 76 of its 91 stores if the above changes play out.

While AYR continues to post losses, the company at least took steps to strengthen its balance sheet by deferring and retiring nearly $400 million in debt in February.

Cresco Labs (CRLBF)

Cresco Labs on March 13 reported a 2% year-over-year decline in fourth-quarter revenue, to $188 million, excluding the impact from strategic divestitures aimed to drive profitability. It reported gross profit of $96 million, and a net profit of two cents per share or $4.8 million. The company retained its number one market share position in Illinois, Pennsylvania and Massachusetts.

For the full year, the company reported a net loss of $180 million which included $151 million of impairment charges. It generated $59 million in operating cash flow for the year, and ended the year with $109 million of cash.

Cresco added 16 stores in Florida and Pennsylvania last year, a good strategic move since these markets look like they will soon approve recreational-use sales. Cresco has five dispensaries Ohio, which is in the process of converting to rec use this year, and it says it will add three more when rec use launches. The company said it will continue to invest in Florida to increase cultivation capacity.

Cresco guided for low single-digit sales declines in the first quarter, flat revenue in the second and third quarter, and fourth-quarter growth driven by the launch of rec use in Ohio.

“We expect the adult-use conversions in Ohio, Florida and Pennsylvania to provide meaningful year-over-year growth in both 2025 and 2026,” said CFO Dennis Olis. It expects significant cash flow growth this year thanks to cost cutting last year. “We expect 2024 to be a record year for operating and free cash flow,” said Olis.

Cronos (CRON)

Cronos reported an 11% gain in fourth-quarter revenue on February 29 to $23.9 million, primarily driven by higher cannabis flower sales in Canada and sales to Germany and Australia. Canadian revenue increased 21%. The company reported a slight increase in gross profit to $1.9 million, and an earnings per share loss of 12 cents, or $45 million.

For the full year 2023, Cronos reported net revenue of $87.2 million a slight increase driven by higher cannabis sales in Canada and the initiation of sales in Germany and Australia. This increase was offset in part by lower cannabis sales in Israel. The company reported gross profit of $11.9 million for 2023 a decrease of $3.5 million. For the year, the company reported a loss of 19 cents a share or $52.5 million. The company achieved $30 million in savings in 2023, boosting cash by $22 million to $862 million.

Besides starting sales in Austria and Germany last year, it launched its Lord Jones brand in Canada. Last year its Spinach brand became the number two overall brand in Canada, according to Hifyre. The company exited U.S. hemp-derived CBD operations.

Curaleaf (CURLF)

Curaleaf reported fourth-quarter 2023 revenue of $345 million on March 6, a year-over-year increase of 1% compared to Q4 2022. Gross profit came in at $156.2 million for a gross margin of 45%. The company reported a net loss of $57.7 million or eight cents a share.

The company opened one store in Florida in the fourth quarter, taking the total to 61 stores. In December it started selling into the New York rec-use wholesale market. It also completed an uplisting to the Toronto Stock Exchange.

For the year, revenue came in at $1.35 billion, up 6% from 2022. Gross profit was $614.4 million for a gross margin of 46%. Curaleaf reported a 2023 loss of $281.2 million or 39 cents a share. Operating cash flow from continuing operations was $91.2 million, and free cash flow from continuing operations was $25.8 million.

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, and ongoing liberalization of cannabis sales in European countries like Germany, the U.K., and Poland.

“Our domestic and international footprint positions us in front of the largest catalyst of New York, Ohio, Florida, Pennsylvania and Germany, which gives us confidence in our long-term growth prospects,” said CEO Matt Darin in the earnings call. “These catalysts combined could contribute $500 million to $750 million of revenue to our business over the next several years. We have leaned out the business, become more efficient and more automated.”

The company guided for annual sales growth this year in the mid-single digits. “The global opportunities we’ve been building our business toward are unfolding rapidly, and 2024 will be Curaleaf’s catalyst year,” said Curaleaf founder and executive chair Boris Jordan in the call.

After it reported earnings Curaleaf announced it is buying the Canadian cannabis producer Northern Green Canada, a cannabis exporter. Curaleaf said the company will help it meet demand in Germany,

Poland, the United Kingdom, Australia and New Zealand. Curaleaf has been the most aggressive company in our portfolio in terms of building exposure to European liberalization of cannabis consumption and sales.

Green Thumb Industries (GTBIF)

Green Thumb reported a 7% year-over-year increase in fourth-quarter revenue on February 28 to $278 million. Revenue growth in the fourth quarter was primarily driven by the strength of its popular brands RYTHM, Dogwalkers, Incredibles, and Beboe, and increased sales in Maryland, which expanded to rec-use sales on July 1.

The company reported earnings per share of a penny or $3.2 million compared to a net loss of $51.2 million, or 22 cents a share in the prior year.

Gross profit for the fourth quarter was $142.7 million or 51.3% of revenue compared to $124 million or 47.8% of revenue for the fourth quarter 2022. The company reported $71 million in cash flow from operations. It ended the quarter with $162 million in cash.

Green Thumb continued to strategically position itself in markets that look poised to expand to recreational uses sales. It opened six RISE Dispensaries in Florida and one in New York. Green Thumb ended the year with 91 dispensaries across 14 states. The day after earnings, Green Thumb announced it opened its fifteenth Florida dispensary. The company also made major wholesale investments in New York, Minnesota, Virginia, New Jersey, and Florida, “markets that we anticipate will grow considerably in the years to come,” said president Anthony Georgiadis.

“Adult-use sales are on the horizon for Virginia, Ohio, and Minnesota and potentially other states where we operate like Florida and Pennsylvania,” said CEO Ben Kovler in the earnings call.

For the full year, revenue came in at $1.1 billion a 4% increase over the prior year. Cash flow from operations was $225 million an increase of 42%. Gross profit was $526.5 million or 49.9% of revenue versus $504.0 million or 49.5% in 2022. Net income for the full year was $36.3 million or $0.15 per share, compared to net income of $12.0 million or $0.05 per basic and diluted share in the prior year.

On February 28, 2024, the company authorized an increase in its share repurchase program by $50 million, bringing the total remaining repurchase plan to approximately $60 million.

“As I look to the future in 2024 and beyond, I am very optimistic,” said Kovler. “We have industry-leading brands that are gaining momentum, the best team in the business, a loyal and growing customer base, and the financial flexibility to keep riding the Green Wave.” Big picture, Kolver said that over the next five years, there will be 18 million new cannabis consumers in the U.S., and two million fewer alcohol consumers.

Trulieve Cannabis (TCNNF)

Trulieve reported fourth-quarter sales of $287 million on February 29, a decline of 4% year-over-year, but an increase of 4% sequentially. The company reported gross margin of 54% and a gross profit of $154 million. The company lost twelve cents a share, or $33 million. It generated cash flow from operations of $131 million and free cash flow of $122 million. It opened four new dispensaries in Florida.

For the full year it reported revenue of $1.13 billion a 7.4% decline over the prior year. It reported gross margin of 52%, and a gross profit of $589 million. Trulieve posted a loss of $527 million for the year, compared to a loss of $246 million in 2022. But it generated cash flow from operations of $202 million and free cash flow of $161 million. Cash at the end of the year was $208 million. It opened 17 dispensaries in 2023, increasing retail footprint to 192 retail locations nationwide at year end. It opened stores in Arizona, Florida, Georgia, Ohio, Pennsylvania and West Virginia and launched recreational sales in Connecticut and Maryland.

After it reported earnings, the company opened two new dispensaries in Florida. Trulieve is positioning ahead of expected rec-use approval based on a referendum vote in November this year. If voters approve the change, rec-use sales would probably launch in the summer of 2025. Trulieve is heavily exposed to Florida. About 68% of its retail locations are in the state.

“Legal cannabis in Florida could be a $6 billion market opportunity, effectively tripling from today’s medical only market. With 22 million residents and 138 million annual tourist visits, we believe Florida will be the best cannabis market in the world,” said CEO Kim Rivers in the earnings call. “Trulieve maintains outsized market share with 21% of stores in Florida selling over 115% more flower than the state average, eclipsing all competitors. Throughout 2024, we will be adding new locations in Florida, expanding our retail network to serve the growing medical market.”

The company guided for zero revenue growth in the first quarter, sequentially. It expects to open at least 25 stores this year.

The company filed amended federal tax returns for 2019, 2020, and 2021 claiming $143 million of refunds, and it filed corresponding amended state returns claiming $31 million of refunds. It got $62 million in refunds in the fourth quarter and $113 million in refunds to date alongside one rejection notice in the amount of $1.2 million.

Verano (VRNOF)

Verano reported revenue of $237 million on March 15, an increase of 5% year-over-year, and decrease of 1% versus the prior quarter. The revenue gain was driven primarily by strength in wholesale adult-use sales in New Jersey, and growth in Maryland and Florida retail sales. It reported gross profit of $118 million or 50% of revenue. The company posted a loss of $77 million compared to a loss of $216 million in the fourth quarter of 2022 and $18 million for the third quarter of 2023. Net cash provided by operating activities was $32 million, and free cash flow came in at $23 million.

For full-year 2023, Verano reported revenue of $938 million, an increase of 7% year-over-year.

Gross profit of $475 million or 51% of revenue. The company reported a loss of $117 million for the year, or 34 cents per share. Net cash provided by operating activities of $110 million. Free cash flow was $73 million. Verano finished the year with $175 million in cash.

The company increased exposure to two states that look poised to legalize recreational-use sales in the fourth quarter. The company opened a Florida dispensary, increasing its retail footprint there to 74 dispensaries. It opened two dispensaries in Pennsylvania taking the state total to 18. In all of 2023, it added 16 dispensaries in Florida, Connecticut, Pennsylvania and West Virginia, bringing our year-end dispensary count to 136. It added two stores in 2024, taking its total Verano has 138 dispensaries and 14 production facilities in 13 states.

The company guided for first-quarter 2024 revenue declines of 5%-7% decline versus the prior year. It said that like other cannabis companies, it will be filing for federal tax refunds this year.

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)

This cannabis sector real estate lender reported a fourth-quarter loss of 45 cents per share and $9.2 million on March 7. It reported distributable earnings (GAAP earnings plus some accounting adjustments) of $10 million and 49 cents per share. For all of 2023 it reported income of $1.02 per share or $10 million, and distributable earnings of $41.4 million or $2.04 per share. The company declared a dividend of 48 cents per share for the first quarter of 2024. The company is planning on being a pure-play cannabis lender again this year after it spins off its commercial real estate portfolio.

“We continue to see lending opportunities with the emergence of Cannabis 3.0 operators that have clean capital stacks and are looking to build or expand,” said CEO Daniel Neville. “As an early mover and one of the leading debt providers in the cannabis industry, AFC Gamma is uniquely positioned to capitalize on these opportunities and deploy capital at attractive risk-adjusted returns.” On March 26 the company announced that it has provided $34 million in debt capital to Sunburn Cannabis a private, vertically integrated, Florida operator.

Chicago Atlantic Real Estate Finance (REFI)

This cannabis sector lender reported fourth-quarter earnings of 51 cents per share on March 12, beating estimates by two cents. It reported revenue of $14.8 million. That was a 14.6% decline over the prior year, but it beat estimates slightly.

The company reported $378.8 million in loans across 27 portfolio investments. The weighted average yield to maturity on issued loans was 19.4%. In the middle of January, the company paid a regular quarterly cash dividend of 47 cents per share, and a special dividend of 29 cents per share. The company reported book value per common share of $14.94.

“The wall of debt maturities we have anticipated among the larger cannabis operators is beginning to occur, with early indications this opportunity could be as meaningful over the next 12 to 18 months,” said executive chair John Mazarakis. “We intend to utilize our direct lending expertise and leading platform in the cannabis space to continue to position us in front of these trends driving the improved sentiment and growth in the industry.”

The company expects to maintain its dividend payout ratio. It will pay a cash dividend of 47 cents per share for the first quarter of 2024 on April 15, 2024, to shareholders of record as of the close of business on March 28, 2024.

Sector Performance

Our main cannabis portfolio continues to vastly outperform the New Cannabis Ventures Global Cannabis Stock Index. Our Cabot Cannabis Investor portfolio cannabis portfolio was up 38% this year as of the March 26 close. That was 15 percentage points better than the 22.8% gain for the New Cannabis Ventures Global Cannabis Stock Index. We’ve done 31 percentage points better than the 7.1% gains this year in the S&P 500.

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 Cabot Cannabis Plus Insider Portfolio is up 42.6% since I launched it on March 29 last year. That’s more than twice the 16.8% 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 11.58% and 14.75%. The dividends were recently confirmed even though they look suspiciously high. Portfolio prices are as of the close, March 26.

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 $50 million in cash and $635 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 0.84. 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 $862 million in cash, or about $2.26 per share, against minimal debt of $2.5 million. Some of that cash could be deployed in acquisitions, possibly to expand in the U.S. adult-use market.

Cronos trades at 0.86 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 2.66. 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 3.06. 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 1.72. 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 2.08. 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 $201 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 1.89. 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 $175 million against debt of $542 million.

Verano is founder-run, which can be a plus in investing. Verano has a price to sales ratio of 1.96. BUY

The next Cabot Cannabis Investor Issue will be published on April 24, 2024.

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