Cabot Cannabis Investor Issue: October 25, 2023

Cannabis stocks are trading like a group in need of a catalyst.

* The AdvisorShares Pure U.S. Cannabis (MSOS) exchange traded fund (ETF) has fallen 28% from the peak of the rally caused by last summer’s news of federal government progress on rescheduling.

* The AdvisorShares MSOS 2x Daily (MSOX) ETF is down 38%.

Will the group see a catalyst soon? I put odds at much higher than 50%. This makes cannabis stocks a buy in the current retreat, both for a trade but also as a medium-term, multiyear position.

What to Do Now

Consider buying AdvisorShares Pure US Cannabis ETF (MSOS) or the levered version, AdvisorShares MSOS 2x Daily(MSOX), or any of our portfolio names (see below).

Here is a look at what could drive them higher over the next several weeks, or by the end of the year.

Potential catalyst #1: Rescheduling news

The context: Cannabis stocks nearly doubled last summer beginning in late August when we learned that the Department of Health and Human Services (HHS) recommended rescheduling cannabis under the Controlled Substances Act (CSA). HHS recommended cannabis be moved to Schedule III from Schedule I. The change would help cannabis companies by allowing them to deduct expenses against income in federal tax returns.

The next step in this process will be the publication of a proposed rule on rescheduling by the Drug Enforcement Administration (DEA). Consensus holds this will happen by year end. But a source close to the regulatory process in Washington, D.C. tells me that publication of the proposed rule might happen much sooner than that.

The Congressional Research Service (CRS) says the DEA is likely to go along with the HHS recommendation, given its track record of nearly always doing so in the past. This will be a meaningful catalyst for cannabis stocks. It could send them back up to near the levels they hit on the HHS news last summer.

After a rule is published, there will be a comment period lasting two months or more. Then the Department of Justice (which houses the DEA) will issue a final rule. Cannabis sector analysts say this could happen by spring, or summer at the latest.

Note that this would be an unusually short turnaround time. However, the Biden administration seems to want rescheduling progress in time to serve as a campaign talking point in the 2024 elections. Curaleaf (CURLF) chair Boris Jordan says Democrats are conducting focus groups on how to address the issue with voters. This suggests they are serious about having significant progress on rescheduling as a mechanism for winning votes in the 2024 election campaign, he says.

Potential catalyst #2: SAFER banking

The context: The Senate Banking Committee approved the Secure and Fair Enforcement Regulation (SAFER) Banking Act on September 27. This is a bill that would allow federally regulated banks to the cannabis industry.

The issue has dropped off the radar screen, but it could come back in a big way, and soon. For insights on cannabis issues from Washington, D.C., it’s a good idea to pay attention to what the leadership at our Curaleaf (CURLF) and Cresco Labs (CRLBF) are saying, because they spend so much on lobbying efforts there.

Curaleaf chair Boris Jordan believes Senate majority leader Charles Schumer (D-NY) will soon announce a floor vote on SAFER to happen around the end of October or early November. “We expect it to come to a floor vote and it will pass the Senate,” says Jordan. It’s always tough to predict the timing of actions by politicians especially now that they have other serious issues to deal with like war in the Middle East and the federal budget. But if he is right, it will be a major catalyst for cannabis stocks.

I think the news will be tempered by uncertainty about SAFER’s prospects in the House of Representatives because the House is now controlled by conservatives who are reluctant to embrace cannabis reform. But Jordan disagrees.

One path would be for Schumer to put SAFER into “must pass” legislation like a budget bill, he says. Members in the House would not oppose this, says Jordan, because so many of them have voted in favor of SAFER in the past.

Senate minority leader Mitch McConnell (R-KY) blocked this tactic by Schumer last year, says Jordan, because the version of SAFER at the time had not gone through the proper channels of a Senate committee vote and full Senate vote. That won’t be the case now, so Jordan believes McConnell wouldn’t block the use of the piggyback tactic this time around. “SAFER could go through in a ‘must pass’ bill by year end,” concludes Jordan. This would be a big catalyst for cannabis stocks.

A recent survey paid for by the American Bankers Association (which wants SAFER approved because it would create new business for banks) found that 55% of Americans say they want Congress to pass a law allowing banks to serve cannabis companies in states where marijuana is legal. A similar survey in 2022 found that 66% of people support this.

A big challenge for SAFER in the House is that Republicans just chose Rep. Mike Johnson (R-LA) as their new candidate for speaker. He voted no on a prior version of SAFER, called SAFE. He has consistently voted against cannabis-related legislation, and he abstained from voting on bills to legalize cannabis. If he fails to get approved, two other contenders on a recent short list for House speaker would be better for cannabis.

One is Rep. Kevin Hern (R-OK) who voted yes on SAFE but opposed a bill to legalize cannabis. The other is Rep. Byron Donalds (R-FL). He voted yes on SAFE and a bill reducing restrictions on cannabis research. He co-sponsored a bill to protect gun rights for medical cannabis patients and automatically seal criminal records for people convicted of non-violent marijuana offenses. He has voted against a bill to legalize cannabis. Donalds was arrested for cannabis distribution in 1997, but the charges were dropped.

Potential catalyst #3: Progress on state legalization

The context: Two big states are in the balance. Both allow medical use sales, and they each may soon legalize recreational use sales.

In Ohio, voters will weigh in on a referendum proposing the legalization of recreational use sales, this November. Polls suggest voters will approve the initiative. Florida is mulling a similar referendum, but for 2025. That’s a ways off, but the Florida Supreme Court will hear oral arguments on this referendum on November 8. This hearing could yield bullish headlines. But Ohio is the big one to watch here as a catalyst for cannabis stocks. I have more on Ohio, below.

Cannabis news from around the country

The push and pull towards legalization and wider cultural acceptance of cannabis continues to play out in a lively manner – at ballot boxes, courts, cash registers and pharmacies around the country. Generally, updates from the past few weeks confirm the strong cultural momentum towards cannabis reform, a positive for investors in the space. Here are the most important developments for cannabis investors.

Legalization on the ballot

* A recent poll found that 57% of registered voters in Ohio support a referendum calling for the legalization of recreational cannabis on the ballot November 7. Two-thirds of Democrats supported the ballot initiative, as did 59% of independents. The results suggest the initiative is almost certain to pass, says Tom Sutton, a professor at Baldwin Wallace University, which conducted the poll.

Prior surveys found that just under 60% of Ohio voters support legalization of recreational use.

Meanwhile, a recent informal survey of Ohio lawmakers found that 54% of them think voters will approve a recreational use referendum in November. The poll found that 62% of Democratic lawmakers and 52% of Republican legislators believe it will pass. The poll surveyed 35 members of the state legislature, or about a quarter of them. The sample in the poll, conducted by Werth PR and Gongwer News Service, was not randomly selected.

There is a potential wrinkle in the story here. Under Ohio law, legislators can modify policy outlined in referenda before their provisions become law.

Ohio Senate President Matt Huffman (R) has warned that GOP lawmakers may try to undermine some of the core components of the referendum if voters approve it, but that he would stop short of completely overriding legalization. He cautions Ohio will have a “mental health crisis” if recreational-use legalization goes through. The state Senate passed a GOP-led resolution urging voters to reject a marijuana legalization measure on the ballot.

But Ohio Rep. Ron Ferguson (R) has said a repeal of the referendum (if approved) is unlikely because not enough Republicans support repeal, and no Democrats would be on board. U.S. Rep. Dave Joyce (R-OH), co-chair of the Congressional Cannabis Caucus, has said he will vote for the initiative.

Huffman is concerned mainly about a provision that will allow cannabis tax revenue to be used to support applications for cannabis business licenses by people who’ve been convicted of marijuana-related laws.

Ohio would be the 24^th state to approve recreational use.

Cannabis battles on the legal front

* San Diego County cannabis companies are suing competing dispensaries for allegedly selling synthesized cannabis in violation of state law. The companies claim competitors sell hemp-based products that contain illegal amounts of delta-9 THC. The lawsuit is of interest to cannabis investors because sales by illicit vendors cut into the sales of publicly traded companies that operate legally. “There is a direct correlation between the explosion of illegal designer drugs that are flooding California communities from defendants and other bad actors, and the downward spiral of the nascent legal cannabis industry,” the lawsuit alleges.

* New York City lawmakers say they will notify landlords in lower Manhattan of their legal liability for leasing stores to unlicensed cannabis vendors. Publicly traded cannabis companies have complained that one of the obstacles to opening in New York is the large number of unlicensed operators.

“The proliferation of illegal, unlicensed stores has crowded out legal applicants and brought dangerous products and activities to our neighborhoods,” said Assembly member Grace Lee. “Landlords are legally responsible for preventing illegal conduct on their property, and I plan to work with local enforcement agencies to hold them accountable.”

Despite the challenges of illicit operators and the maze of complex and expensive regulation, sales are picking up in the New York state market. Sales came in at $51 million in the third quarter, compared to $8.7 million in the first quarter, according to the New York Office of Cannabis Management.

* Jersey City is pushing back on state policy that prevents police departments from testing officers for off-duty cannabis use. The city is suing the state in federal court to regain the right to test and fire police officers for cannabis use. Under pressure from the state, Jersey City recently had to reinstate two officers who had been fired because of positive cannabis tests. Jersey City wants the courts to apply federal cannabis law that prevents people who use cannabis from having firearms and ammunition.

“No city in New Jersey has been more supportive of cannabis overall, but we should have common sense as well,” says Jersey City Mayor Steven Fulop (D), who is running for governor. Federal law appears to carve out an exception to the ban on firearms for people who test positive for cannabis use when they work for state agencies and departments. Police officers in New Jersey can still be tested for cannabis if departments suspect use during work hours.

Sales growth remains robust

* Rhode Island cannabis sales hit $9.63 million in September, just short of the record $9.67 million in August. Medical cannabis sales slipped, but recreational use sales came in at $7.1 million in September, rising for the 10th consecutive month. Medical use sales brought in $2.5 million in September, down from $2.64 million in August and $4 million in December 2022, when recreational sales began. There are six licensed retailers in the state. The Rhode Island Cannabis Control Commission has 24 retail licenses left to issue, and it expects to start next year.

* Missouri cannabis sales hit $97 million in August, up from $71.7 million in February when recreational use sales were first allowed.

* Colorado dispensaries have sold more than $15 billion worth of cannabis products since the state’s first recreational-use retailers opened in 2014. That has generated more than $2.5 billion in cannabis tax revenue, says the state. Colorado was the first state to launch recreational-use sales after voters approved a referendum on the legalization initiative in 2012. Colorado generates more tax revenue from marijuana than alcohol or cigarettes.

* Georgia will soon become the first state to allow pharmacies to sell cannabis for medical use.

Cannabis portfolio company news

Our companies continue to take steps to position themselves in markets that may soon see rapid growth because of legalization efforts, and shore up their balance sheets.

Cresco Labs (CRLBF)

Cresco Labs (CRLBF) generated $32 million in cash in October by selling an Arizona operation for $6.5 million and securing a $25.3 million mortgage against New York properties. This is good news for investors, because cannabis companies with stronger balance sheets will be the ones that survive the current challenges of price compression and limited access to capital.

Curaleaf (CURLF)

Curaleaf (CURLF) expects a Toronto Stock Exchange (TSX) decision on its uplisting application around the last week of November, says Boris Jordan, the company’s chair. Jordan believes the uplisting would help create demand for the stock and support the stock price by bringing institutional investors into the shareholder mix. Theoretically, that may happen because large banks could offer shareholder custody services if the company gets listed on a major exchange like the TSX. Jordan also says he will launch a non-deal road show soon to meet with institutional investors ahead of the potential listing.

Green Thumb Industries (GTBIF)

Green Thumb Industries (GTBIF) opened its 9^th RISE Dispensary in Florida on October 14. The company plans to open its 10^th dispensary in Florida on October 27 (this Friday). That will be its 86^th dispensary nationwide.

The Florida launches are part of a strategy of opening medical sales operations in states that look poised to see a surge in cannabis sales because they approve recreational use. Floridians may get to vote on a rec-use legalization referendum in 2025. Referendum language must first be approved by the Florida Supreme Court. It will hear oral arguments on the referendum from advocates and opponents on November 8. Medical-use sales are already permitted in Florida.

Trulieve Cannabis (TCNNF)

Trulieve Cannabis (TCNNF) opened a new Florida medical dispensary on October 21. The launch is part of a strategy of opening medical sales operations in states that look poised to see a surge in cannabis sales because they approve recreational use. Trulieve is the biggest cannabis company in Florida. It has funded the drive to get a recreational-use legalization referendum on the ballot. The proposed referendum may give Floridians the right to vote on rec-use legalization in 2025.

The company also filed amended federal tax returns claiming refunds for 2019, 2020, and 2021 worth $143 million. Trulieve is challenging Section 280E of the Internal Revenue Code, which bars cannabis companies from deducting most expenses against revenue, for federal tax purposes. The company has not shared details on the thinking behind this tactic, so it is hard to assess probable outcomes. But a victory would be a watershed moment for cannabis companies, given how much they’ve paid in taxes because 280E prohibits them from deducting expenses.

The company also recently announced its partner in Georgia, Riverside Pharmacy in Gainesville, passed a state inspection which moves it closer to selling Trulieve’s low-THC products. Licensed pharmacies in the state can apply through the Georgia Board of Pharmacy for a permit to sell products derived from low-THC oil, the only form of medical cannabis that is legal in Georgia. Trulieve hopes to offer a wide range of low-THC products under Trulieve’s Momenta brand, including nasal spray, tinctures, capsules, and topicals.

Tilray Brands (TLRY)

A division of Tilray Brands (TLRY) called Tilray Medical is supporting a clinical trial in Spain that will test the use of cannabis as a treatment for glioblastoma, a form of brain cancer. The clinical trial will be carried out by the Spanish Research Group of Neuro-Oncology (GEINO) and the Complutense University of Madrid. Tilray Medical will supply the pharmaceutical-grade medical cannabis for the trial.

The Phase I trial will evaluate the safety of Tilray Medical’s extract used in conjunction with temozolomide and radiotherapy for Glioblastoma patients.

“Biological evidence has been accumulating for more than 15 years that cannabinoids have anti-tumor activity in the most aggressive brain tumors, glioblastomas,” says GEINO’s Juan Sepulveda. “However, no clinical trials have been conducted to prove this hypothesis in patients. With this clinical trial, we can finally study the effect of cannabinoids on tumors that have not received active treatment.”

Verano (VRNOF)

Verano (VRNOF) opened a Zen Leaf dispensary in Hartford, Connecticut on October 12. This is the company’s second social equity joint venture in Connecticut and its fourth cannabis dispensary in the state.

The company’s shares got uplisted to Canada’s NEO Exchange on October 18 under the ticker symbol VRNO.

Canna Plus portfolio news

This portfolio consists of cannabis-related companies that do not touch the plant, where insiders have been buying shares.

Cerevel Therapeutics (CERE)

This biotech company just saw huge smart-money buying in a recent financing round. In the capital raise, Bain Capital bought $125 million worth of stock, and Perceptive Advisors bought $20 million. I follow the activities of these two investment shops closely, because they have a good record in biotech.

To put the Bain size in perspective, biotech fund participation in capital raises typically peaks at the amount that Perceptive bought, or $20 million.

I suggest Cerevel as a Canna Plus portfolio name because it is developing a therapy for schizophrenia. Studies consistently show that cannabis use contributes to schizophrenia in some people, probably because they have a genetic predisposition to the disorder.

Irons in the fire and potential catalysts

Cerevel has a lot of irons in the fire, in the realm of therapies for neurological disorders. The big therapy in development here is emraclidine, the potential schizophrenia treatment. A study here (called Empower) is expected to read out in the second half of 2024. The company recently pushed back the timeline because of enrollment delays. Part of the issue here is the company wants to screen candidates to reduce the number of people who it deems susceptible to the placebo effect.

Cerevel is also doing a Phase I study of emraclidine for use against Alzheimer’s disease psychosis. It has fast track status from the FDA, a positive. It does not yet offer a data readout timeline.

It is studying darigabat for epilepsy and panic disorder. Both are in Phase II development. The epilepsy trial, called Realize, should read out in mid-2024. The Adapt trial in panic disorder was recently initiated and the company does not offer a readout timeline.

Cerevel is studying tavapadon for use against Parkinson’s disease. This is in Phase III trials. Various trials here (there are four of them, Called Tempo-1 through Tempo-4) should read out in the first and second half of 2024.

The company is studying CVL-871 for dementia related apathy. This one is in Phase IIa trials. The readout timeline is under review because of enrollment snags.

Cerevel also has several early clinical pipeline and discovery programs in the works for use against major depressive disorder, substance use disorder and neuroinflammatory disorders, among others.

One issue here is that catalysts are reasonably far off, in the middle and second half of 2024. However, partial data releases along the way can move biotech stocks. And if extremely negative sentiment towards biotech stocks turns more favorable, Cerevel is the kind of name that would benefit. It has funding now well into 2025 ($825 million in cash before the recent capital raise), and it would raise more capital next year if the catalysts actually do move the stock up.

One tactic here might be to use covered calls to generate income. With covered calls, you own 100 shares of a stock and then sell one call against the position for income (one stock option represents 100 shares), with the hope that the call expires worthless. Generally, focus on strikes fairly close to the current stock price to keep premia high, and with nearby month expirations to keep them on a tight leash.

An example: The calls with a $25 strike price and a November 17 expiration, which recently sold for 50 cents.

Then when the call expires, you do it again. (You can use multiples of 100 shares and calls, depending on account size.) A risk here is that the stock moves up 50% in a day on a catalyst, and you miss out on the quick upside because you sold calls.

Sector performance

Our main cannabis portfolio continues to outperform The New Cannabis Ventures Global Cannabis Stock Index, now by 3 percentage points. Year to date, as of the close October 24, our portfolio was down 19% vs. a 22% decline in the index. We achieved this outperformance in the sector drawdown despite continuing to have leverage in the portfolio, which amplifies upside and downside against the unlevered index.

Our portfolio is leveraged because of the large position in AdvisorShares MSOS 2X Daily (MSOX). It is a top-five position. This makes the portfolio swing around a lot. I think the volatility is worth it, in exchange for the opportunity to capture more upside over the next year as we see progress on rescheduling cannabis, progress towards approval of recreational use in more large states like Ohio and Florida, and possible passage of cannabis-friendly banking reform at the federal level.

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 one of our other ETFs. 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.

The Cannabis Plus Insider Portfolio is down 0.45%. But it is well positioned to outperform because our cannabis investment companies Chicago Atlantic Real Estate Finance (REFI) and AFC Gamma (AFCG) pay attractive yields of 13.1% and 17.9%, and the dividends were confirmed in mid-September even though they look suspiciously high. And Cerevel Therapeutics (CERE) has several potentially bullish catalysts in the form of important data readouts in 2024.

Portfolio prices are as of the close, October 24.

Portfolio

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 $60 million in cash and $626 million in net debt. This debt overhang is one reason why Ayr trades at 0.24 times sales. The company says it will be cash flow positive for the year in 2023. 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 0.6. 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 I 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 $840 million in cash, or about $2.21 per share, against minimal debt of $3.2 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 0.62 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 1.82. 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 a 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 (WEED), 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 2.15. 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 increased 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, owning 19.4% of the company, an endorsement of its potential. The two companies collaborate to develop cannabis products. The price to sales ratio is 0.75. 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. Once Germany legalizes, other countries will follow suit, probably using Germany’s regulatory framework as a blueprint on how to proceed.

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 1.92. 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 $188 million in cash against $1 billion 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 0.73. 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 thirteen 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 roll out 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 $102 million against debt of $508 million.

Verano is founder run, which can be a plus in investing. Verano has a price to sales ratio of 1.52. BUY

The next Cabot Cannabis Investor Issue will be published on November 29, 2023.