Cabot Cannabis Investor Issue: September 25, 2024

Cannabis investors remain in a depressed state, despite several potentially bullish developments that could move stocks in the sector up significantly over the next year.

* One of the biggest bullish factors is that both presidential candidates openly support significant federal and state cannabis reform. This is probably because polls show the majority of voters in key battleground states like Michigan, Pennsylvania, Wisconsin, Arizona and Nevada favor reform, including legalization of recreational-use sales.

* Voters in Florida seem increasingly likely to approve a November referendum that would legalize recreational use in the state, especially now that presidential candidate Donald Trump supports the initiative. Trump is a Florida resident. The betting site Polymarket suggests 83% odds of approval. Betting sites are often good indicators of election outcomes. You can track the Florida betting market odds here.

* Cannabis companies in states around the country continue to post record sales, a market signal that people increasingly accept cannabis. Politicians are noticing the trend, which encourages them to promote favorable reform to garner both votes and tax revenue.

* In a little-noticed key development behind the scenes, the Drug Enforcement Agency (DEA) recently acknowledged a new test proposed by the administration, which makes rescheduling much more likely. Rescheduling would be a big catalyst for cannabis stocks because it would increase cannabis company cash flow and earnings meaningfully. I get into more detail on this geeky development, below.

* Sen. Elizabeth Warren (D-MA) and other legislators recently suggested Congress may take up SAFE banking reform in the lame-duck session after the election. The reform would allow banks to serve cannabis companies so they no longer have to be cash-only businesses. Approval or even signs of progress would be a group catalyst, though it is tough to put odds on this development.

What to Do Now

The best time to buy stocks is when they are widely hated, but plausible catalysts lie on the horizon. That is clearly the case with cannabis stocks now. But this is also the hardest time to buy stocks. That resistance may also be a signal to buy. As a general rule, some of your best stock purchase decisions will be the ones that are the hardest to make.

Consider taking both trading positions and multiyear positions in portfolio names now, or averaging down. I am personally averaging down in the current weakness.

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.

Note that our Trulieve will be the biggest beneficiary of a positive Florida vote on legalizing rec-use sales, which seems increasingly likely. Other portfolio names that would benefit the most are Ayr Wellness, Cresco, Curaleaf and Verano, because of their large and growing presence in the Sunshine State.

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 institutional investors will not ignore cannabis stocks 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.

* In a key development for investors, the Drug Enforcement Administration (DEA) recently acknowledged the validity of a new checklist for cannabis rescheduling, which would be a game changer for companies in the sector. The new checklist makes rescheduling much easier to do.

To bring you up to speed, the background here is that for a drug to move to Schedule III from Schedule I under the Controlled Substances Act (CSA), it must have some currently accepted medical use (CAMU).

When the Department of Health and Human Services (HHS) proposed rescheduling cannabis earlier this year, it created a new, two-part test to demonstrate the CAMU needed to get cannabis into Schedule III.

The proposed two-part test considers whether there is widespread acceptance of the benefits of a drug in the medical field and whether there is at least some evidence supporting medicinal benefits. For geeks (like me), I offer more detail on the language in this rule, below.

The key takeaway is that this is a much lower hurdle than the previous five-part test which, among other things, set stricter guidelines for medical studies supporting conclusions about a drug’s effectiveness.

The easier, two-part test makes rescheduling cannabis to Schedule III far more likely. That would be a big catalyst for cannabis stocks. Rescheduling cannabis down to Schedule III would be a big deal because that would neutralize an IRS rule (called 280E) which effectively wipes out company cash flow and profits by prohibiting the deduction of operating expenses against income from the sale of Schedule I drugs.

The DEA’s nod of approval of the new two-part test came in a footnote to a decision placing some synthetic opioid drugs in Schedule I of the Controlled Substances Act (CSA).

The DEA’s acknowledgment of the easier two-part test isn’t really too much of a surprise. That’s because earlier this year the Office of Legal Counsel (OLC) inside the Department of Justice (DOJ) ruled that the prior five-part test was too narrow. The OLC concluded the easier two-part test “is sufficient to establish that a drug has CAMU even if the drug has not been approved by FDA and would not satisfy DEA’s five-part test.”

The DEA has scheduled an internal, administrative law judge hearing on rescheduling, to begin December 2. There’s no telling how long that hearing may last. But President Joe Biden has expressed a strong interest in rescheduling. That may encourage the DEA to keep the hearing brief.

Here is the detailed language for the new, two-part test to demonstrate currently accepted medical use. First, there has to be “widespread, current experience with medical use of the substance by licensed health care providers operating in accordance with implemented jurisdiction-authorized programs, where medical use is recognized by entities that regulate the practice of medicine.” Second, there has to be “some credible scientific support” for use of a drug to treat medical conditions. The old five-part test set much higher standards for medical research.

* Newly surfaced taped conversations of Richard Nixon show that the former president, who was a chief architect of stringent federal laws against cannabis use, privately had doubts about the policy. On the tape, Nixon admitted that he did not believe that cannabis was “particularly dangerous,” and he questioned “ridiculous” penalties for possession.

* Another poll shows that the majority of voters in swing states favor cannabis reform. The poll found that a majority of voters in Arizona and Nevada favor recreational and medical use, as well as reform that would allow banks to serve cannabis companies. The poll, conducted by The Tarrance Group and paid for by Scotts Miracle-Gro (SMG) found that only around 20% of voters think cannabis should be a Schedule I drug under the Controlled Substances Act (CSA). A previous Tarrance Group poll showed similar results among voters in the key battleground states of Michigan, Pennsylvania and Wisconsin. These polls probably explain why both candidates for president now openly support cannabis reform, a bullish development for cannabis stocks.

* States keep posting record cannabis sales, a clear market signal that cannabis continues to be more broadly accepted. This trend will continue to pressure politicians to enact favorable reform, a positive for cannabis companies.

Let’s start with Michigan because its ongoing sales growth does not appear to have been dented by the legalization of recreational-use sales in neighboring Ohio in August.

Despite the potential for a loss of “cannabis tourist”: customers from Ohio, Michigan cannabis stores sold a record $295.4 million in sales in August,
confirming widespread popularity of the drug in the Midwest.

That was $6.6 million higher than the prior record in March. State residents bought more than $294.1 million in recreational-use cannabis and around $1.3 million in medical product. Michigan is a key swing state, and both presidential candidates support significant cannabis reform, probably in part as a play for crucial swing state votes. Extrapolating sales trends, Michigan could hit $3.32 billion in cannabis sales this year, which would be an 8.6% increase over the $3.06 billion in 2023 sales.

For context, California is on track to hit $4.75 billion in sales this year, even though it has nearly four times the population of Michigan. Michigan’s annual cannabis sales come in at $330 per capita compared to $120 per capita in California. Michigan has 8.7 stores per 100,000 people, while in California the count comes in at 3.2 stores per 100,000 people. Michigan also has a 16% tax on cannabis sales compared to 35%-45% tax in California.

Beyond Michigan, several other states posted record or near-record sales. Illinois cannabis companies sold $147.4 million worth of product in August, the third-highest monthly sales total. Missouri posted $126.15 million in sales in August, the second-highest month ever. It saw record rec-use sales of $110 million. Maryland saw a record $100.62 million of cannabis sales in August. Connecticut posted a new monthly cannabis sales record in August, of $25.6 million. Maine cannabis sales in August reached $23.95 million, beating the prior record of $22.91 million in July. New York saw $97.8 million in August sales, surpassing the prior monthly record of $74.1 million in June. New York reported $429.9 million in revenue for the year by the end of August, and it is on track to sell $1 billion worth this year, a top state regulator said.

* Nebraska has given the green light to two medical cannabis referenda which will now go on the November ballot.

However, the initiatives are being challenged in court by the state attorney (AG) and a former state senator.

AG Mike Hilgers has charged a signature collector with fraud, alleging he falsified thousands of signatures. Former state Sen. John Kuehn (R) has filed a lawsuit claiming The Nebraskans for Medical Marijuana (NMM) signature drive violated state law.

NMM says it is confident it “satisfied all legal requirements and gathered the required signatures to qualify for placement on the November ballot.”

One of the referenda would legalize medical cannabis and require lawmakers to clarify legal protections for patients and their doctors. The other would create a Nebraska Medical Cannabis Commission to help regulate medical cannabis vendors.

* A majority of people in Arkansas support a referendum that would significantly broaden out the state’s medical cannabis program. The initiative would expand the list of people who could make recommendations to nurse practitioners, physician’s assistants, pharmacists and osteopathic doctors. They could recommend cannabis for whatever ailment they choose. Patients would be allowed to grow their own supply, and they’d only have to renew cannabis cards every three years, instead of once a year.

A Hendrix College poll found that 54% of potential voters support the referendum, 35.5% are opposed and 10.5% percent are undecided. The initiative is especially popular among youth, voters with college degrees, and voters of color. If it is approved, the referendum will face legal challenges.

* Cannabis use by older people in the U.S. has nearly doubled in the last three years, according to a University of Michigan study supported by AARP. Over 20% of respondents said they used cannabis at least once in the past year, and 10% said they use cannabis at least monthly. Respondents in the study said they use cannabis to relieve pain and help with sleep, and because they enjoy it. The study was published in the journal Drugs and Aging.

* States have collected more than $8.7 billion in cannabis tax revenue since mid-2021, says the U.S. Census Bureau. California took in the most, or more than $2 billion in taxes, followed by Washington at $1.3 billion, Colorado at $898 million and Michigan at $698 million. The actual tax take total is higher because several states including Nevada, Maryland, New Mexico and New Jersey had not yet reported their most recent quarterly data.

* Around 70% of North Carolinians think medical cannabis should be legal. About 16% are opposed and 14% are not sure, according to a WRAL News poll. The poll found “overwhelming support” among every demographic group, said WRAL. Even a majority of voters who identify as very conservative, and voters over 65, favor medical cannabis legalization. Those are two groups often less favorable towards cannabis reform.

* Pennsylvania continues to look like one of the next big states to legalize recreational-use sales. Pennsylvania state representatives recently filed a bill to legalize recreational-use cannabis. Republican Representative Aaron Kaufer and Democrat Emily Kinkead filed the bill on September 13. A similar bill has been introduced in the Senate. Pennsylvania has legalized medical cannabis. Stores have sold more than $6.5 billion worth of medical cannabis since sales launched in February 2018. Pennsylvania is surrounded by states that have legalized rec-use sales. It presumably gives up a lot of tax revenue to neighboring states. Pennsylvania Gov. Josh Shapiro (D) supports legalization of recreational-use cannabis.

* A recent study found that legalization of cannabis may significantly reduce health insurance costs. The study found that in states with legal medical cannabis, companies spent 3.4% less on health insurance premiums compared to states where cannabis was illegal. That was a savings of about $238 per employee per year. Extrapolating out to a scenario in which all states legalized medical cannabis, the reform could save the country $29 billion a year in health insurance costs. The study was done by a medical cannabis company called Leafwell. One possible explanation could be that the use of opioids and other pain medication with harmful side effects declines after medical cannabis becomes legal. The study was published in the journal Applied Health Economics and Health Policy. It used data from annual surveys of employers conducted from 2003 to 2022.

* A U.S. Senate committee has approved a bill that would limit the federal government from considering cannabis use in hiring and security clearance decisions. The bill is called the Dismantling Outdated Obstacles and Barriers to Individual Employment, or DOOBIE, Act, a play on a slang word for cannabis cigarettes.

“The federal government must adapt its hiring practices to reflect the evolving legal and social landscape of our nation,” said Sen. Gary Peters (D-MI), who introduced the bill. “This approach will expand our talent pool and create a fairer, more inclusive hiring process.” The Department of Defense (DOD) says cannabis is the most common substance found in drug tests on people who are on active duty.

* Police confiscated $10 million worth of cannabis in a Queens bust in September. The arrest is part of an ongoing crackdown on illicit operators which cannabis companies say is needed for them to be able to operate in the state.

* A recent study concluded that using cannabis for a year does not affect working memory or the executive function of the frontal cortex, which manages behavior like impulse control. The study used functional magnetic resonance imaging (fMRI) to monitor the brains of 57 participants while they carried out mental tasks. Their brains were scanned after a year of medical cannabis use to look for differences.

“Our results suggest that adults who use cannabis, generally with light to moderate use patterns, for symptoms of pain, anxiety, depression, or poor sleep, experience few significant long-term neural associations in these areas of cognition,” says the study.

The research was carried out by a team from Harvard Medical School, MIT’s McGovern Institute for Brain Research and the University of Pennsylvania School of Engineering and Applied Science. It is part of an effort to understand the health risks from using medical cannabis. The study was published by the American Medical Association. It was funded by the National Institute on Drug Abuse (NIDA) and published in the journal JAMA Network Open.

* State-level cannabis legalization continues to be at odds with federal policy, but a Georgia pharmacy is taking it to a new level. It is challenging a Drug Enforcement Administration (DEA) ban on pharmacies selling medical cannabis. The state’s medical cannabis program seems to allow mainstream pharmacies to sell medicinal cannabis, which is unusual. But the DEA has cautioned them not to. The DEA says pharmacies “may only dispense controlled substances in Schedules II-V of the Controlled Substances Act.”

Company News

AYR Wellness (AYRWF)

AYR Wellness recently announced that CEO David Goubert has resigned. AYR’s board appointed Steven Cohen as interim CEO. He previously served as outside legal advisor.

Cresco Labs (CRLBF)

Cresco Labs recently announced that chief financial officer Dennis Olis will retire. Cresco has appointed former BJ’s Wholesale Club (BJ) executive Sharon Schuler to replace Olis. She also brings experience in finance at TJX (TJX).

Green Thumb Industries (GTBIF)

Blue-chip cannabis company Green Thumb recently opened a store in Jacksonville, Fla., its 20th store in the state. It has 98 stores nationwide. The move is part of a strategy of expanding its presence in a state that will probably launch recreational-use sales in 2025. Florida already allows medical-use sales. Voters in November will decide on allowing legal rec-use sales which would be permitted under a referendum called Amendment 3.

Green Thumb in September also refinanced debt in September by landing a $150 million five-year credit facility which carries a 5% interest rate. The company will use the proceeds to retire $225 million in senior secured debt which would have expired in 2025.

The syndicated credit facility is managed by Valley National Bank, a subsidiary of Valley National Bancorp (VLY), a long-standing Green Thumb financer. Founder and CEO Ben Kovler said the company’s capital discipline and cash flow supported the transaction. “This new capital funding further strengthens our already clean balance sheet for another five years. We plan to double down on our efforts to build brands that Americans love.” He said the company is open to considering strategic M&A.

Green Thumb also announced a $50 million share repurchase plan in September. Green Thumb repurchased 6.5 million shares for $73.3 million under its previous share buyback plan which expired September 10. “We continue to believe in the value-creating nature of share buybacks done at attractive prices,” said CEO Kovler.

Tilray Brands (TLRY)

Tilray Medical, a division of Tilray, has launched its medical-use cannabis brand Redecan in Australia. The move is part of a broader strategy in the cannabis sector of increasing exposure to European markets. Companies hope to take advantage of the growing momentum in cannabis reform on the continent.

Trulieve Cannabis (TCNNF)

Trulieve is opening yet another two stores in Florida in New Pasco County and Lake Worth in Palm Beach County. The move is part of a strategy of expanding its presence in a state that will probably soon launch recreational-use sales. Florida already allows medical-use sales. Voters in November will decide on allowing legal rec-use sales which would be permitted under a referendum called Amendment 3.

Trulieve is the cleanest investment play on approval of the rec-use initiative, which seems increasingly likely given the recent endorsement by presidential candidate Donald Trump, a resident of the state. About two-thirds of Trulieve’s stores are in Florida, and it is the biggest cannabis company in the state. It has poured tens of millions of dollars into ad campaigns in support of the rec-use initiative.

Verano Holdings (VRNOF)

Verano is opening two new MÜV stores in Florida, in Melbourne and Okeechobee. The company is positioning ahead of potential approval of rec-use sales by voters in a November ballot. The opening takes its Florida store count to 79, out of a total of 152 stores in fourteen states.

Cannabis Plus Insider Portfolio News

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

AFC Gamma (AFCG)

Our cannabis lending company AFC Gamma announced it will pay a third-quarter dividend of 33 cents per share, which suggests an annual yield of 12.4%.

Chicago Atlantic Real Estate Finance (REFI)

Our cannabis lending company Chicago Atlantic Real Estate Finance declared a third-quarter dividend of 47 cents per share. This suggests an annual yield of 11.4%.

Sector Performance

Our Cabot Cannabis Plus Insider Portfolio is doing very well. But our main Cabot Cannabis Investor portfolio is not, though it has recovered significantly from a month ago.

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 down 4.5% this year as of the September 24 close compared to a decline of 15.5% a month ago. The 4.5% decline was below the 8.2% 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.

When we get a significant sector rally, 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 faring much better. It is up 63% since I launched it on March 29, 2023. That’s nearly three times the 25.5% 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 11.4% and 12.4%. The dividends were recently confirmed even though they look suspiciously high.

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 recently reported reported $71 million in cash and $607 million in net debt. This debt overhang is one reason why Ayr trades at 0.35 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 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 0.78. 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 0.78 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 1.68. 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. Note that leveraged ETFs suffer from some persistent valuation decay because of the cost of the leverage. 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 chain of 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 2.28. 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 1.22. 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 1.65. 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 1.95. 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 1.3. BUY

The next Cabot Cannabis Investor Issue will be published on October 30, 2024.

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