It’s cannabis company earnings season. So, I highlight fourth-quarter results in this issue.
Before we get to the details, here are the key takeaways from earnings reports:
* Price compression continues, creating an ongoing “Hunger Games” environment in which only the financially strong will survive, given the debt levels at a lot of cannabis companies. Much of this debt comes due over the next two years. Bankruptcies might be the clearing event that helps bring an end to price compression. None of our names appear to be at risk, but no guarantees.
* Hemp-based THC drinks, effectively legal, are increasingly popular. The drinks will probably get the green light in the upcoming Farm Bill renewal. Though other types of hemp-based products may get the boot.
*Cannabis company CEOs remain hopeful that President Donald Trump will follow through on promises to reschedule cannabis. Any sign of progress here will be a significant group catalyst. The change would create a huge tax windfall for companies.
* Consumer cannabis demand continues to be very strong as alcohol use tapers off.
As an aside, I’ll note that the overall market looks particularly buyable here for three reasons.
*Sentiment has hit an extreme negative (a positive contrarian signal);
* Corporate insiders overall were recently buying their company stocks in a big way in the weakness;
* The top economists I follow are not predicting a recession (Ed Yardeni of Yardeni Research, Jim Paulsen of Paulsen Perspectives on Substack, and Jan Hatzius at Goldman Sachs).
This is relevant to cannabis stocks since they may benefit if investors overall return to risk-on mode, which I believe will be the case in the near term.
What to Do Now
Continue to hold. Average down if you can. The best time to buy stocks is when they are widely hated, but plausible catalysts lie on the horizon. That is 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.
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 the leveraged version MSOX, and MJ.
Note that Green Thumb is the highest-quality name in the group and that Cronos looks particularly attractive because its market cap is below cash levels, yet it has been posting solid sales growth.
In this wait-and-see environment, I also like the income-producing names in our Cabot Cannabis Plus Insider Portfolio. It has outperformed nicely since inception.
The portfolio is also positioned to outperform because portfolio names AFC Gamma (AFCG), Chicago Atlantic Real Estate Finance (REFI) and Chicago Atlantic BDC (LIEN) pay yields in the 11%-16% range.
The dividends seem suspiciously high. Dividends that high often suggest trouble at a company. But they were all recently confirmed by the companies. They produce high yields because they lend to cannabis companies at high interest rates. We will also see capital appreciation in these names if sector catalysts hit, but not as much as in the main, plant-touching portfolio. This is why it makes sense to own a sampling of both.
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.
State News
* An Alabama Court of Civil Appeals recently shot down an attempt by the Montgomery County Circuit Court to block the Alabama Medical Cannabis Commission (AMCC) from issuing medical cannabis business licenses. The higher court overturned a temporary restraining order that had blocked a license for a medical cannabis company called Alabama Always.
“On behalf of the many long-suffering patients in Alabama who have waited far too long for access to the benefits of medical cannabis products, we are pleased with today’s decision,” AMCC Director John McMillan said. “We are hopeful that this decision will remove the obstacles that have prevented the Commission from completing the licensing process and doing the work the law charged it to do.”
Alabama approved medical cannabis in 2021.
* The Georgia State Senate recently approved a bill that loosens restrictions on the use of medical cannabis. Senate Bill 220, called the “Putting Georgia’s Patients First Act,” also shoots down a ban on vaping cannabis oil and raises the allowed amount of THC in medical cannabis to 50% from 5%.
* A Texas judge has denied a request from the state’s attorney general to temporarily suspend a Dallas cannabis decriminalization law approved by voters last year. A lawsuit by Attorney General Ken Paxton (R) to overturn the law is still working its way through the legal system.
International News
* Full legalization of cannabis in the U.K. could add £1.5 billion a year to the country’s coffers, says a new study. The amount includes £1 billion in tax revenue and £300 million in criminal justice system savings. Legalization would also create more than 15,500 jobs.
“Making cannabis illegal has been a generational failure, it has undermined public health, criminalized millions of people, wasted taxpayer money, and is increasingly unpopular with the public,” says Ester Kincová, one of the authors. “This Government needs to follow the sensible moves by countries across the world from Canada to Germany, and responsibly regulate and tax our cannabis market, rather than leave control, and profits, in the hands of organized crime groups.”
The study, sponsored by the Transform Drug Policy Foundation, is called “High Returns: The Economic Benefits of UK Cannabis Legalization.” It reached its conclusions by extrapolating trends in countries that have ended prohibition.
Medical News
* Cannabis can be an effective treatment for chronic pain, and its use for this indication may help reduce the use of other painkillers, according to a new study. It found that cannabis can be used to treat chronic neuropathic pain, cancer-induced neuropathic pain, and chronic headaches and migraines.
“The two most abundant and studied cannabinoids, THC and CBD, along with an understudied cannabinoid, cannabigerol (CBG), have been shown in our laboratories to reduce neuropathic pain in animal models,” says the study.
The study also concluded that using targeted cannabinoids to treat pain could help reduce the psychoactive effects of THC. The Penn State College of Medicine study was published in the Medical Cannabis and Cannabinoids journal.
* Regular use of cannabis by people who suffer chronic pain increases the odds that they will quit using opioids, says a new study. The study by the British Columbia Centre on Substance Abuse and the University of British Columbia and Simon Fraser University was published in the journal Drug and Alcohol Review.
* Cannabis can be a safe and effective treatment for pain, trouble sleeping and other age-related conditions in people over the age of 50, says a new study. The study was supported by Greenly Medical Consulting, the cannabis company Tilray (TLRY) and the University of Victoria. It was published late last month in the journal Cannabis.
Portfolio Company News
AYR Wellness (AYRWF)
AYR Wellness recently reported flat fourth-quarter sales year over year but significant losses of $1.40 per share. AYR projected a sequential mid-single-digit revenue decline in the first quarter.
Price compression continued to hurt sales growth.
In response, AYR is focusing on cost cutting and rationalizing its assets. It is selling assets in Illinois and considering adjustments in Massachusetts and Nevada, where price compression is particularly severe.
Interim CEO Steven Cohen offered some encouraging comments. “It’s clear that demand for cannabis continues to rise throughout the country, and Ayr transaction volumes reflect that,” he said. “The core thesis of cannabis as a consumer product remains stronger than ever. We remain confident that sustained growth and enhanced profitability are achievable within our footprint through disciplined cost reductions, streamlined operations, and improved execution.”
The company saw retail share gains in Pennsylvania. It continues to invest in a new plant in Florida. The company has 67 stores there, or 70% of its retail distribution. It is expanding in Ohio, a growth market because it just legalized rec-use sales last summer, and it is positioning for the potential legalization of sales in Virginia.
AYR continues to search for a new CEO.
AYR is more of a borderline company in the space. But I think it is worth having small positions in names like these, since if they survive, they can spring back significantly when bullish sector dynamics develop, like rescheduling.
Cresco (CRLBF)
Cresco recently announced it won a cannabis cultivation license in Kentucky. The state allows the medical use of cannabis.
Cronos Group (CRON)
Supported by the strength of its SOURZ by Spinach PEACE NATURALS, Cronos is posting impressive sales growth.
You wouldn’t know it, judging by its enterprise value, defined as market cap plus cash minus debt. Cronos trades for a negative enterprise value of about $120 million. Market cap of $737 million is exceeded by about that amount of cash given that it has around $856 in net cash. In short, buy the stock and you are getting the business for free, plus $120 million in cash.
It’s a good business, too, especially considering the dire straits of the cannabis sector.
Fourth-quarter sales grew 27% to $30.3 million, and that was not from acquisitions. The company saw good sales growth in Canada and Israel. Spinach is the number one brand in Canada, and PEACE NATURAL tops the charts in Israel. Its brands are also gaining traction in the U.K. and Germany. Cronos reported 11 cents a share in profits.
“Our unwavering commitment to innovation, quality, and disciplined cost management has solidified our leadership in the global cannabis industry,” said chairman and CEO Mike Gorenstein.
Because of its “groundbreaking advancements” in cannabis genetics, and international expansion, “Cronos is well-positioned to capitalize on future opportunities and drive long-term value for our shareholders,” said Gorenstein. “Cronos is not just leading today. We’re building the foundation for long-term excellence in the global cannabis industry.”
The company attributes its success in part to genetic research that helps it produce more desirable product. “Consumers are consistently shopping for a flower-value proposition based on a price-potency equation, and our genetics are helping us meet this demand, which has cemented us as a top-performing flower brand in Canada and internationally,” said Gorenstein.
Curaleaf Reports (CURLF)
Curaleaf recently reported fourth-quarter revenue of $331 million, a 4% decline compared to the year before. But there was a slight gain in sales, sequentially. The company posted losses of 10 cents a share.
“Despite an industry-wide average price compression of 14%, our diversified geographic footprint helped stabilize revenue versus 2023, demonstrating the resilience of our strategy,” commented CEO Boris Jordan.
Price compression was most pronounced in Curaleaf’s larger markets of Pennsylvania, Illinois and New Jersey. This hurt sales growth.
But the news was not all grim. “Cannabis demand remains healthy as seen by the rapid expansion of the hemp market and the persistence of the illicit market,” said Jordan.
For all of 2024, revenue was $1.34 billion, which was flat compared to 2023. Curaleaf produced 2024 operating cash flow from continuing operations of $163 million and free cash flow from continuing operations of $70 million. The company ended the fourth quarter with $107 million in cash.
The latest Curaleaf strategy is called “Return to our ROOTS.” It calls for stronger organic growth, better margins and cash flow, and reduced debt. “With this sharp focus, I am confident that Curaleaf will not only maintain but expand its leadership position,” said Jordan. “We will build on the strong organic growth seen in our international business, Ohio, and New York, while harnessing our innovation pipeline to elevate our product offerings. As we step into 2025, there are tremendous opportunities ahead for Curaleaf.”
Curaleaf reported notably strong foreign sales growth. International revenue was up 73% to $105.6 million. Curaleaf is in Germany’s emerging medical-use market and the U.K.
Jordan expects no change to Germany’s medical-use market following the recent elections. But he thinks the more conservative government now in place will slow down progress on legalization of recreational use.
Jordan sees Curaleaf growth coming mainly from New York, Ohio and Germany. Curaleaf is making a bet on hemp-derived THC seltzers in the U.S. It has rolled them out in over a hundred stores in nine states. “Hemp’s legal status has made cannabis more accessible and affordable, operating free from heavy burdens of regulations and taxation experienced in the regulated market,” he said.
He thinks hemp-based THC drinks will survive the upcoming Farm Bill renewal, but he’s not so sure about other hemp-based products like vapes. “The beverage side of the hemp bill looks as though it will likely be okay, largely because there are a tremendous number of players.”
Jordan also holds out hope for rescheduling reform under the administration of Donald Trump, who supported the reform in his campaign. “It seems as though he’s following through on most of his commitments. And I believe he’ll follow through on this one,” said Jordan.
Green Thumb Industries (GTBIF)
Green Thumb continues to outshine competitors in the space with its profitability and financial strength. It recently reported four cents a share in profits for the fourth quarter. Net income was $13 million.
The gains came on 6% sales growth. Revenue came in at $294.3 million, beating estimates. It ended the quarter with $172 million in cash against $255 million in debt. In a rare show of financial stability in the space, the company repurchased about 1.2 million shares for $9.6 million.
For all of 2024, sales grew 8% to $1.1 billion. Annual operating cash flow came in at $195 million, and this took into account $131 million in tax payments, much of which would go away if cannabis were ever rescheduled.
Note that the sales growth came from store openings, not from organic growth, which would be preferable. Fourth-quarter comparable sales (stores open at least 12 months) decreased 2.6% versus the prior year on a base of 84 stores.
Still, profits increased, and Green Thumb continues to have the financial strength to make it through this tough patch for the sector. Gross profit for the fourth quarter was $158.1 million or 53.7% of revenue, up from $142.7 million or 51.3% of revenue over the prior year period.
The CEO offered some encouraging sector commentary. “Demand for THC in America is at an all-time high, and Green Thumb is well-positioned to deliver on this opportunity,” said chairman and CEO Ben Kovler. “Alcohol consumption trends in America are not positive, as the surgeon general recently warned of the harms of alcohol and its link to cancer. In contrast, cannabis is enhancing the well-being of tens of millions across the nation. We are excited by the promising opportunity that lies ahead.”
In the earnings call, Green Thumb President Anthony Georgiadis highlighted successful partnerships with the Chicago music and entertainment venue The Salt Shed, New York’s Magnolia Bakery, and Barstool Sports.
Overall, the key takeaway is that Green Thumb is a survivor with the financial strength to take advantage of tough times for the sector. The company secured a $150 million syndicated bank loan, which allowed it to retire $225 million in senior secured debt due in April.
“Pricing pressures are real and expected to persist into 2025, but our balance sheet and cash flow give us the flexibility to play offense whether through capital spending, share repurchases, or strategic M&A,” said Kolver. “We’ve got the balance sheet to invest where others can’t. It’s a haves-and-have-nots game right now, and we’re focused on long-term returns, not just weathering the storm.”
Green Thumb also recently announced the opening of a RISE store in Nevada.
Organigram (OGI)
Organigram recently closed on the third tranche of financing from British American Tobacco (BTI). Organigram will get $87 million in funding. The financial support from BAT keeps Organigram off of the list of cannabis companies that risk bankruptcy.
Trulieve Cannabis (TCNNF)
Trulieve recently reported fourth-quarter revenue of $301 million, up 5% year over year. The company reported a net loss of $60 million but earnings of two cents a share after accounting adjustments. Both sales and earnings per share beat guidance. Gross margin came in at 62%, compared to 54% during the fourth quarter of 2023. The company reported record 2024 cash flow from operations of $271 million and free cash flow of $150 million.
Full-year 2024 sales were $1.2 billion, up 5% year over year. It reported losses for the year of $155 million. The company added 33 stores in 2024, increasing its retail footprint to 225 stores by year end.
Trulieve appointed co-founder Jason Pernell as president. It also appointed Ryan Blust as interim Chief Financial Officer while it searches for someone to serve as CFO on a regular basis.
Trulieve also recently announced the launch of a hemp-based THC drink called Onward.
Verano (VRNOF)
Verano recently reported $218 million in fourth-quarter revenue, an 8% decline compared to the year before. The decline was driven primarily by an increase in promotional activity and price compression in key markets. Sales were up 1% over the prior quarter.
The company reported earnings per share of four cents, which beat guidance. It posted net operating cash of $44 million.
For all of 2024, revenue was $879 million, a 6% decline year over year. Net losses for the year were $342 million. Net operating cash was $112 million.
Given the challenges in the sector, Verano will be in hunker-down mode this year. “We do not anticipate undertaking major capital spending projects in 2025,” said CEO George Archos in the earnings call. “Our investments will focus on strengthening our core business, implementing automation and efficiency projects, targeted retail refreshes, and a leaner pipeline of new store openings.”
Along these lines, Verano cut ties with a cannabis store in Arkansas and sold the real estate leased by the store for a profit.
However, Verano will open more stores this year in Connecticut, Ohio and Florida. It will also consider buyouts. “We will continue to selectively explore accretive M&A opportunities as we anticipate further industry consolidation in the future, given current market conditions that have challenged many operators,” said Archos.
The company expects competitive pressure in Maryland following approval of a large number of new licenses. But pricing pressure may ease elsewhere, said CFO Brett Summerer. “We don’t anticipate similar retail declines in Illinois and New Jersey in 2025 compared to last year, given that both states have experienced a decrease in new store openings as those markets continue to mature,” he said in the call.
Verano closed the quarter with $88 million in cash. It recently had over $520 million in debt.
That’s a lot of debt. But its lender recently took collateral holds off most of Verano’s real estate, which opens up opportunities for refinancing to lower the interest rate on its debt.
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