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Nick Gastevich, aka CannaVestments, helps retail investors navigate the cannabis industry; companies that protect shareholders (0:55). 5 stocks: Green Thumb, Trulieve, Curaleaf, Glass House and Jushi – what’s working, what’s not (5:00). This is an abridged conversation from Seeking Alpha’s recent Cannabis Investing Podcast.
Transcript
Rena Sherbill: Nick Gastevich, CannaVestments on Twitter, on Seeking Alpha, in the land of the internet, always happy to talk to you.
There’s always a lot of talk about the financial sort of machinations of cannabis companies and what they’re forced to do and what some of them do very much on their own. But how retail investors tend to navigate that and it’s oft times very difficult for the average retail investors to navigate the cannabis industry.
A, who do you think is best at, or some of the best at, I guess, being kind to shareholders in terms of how they go about all the things that management has to do in terms of keeping shareholders happy, not just the bottom line of price which is out of their control, but in terms of dilution and things of that nature.
Who do you think is the best kind of steward of capital from a shareholder perspective? And then also, I mean I know it’s a bit broad, but what are some of the ways that retail investors can protect themselves from the sector?
Nick Gastevich: Probably like two main aspects of that, in terms of protecting shareholder capital. I would say, one is looking at just dilutive factors and which mostly relates to balance sheet quality from my perspective, as well as profitability.
I was actually looking at just some statistics on some of the bigger Tier 1 and Tier 2 names in terms of how their share accounts have grown over the past two years, and how that exists like relative to their revenue growth profile because if you’re a company and you grew revenue 100% as an example, but your share account jumped by 200%, you can certainly question whether that growth was worthwhile as a shareholder?
So, identifying companies who don’t need to dilute the shareholder base in order to grow, I think is one characteristic I frequently look for. And from what I saw, amongst some of the bigger names like GTI (OTCQX:GTBIF) as an example, their share counts in terms of fully diluted in the money share count only grew about, by about like 1% since the end of 2021 until this most recent quarter, and in that time they grew revenue by 13%. So that’s a very good generation of revenue.
It might not be like the top generation of revenue growth, but they did it off a very stable base of total shares outstanding. And that’s one factor that I certainly look at.
And then the other kind of caveat to, I would say like being a happy shareholder and what companies can do is probably just transparency and connecting with shareholders.
And I think you can point to a company like TerrAscend (OTCQX:TSNDF), who has a very visible CEO or Chairman, and Jason Wild who frequently connects with his investor community and he’s buying shares himself. I think all of that – things like that certainly point to a good connection with the shareholder base and something you should look for as investors.
But other forms of transparency, I’ll give credit to Verano (OTCQX:VRNOF). In their most recent Q3 call, they released a new subset of, kind of data in the press release, where they broke down all of their sales by state, which I think there’s other than maybe Goodness Growth (OTCQX:GDNSF) who’s quite a bit smaller and there’s probably a few others.
I don’t see many companies giving that level of detail on a state-by-state basis. And as an investor, I really appreciate getting that detail and being able to see how is this company doing in every single market quarter-by-quarter? And it really allows you to kind of have insight into the company more than you would otherwise.
RS: I just heard Zach Lowe on his podcast. I don’t know if you’re an NBA fan, but he went through with another NBA analyst just a bunch of teams, and they said nice things and not nice things.
I wanted to do the same thing with you with a few names. Can we do that?
NG: Yeah, yeah, absolutely.
RS: All right, awesome. So, one nice thing and one less nice thing. Let’s start with Green Thumb, everybody’s favorite MSO.
NG: Sure. Yeah, I think I’ve mentioned this before. I mean, I think the nice things are fairly obvious and it’s the reasons why I think it’s a favorite of many and it’s the largest position in MSOS is just the financial discipline and strategic market allocation. They’ve been generating quite a bit of cash flow since 2021 and have only ramped that up going into 2022 and then now in 2023.
And then in terms of market choice, they’ve just been very strategic. They haven’t had to pull out of any states like some of their peers have because they’ve been very methodical and have chosen states carefully and seemingly don’t overbuild like others have.
If I’m going to give a negative. Like others, I think their IR department can continue to be a little bit more transparent. I think in a lot of their calls, they hold things very tightly to the chest and they don’t give out what their capacity sizes is in various states and you kind of really have to ask very specific questions on these calls to get any sort of forecast looking out.
So, I would say that continues to be an area that they need to improve on. But it seems like the one they continue to kind of get away with by just having good financial performance.
RS: Do you think they’re going to end up like Netflix (NFLX), which just released their numbers, which everybody has been begging them to do for years. Do you think Green Thumb eventually kind of releases the numbers and gets more transparent? Do you think that that eventually down the line kind of comes back to bite them in some way, or too soon to tell?
NG: Yeah, probably too soon to tell. Like I would think if this industry continues to head towards normalization and we eventually get up-listed and institutional money come in, that might just be something that institutional money pushes for and eventually gets the company to be a little bit more transparent about.
You would think they would want that, as large investors put it, writing fairly large checks. I think that is an evolution that likely would take place and it would be fairly normal to see.
RS: Yeah. All right, next, Trulieve (OTCQX:TCNNF).
NG: Like I mentioned before, credit to them for kind of getting the costs, and check and even leaving a state like Massachusetts, like it definitely is kind of negative from a headline basis. It’s an indication that they weren’t able to compete in a slightly more competitive market.
And that does say something, but I also think it was like, also somewhat prudent to kind of admit like, hey, we’re not generating profits here, like, let’s take a step back and focus elsewhere.
And to their credit, it does seem like they’ve done a good job on the application basis as well. They won that license in Georgia. We just saw yesterday, or two days ago, the Alabama Medical Program issued licenses, not — this is the third time they’re doing so because there’s constant lawsuits, but Trulieve did win a vertical license there, we’ll see if this licensing regime holds, but they have done a good job of that.
On the negative side, what I mentioned about the headline, top-line revenue figure does certainly – it is something to look at. They’ve seen revenue drop by close to 40-something million. And at the same time have added 35, 40 stores across the platform. So, I do think there is some level of issue just when it comes to growth, but like others, if Florida does flip to rec or they see a state like Pennsylvania, where they’re quite large, flip to rec as well, I think that growth potential reignites overnight and they certainly have opportunity there.
RS: Alright. Curaleaf (OTCPK:CURLF)?
NG: Yeah. I mean Curaleaf is, I think kind of like a figurehead name of just the evolutions of the cannabis market. They’re obviously the ones who, I would say, were growth at all costs and definitely took advantage of the opportunities that afforded them and got into good markets.
If you look at like in Arizona, where they went big on the retail side, it’s a good market to have retail in. And kind of every, essentially every major market that flips to adult-use, whether it was, Maryland in July or most recently in New York, they seem to always have exposure.
And that’s a good aspect of the growth at all cost opportunity, but on the opposite end, they obviously face the realities of, I would say, spreading a little bit too thin and being a little bit too aggressive and having to put money into four markets that you later pulled out of is obviously a red flag to some extent just in terms of capital allocation.
If you look at like, look at the Los Sueños Colorado deal, which was like a large outdoor grow in Colorado that they acquired via an M&A in — it was 2021. And here we are two years later and they’ve exited the state fully. That obviously isn’t a good return on investment as a company, or for shareholders.
So I think they’re similar to Trulieve with exiting Massachusetts. They’re making the tough decisions that I think are good to make, but it’s also a reflection of management probably not making optimal decisions for the company and being a little too aggressive at the same time.
RS: Glass House (OTC:GLASF)?
NG: Definitely got to give Glass House a lot of credit. Similar to Grown Rogue (OTCPK:GRUSF) just being able to operate in a very tough market and now doing so at least close to profitably.
I think they know what they do well, and that’s growing greenhouse flower at scale at a very low cost. And they’ve capitalized on that opportunity certainly. And that was another name I was looking at, the cash flow figures and they’ve improved pretty significantly year-over-year, where they actually are cash flow positive this year. Some of that is due to kind of working capital adjustments, but they’re, you can kind of call them break even at worst.
So I think they’ve done a very good job of that, little hiccup in their forecast for Q4. They mentioned some non-optimal grow conditions that led to lower yields and I think that’s just a reality you’ll face with greenhouse growing. But in a market where there’s just a ton of struggling operators, you’ve got to give them credit for putting out good margins and doing what they do best.
From a negative side, I definitely don’t like the preferred raise that they have done as of late. It’s the interest rate that’s charge is just egregious. And it really puts the common shareholder in a tough spot in terms of those preferred shareholders getting paid out a very healthy dividend. I think it’s like 15% cash, and then another 5% or 10% in kind.
So definitely a tough structure there, although somewhat a reality of just a tough capital raising environment. But overall, I think it’s a good team operating in a tough market and seemingly doing it fairly well.
RS: I was going to ask about that, the last issue that you mentioned about the preferred shares. You just maybe alluded to it or said it out loud, but is it just kind of the nature of the beast at this point or do you think that that could have been handled differently or should have been handled differently?
NG: Yeah, it’s tough to say. I thought from – they did start the raise when their numbers were still developing. It’s very much a story that has changed quarter-over-quarter with their growth rate. It’s been pretty impressive. And maybe at the time when they just went to market, there just wasn’t that appetite for a better deal.
But it does seem pretty like surprisingly bad for a company that’s seemingly on a good trajectory in terms of just like how painful that interest rate they’re charging is, that I expect them to be able to get something better on the market. But like you said, I think it could just be the reality of trying to raise capital for a California operation after so many people out there have been burned over the years.
RS: Right. Also, I’ve seen examples where they’ve hit a really nice capital raise in the past. So, I think it surprised a lot of people. Yeah, curious to know I mean, look, it’s obvious that it’s super hard to operate and California is no picnic for sure.
Okay. Jushi (OTCQX:JUSHF).
NG: Yeah, Jushi is an interesting name and I think it’s kind of unique in where they’re concentrated in, the markets they’re heavy in. I think like some of the other Tier 2s, I think they took on a little bit too much debt and kind of sale and lease back for my liking where they really haven’t been able to inflict towards any sort of serious cash flow generation. They’re still tax adjusted quite a bit in the negative so far in 2023, but I think they have some interesting growth opportunities ahead.
It’s just kind of timing wise difficult to see when that inflection point happens. I mean, most obviously they have a big footprint in Pennsylvania. And that’s a market where the legislature has been split party wise, and it’s been tough to get something across the line in terms of an adult-use framework, but that state is completely surrounded by adult-use states now. So, there’s more impetus than ever for them to do something.
And then separately you look at Virginia, where they have one of the four operating licenses in the state, well known to be what they think of as kind of the most populous and densely concentrated area. So, arguably a really good part of the state. But I think they kind of just were an unfortunate bystander in again the politics that happened in that state where an adult-use bill was formed or, an adult use initiative was passed I think it was in 2021. And then the Republican governor came in there and kind of kiboshed the whole, actually upstanding the market into a licensed framework.
So, unfortunately for them, the two biggest states that they’re in have that growth potential ahead. But it kind of seems like a 2025 story like at the very earliest.
And given that and given their lack of cash flow generation and somewhat thin balance sheet, I do worry if they’ll have a need to raise some sort of capital. Definitely I wouldn’t want them to raise more debt or add more sale and lease back, but obviously raising equity would be tough in this market. So that is a name I would be slightly concerned about, at least in the interim.
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