- Cannabis stocks are really cheap, but Alan Brochstein is worried about 3 things.
- Thoughts on Cresco/Columbia Care deal.
- Sector debt and optimal cannabis investing metrics. Canadian and US operators.
- Concerns around MSOS; limitations of ETFs.
Alan Brochstein: Thanks for having me again. I always love it. And Seeking Alpha is very important to me nowadays. It was always important. It’s more important now.
RS: Well, it’s great to hear. We always are a fan of your work. So always glad to hear that. So talk to us, what are you thinking about? We’ve — I feel like we almost recorded an episode before actually hitting record. So there’s a lot to talk about in the industry, a lot to be thinking about, a lot of movers and movements. What are you thinking about when you’re looking at the industry, kind of big picture, small picture, however you would describe it?
AB: So six months ago, when we got together, I was optimistic that the second half would be better than the first half, which technically I was right. It was not as bad as the first half, but it was terrible. And we had July and August, and we met in early August that were okay. And then September was terrible. Then we had November, October-November, which were great. And then December, which was a disaster. And so I kind of learned from that, that you can be optimistic about the future. But that doesn’t mean that things are going to get better immediately.
And so today, I’m very optimistic about the future. But I — just so your audience knows, I’m no longer running 420 investor at Benzinga. And I will be opening it to the public no later than mid-May. But for now, I’m staying on top of the industry, continuing my duties at New Cannabis Ventures. And I have a two model portfolios now. One of which is a overall cannabis model portfolio where I try to — it’s called beat the Global Cannabis Stock Index. So it’s kind of obvious what I’m trying to do there. And it’s up 29%, year-to-date.
And I’ve gotten a little nervous, not because I’m up, but more for the things I’ll say in a moment. But I’ve gone to 19% cash, and I’m in — the rules for that model portfolio, I’m only allowed 20% maximum. So I’m about literally as bearish as I could be. But up a lot before I did that. And I think that things are going to work out really well. But I learned in the second half of 2022 that that doesn’t mean things are going to work out well immediately.
Number one, and most importantly, the volumes for the cannabis market have been very low. So we’re seeing a rally. But it’s — there are some sellers, but the prices are low. There aren’t that many sellers. And the small number of buyers are running the stocks up and I don’t quite understand that.
And then also I’ve talked about publicly my concerns about NYSEARCA:MSOS, the ETF’s high leverage to just five of the largest MSOs. And it’s been experiencing unlike ever before redemptions. And in fact, is down 5%, year-to-date, 13% since mid-December. And I don’t think that’s the end of the world. But I have noticed that they still have 78% in the top five names. And that’s way out of whack, whether you look at the revenue, the market caps or any.
And so they’re making a big bet on these five names. There’s nothing wrong with the five names. But when I look at the valuations, some of them look higher than others, like the tier 2. And so I’m worried right now that if MSOS keeps getting redemptions, they’re going to have to sell the five largest names that they hold. And for anybody that questions that, they have actually started to sell. They’ve cut a lot of their names. They sold IIPR out recently. They sold a little bit, but they sold most of their IIPR at the lows, and they exited Hydrofarm right before it took off. So now they have been selling some of the largest MSOs and I worry about that.
And then a third thing that I think cannabis investors should be wary of is that the overall stock market moves could impact us and we’ve had a move up. And I’m not bullish on stocks all the time. I thought last year kind of surprised me how poorly it went, but the S&P 500 is still way up from the March ’20 pandemic lows. And it didn’t fall that much last year when it was all said and done, and the duration of the bear market was short. So I’m aware that we could reverse these recent gains. And I think that would be bad for cannabis. So I think stocks are really — cannabis stocks are really cheap. But I’m worried about these three things.
RS: So what makes you kind of get out of cash? Or put it more into the market? What’s something that will make you do that?
AB: So one thing would be a bigger collapse in the Tier 1 MSOs, the largest five. And I do own one right now, Verano (OTCQX:VRNOF). And I think it’s cheap, but it’s not so cheap. And when I look at what’s so cheap, the two cheapest names, in my view, or three cheapest names are in the Tier 2. I find Ayr (OTCQX:AYRWF) who’s a client of New Cannabis Ventures, I find Columbia Care (OTCQX:CCHWF), and I find Ascend (OTCQX:AAWH), which I don’t own in my model portfolio, of the Global Cannabis stock index, but I do own a small amount and Beat the American Cannabis Operator Index Model portfolio. It’s not in that index.
And I find that these are really cheap, but I own them already. And so I would buy a dip on Ascend. For example, I already own enough Columbia Care and Ayr. So I don’t think I could add to those.
I like Trulieve (OTCQX:TCNNF), I don’t own any, in my Beat the Global Cannabis Stock Index in my portfolio, but I do own some decent size and I’m overweight in Beat the American Cannabis Operators Index. And I would buy dips on Trulieve, GTI (OTCQX:GTBIF). Now I would just go right now because of the big spread for I think Colombia Care looks better. But that would be one thing. I could be wrong. Things could take off on volume. And that would wake me up and I would probably jump aboard. So there are a lot of things that could happen. But right now I’m waiting.
RS: All right, some follow up questions, stock specific. With Ayr, this is a company that we’ve — I mean, we’ve talked a lot about that on the about that company on the podcast, but specifically, we’ve been talking about their debt issues lately. Is that worrisome to you? And maybe do you want to speak why you are bullish on them?
AB: So the debt’s not due in 2023? And I think that’s very important. So it’s not due immediately. It’s not a gun at their head? Is it a problem? Yes, because they can’t do — they just walked away from an expensive acquisition in Illinois, for example. And I’m not sure that doing acquisitions is really part of their strategy right now. So I’m not going to really hold that against them in such — at a high level. And I think that when I do the valuations, I add the debt, I do enterprise value. So I add net debt. And so it is so cheap.
And we just published, in our newsletter at New Cannabis Ventures a table of the top nine MSOs. And it is by far the cheapest. And so I know they have debt, I factor it in. And I think that the company is doing well. They’re in some states that could get better. They’re not really in California, which is a state I think could get better. But they’re in New Jersey. And they’re — I think that they’re fine. They’re really cheap, and they’re okay operators. And I liked their new President who came from Neiman Marcus. I never talked to him, but I like his background.
RS: And in terms of looking at — you said that you like Columbia Care over Cresco (OTCQX:CRLBF)? Do you — are you bullish about that deal? Are you — why do you feel like they’re more advantageous?
AB: So for your listeners that really care what I think, I am writing an article that I’m almost done with, and it will be published, probably by the time they hear this and — because it should be published on Monday the sixth. And I liked that deal when it came out. And Cresco was formerly a New Cannabis Ventures advertiser. So I couldn’t really talk about it publicly, but they’re no longer employing us. And so I’m not limited.
I like Cresco, I know they didn’t renew with us, but I really like that company. And that stock made an new all time low recently, and the old low was made when one of its co-founders Joe Caltabiano left, right around the same time as the pandemic bottom. And that bottom was stupidly low at the time, and were lower now. And so I like Cresco Labs, I like the merger. I think these things are hard to pull off. And part of that deal was that they were going to have to sell some assets of which they’ve done some. And there is a chance that they’re not going to be able to sell the rest at the price they want. And maybe the deal price will be cut for Columbia Care from 0.5579, let’s say it’s cut to 0.4579 by about 20%.
The stock is trading at a 34% discount right now to the deal price. That’s — it would go up on that cut. And I think that when I look at Columbia Care’s valuation, as it is right now, it’s really cheap, not quite as cheap as Ayr, but it’s really cheap. So if the deal doesn’t go through, that won’t be as good for investors, in my opinion initially, but it will still be good. They’ll own a cheap stock that’s moving a — company, it’s moving in the right direction, in my opinion.
RS: Got you. And just picking up where you were talking about MSOS at the top of the show, how do you think that plays out? Like you’re talking about these redemptions? And you’re talking about the inequitable buying and selling that’s happening? A, how does that work out? And B, what would you have them buy as opposed — that as opposed to but in addition to the top five? Where would you like them to be allocating their portfolio holdings?
AB: Okay. So if I were an investor, because your listeners should know, I’m not an investor in cannabis stocks. If I were an investor in cannabis stocks…
RS: He just plays one on the internet.
AB: Yeah. No, I don’t put my own…
RS: No, no, I know. You’re not personally invested.
AB: I’m a CFA. And there’s a front running issue, potentially. So I don’t do it. But I am a big investor. But that’s a different subject, but not in cannabis stocks. If I were invested in cannabis, and I were restricted to ETFs, I would want a more broadly diversified. I think I wouldn’t say that all the time. But right now, because I think the MSOs did better than the rest of the market last year, and aren’t any better necessarily. I like ancillary stocks, or I have I should say. And so I think that investors choosing an ETF that limit themselves to one, just as MSOs are making a mistake. And they’re limiting themselves to, you know, a strategy that sometimes works. No, not most of the time.
So to answer your question though — so in the article that I wrote in November on Seeking Alpha, I said that if you’re an ETF investor, you should look at Tim Seymour’s Cannabis ETF CNBS. And do I really like that? No, it owns two stocks, I can’t stand Canopy Growth (NASDAQ:CGC) and Tilray (NASDAQ:TLRY). And so would I buy that? No. Do I think Tim should do things differently? Yes. Do I think that he’s going to beat CNBS — MSOS? Yes, I was right about that. And I think in general, that’s a better idea.
If I were MSOS, I would own more Tier 2s. And I know that they have some issues with liquidity and all that, but their investors need to understand that. I’m not trying to make an excuse for them or anything like that. I’m just trying to say, you know, if you’re an investor, you need to understand what their limitations are. And if they can only buy the very largest MSOs that’s a problem, I think. And if you’re an investor out there, you don’t have to buy the ETF. And you can buy what you think are the cheapest stocks, whether they’re only MSOs, or more broadly.
RS: How do you think it plays out? Like some people talk about this as a ticking time bomb. How do you see it playing out?
AB: So I don’t know how it’s going to play out. I’ve noticed these redemptions that are unheard of, that over time, it’s gone up a lot. The year-over-year growth is at a record low in the number of shares. I can look it up. I have it right here. It’s I think 27%, hold on. It is 34% year-over-year growth, an all-time low.
This was a great ETF. It did a lot for the market. And it did a lot for AdvisorShares. And if you are riding the trend, you’re going to be negative because the trend is down, has dropped in shares 13% since mid-December. And could it go down a lot more? Yes. Will it? I don’t know. But if it does, then I think that they will have to sell what they own, which we know what they own. And that’s the way I think about it.
RS: Do you have any thoughts about MSOS and what they’re trying to do with that ETF?
AB: Are you talking about the leverage?
AB: So I just want to officially say leverage sucks for cannabis investors. And I like the folks at Poseidon [PSDN]. I think they’re great people. But I think their ETF and I think the MSOS, there’s no reason anybody that can buy MSOS could use margin to get it done. They don’t need to do that. That is silly and unless I’m missing something. But I don’t see how that — I’m not saying it’s a bad idea to buy it, every now and then because it could do really well. But I’m not bullish on MSOS yet. And I think that leverage is silly.
RS: And that’s your beef with Poseidon also?
AB: Yes, I really like them. I think that ETF, which is really small. The reason it’s so small is it’s not necessary. And by the way, as long as I’m on Poseidon, and I told you, I liked them. Emily was on the Board of Directors of Ascend and people got all nervous when she left. I don’t think she should have — she should have quit a long time ago. She has a big role at Poseidon. That was a conflict of interest to invest in your leveraged ETF in Ascend like they were doing. I don’t think that’s wrong. I just think it’s wrong to be a Board member still and do that.
And so I was glad that she made that improvement in my opinion. And I liked AAWH, and did very well with it. I still own a small amount, as I said earlier in my Beat the American Cannabis Operator Index small portfolio but I took a big profit and beat the Global Cannabis Stock Index.
RS: So talk about that a little bit. That was the other side that you mentioned. Why do you like them? Why do you like…
AB: So it’s not as cheap as Ayr. But it’s in line with Columbia Care. And I think if you just say why, why is it so cheap? So MSOS doesn’t own it. I think that’s part of it. And so my fear of what MSOS will have to do if they get more redemptions, doesn’t really apply directly, at least to Ascend. Now if they sell GTI and MSOS, which they have done recently, but if they were to sell a lot, then — and GTI were to fall, then that could put pressure on Ascend, I get that. And people could say hey, look at GTI, it’s down 10% year-to-date, and Ascend is up 10%. I’m going to do that trade, and that could matter. But I like Ascend.
So I was getting to the why. Why is Ascend not doing well, because it didn’t benefit from the MSOS play? And I think the other thing is they they’ve had some CEO issues. Their CEO, who’s a financial guy, we suffer in our industry from that. Too many lawyers and financial guys are running these companies. And I’ve talked to Abner once in my life. And I was okay with them. Right. But I’m not okay with his background. And just not his background. But in general.
I like real operators running the companies. And so they are — CEO less, right now. They have two their CFO and another guy are co-CEOs on an interim basis. And Abner Kurtin is the Executive Chairman, good role for him. And I don’t have anything bad to say about Abner, by the way. But he got in trouble with the law. And I don’t think he did anything wrong. Or at least that’s the way it played out. And that whole thing was dropped down in Florida. But I think that created a big problem short term for the stock as well.
RS: Can you talk about that notion of that you’d like an operator in terms of management? How would you define that?
AB: So I go on Seeking Alpha, have you heard of that Seeking Alpha? Okay, so I wrote this article about Plant 13 (OTCQX:PLNHF). And it was a very early article in December, and I talked about how I had no position in my model portfolio at Benzinga at the time. And I closed my Benzinga positions when I left in late December. But I started my new model portfolio at yearend. And I built it up with Planet 13. In that article I wrote about how I liked the company and all sorts of things about it. But one of the things I think I mentioned was that their management team was real managers. And I don’t think that they’re necessarily the best managers ever. But they’re not lawyers, and they’re not financial people. And I said a lot.
And after that article was published, the stock dropped a lot in that yearend. When I started my new model portfolio after exiting Benzinga, the stock was at an all time low of $0.61. And I no longer have a position but I loaded up on it, and the stocks up a lot year-to-date. So that’s an example of real management. And I still like the company a lot. And on a small dip, I would add to it again,
RS: What does it make you like somebody that has financial background? What is it that leaves you — that what is it that you feel like is lacking there?
AB: Okay, so I don’t want to sound like a self hater. But that’s my background, financial expertise. Do I envision myself as being the CEO of a company? No, there are many skills that are necessary to be a good CEO. And maybe I have some of them. I’m not really trying to make this about Alan. But in general, being a financial person is just one piece of the overall person package. And I want to see some other things and having success running a business is more important. Being a good investor is nice. But does it mean that your company is going to be run well? No.
And I think that our industry has — I told you, I like Cresco, they are run by a lawyer. I think he’s a nice guy, but he’s a lawyer. And so is Trulieve’s leader, a lawyer. And same thing there. Being a good lawyer, you may be a good CEO, but neither of those people had CEO experience. And I think that investors need to pay attention to that. And then in the financial, wow, it’s so much deeper, there’s so many financial guys. And it’s great to see somebody put their money into a business. But should they run it? No, I don’t think so.
RS: I was talking to somebody that’s been very bearish on the industry for a long time. And they feel — and I was talking to them, and they’re like, well, now look, I was right. And sometimes I feel like I have a lot to say in response to that. And sometimes I feel like, well, there’s many ways to look at the industry, and you can certainly be disappointed. And you can stay bearish. And I think with good reason, even though I’m long term bullish. What would your answer be to somebody saying that most of the operators in cannabis don’t know what they’re doing? There aren’t good operators to buy? What would your answer to that be?
AB: So I know, I was just critical of the backgrounds of some of the CEOs. And first of all, I would point to a lot of the companies have hired the right people underneath. And I think that’s important. And so that’s the first thing I would say. Second time is the friend. These companies have been through a lot since the pandemic. And at first it went well. Things were way better than expected, that we all kind of fell for that, in my opinion. But the last two years, they’ve suffered with falling stocks and lack of capital, and they’ve had to improve their businesses. And we’ve seen gross margins do better, production get more efficient.
So I would say time is on our side, in that regard. So better staff and better operations. And I think some of the companies have really stepped up, and they’ve hired, even GTI, I love this guy, Anthony, I love. I like this guy, Anthony, that was the CFO. And but I talked to him a while ago. And I said I don’t understand why you’re the CFO. You have no public company experience. And so he gave me an answer. I don’t want to get into it. But I was really glad to see GTI upgraded in my opinion their CFO. And there’s been a lot of that.
RS: Do you think that’s a positive those, that switch out at the executive level at GTI?
AB: I think so. Yeah. And could it have been better? Sure. And that’s a company, people love GTI. I don’t have a big problem with it. They’ve done very well. And I can say a lot of good things. But I can also say they are one of the few big MSOs that are kind of controlled by insiders, which I don’t think investors like. Is that the end of the world? No. But I think a lot of investors worry about that. And did they fix that? No.
RS: And what would you say is worrisome? And why would you say is a reason not to necessarily be worried by it? Can you give…?
AB: So I think that’s worrisome. I think in America, we want to have companies that are run by the shareholders. But there’s a big trade off there. You can be, quote-unquote, run by the shareholders, but you want a good management team that is incentivized to do well. And I think that the problem can be that you have a CEO and his people that aren’t smart and aren’t doing the right thing. And they can get away with it. Is that what’s going on? No I don’t think GTI is making a big mistake. Could that happen in the future? Yes.
And I think — so it’s tricky. I’m sure one stock right now in there. I was really long in three months ago. And that’s Meta (META), and — or Facebook and I’m short the stock now. It ran up. It was — just blew me away. Mark Zuckerberg was terrible and the stock was too low. Mark Zuckerberg is great. The stock is too high. The reality is, he’s not terrible, and he’s not great. And I think the same thing can be said about these cannabis guys. They’re human, and they’re not so great. And they’re also not so terrible.
I started in this industry when they were all terrible. There were — there was penny stocks only. They weren’t really cannabis companies. And they were crooks. So we’ve come a long way, in my opinion, since ’13.
RS: Yeah, it’s all relative, it’s all relative. So speaking about, operational or striving for operational excellence? Do you see share repurchases coming anytime soon to the industry?
AB: No, not, not anytime soon, I think, so when you talk about the industry, I should be careful. The industry is bigger than the MSOs, which we seem to be talking about. And so there are some companies that have a lot of cash. But the ones I’m thinking of, they’re not. And their stocks are cheap, but they’re like one stock. I’m not going to say it because it’s against Seeking Alpha’s rules. I wrote a blog on it. I originally written that as an article, but this company is trading on the NASDAQ. And it’s really cheap, but I don’t think they can buy their shares back because the market cap is so low, and they need to get better liquidity. So buying share back…
RS: You can talk about them on this podcast.
AB: So CEA Industries (NASDAQ:CEAD). And people can read my blog about it. The stock went down a lot after I wrote it in December. And now it’s right back to where I wrote it. I just added to it a little bit lower than now. But I love their valuation. And I just wrote a piece for my records on why I still like it. But so that’s an example of one that could, but for the most part, capital is tight right now. The industry is not doing well right now. And when I say the industry, I mean not only MSOs, but we’re talking about ancillaries, which were really cheap. And even Canadian LPs, and could — one of my favorite stocks is Organigram. I don’t love Canadian cannabis. And that’s about all they do.
There’s some international stuff going on, too. Could they buy stock back? Yes. Should they? Or will they? Probably not? And I think is it cheap enough to do? Yes. Are they making enough money that they they’re drowning in incoming money? No. And I think if you were to ask me in a year, I think we’ll have a more enlightening conversation about who’s going to buy back stock at what price and why. But right now, no, it’s not in the near term.
RS: And do you think that will be in a year from now because of better market conditions? Do you think there’s going to be less of a liquidity capital crunch? What would you put that at?
AB: So I would say in the United States, I’ll get back to Canada in a moment. I think that we’re going to see the MSOs doing better. And, because they’ve really — we hit a pandemic plateau. I mean, the pandemic lifted consumption, and everybody scaled up their production and some of the new States have been not so great. Like New Jersey. New Jersey is okay, but no, they don’t have enough of stores, like New York, was expected to be big. It’s a kind of a near term disaster. But when I look at it here, I think we’re going to have it — and one of the things I said to you six months ago was, I don’t think margins are going to fall as much as people think. And I’m less confident that they’re going to stay at this level. But I don’t think they’re going to fall that much.
And I think that revenue is going to accelerate for a lot of reasons. So in the United States, on the production side, better numbers, and — but those companies, they have debt, all of them except for Planet 13. And unless the capital markets get better I don’t think they’re going to be buying stock. And then the ancillary I think that they’ve been — their financials have been depressed by the weak MSOs and the curtailment in spending. But that’s going to get better, I think. And then, in Canada, the Canadian adult use market is pretty mature. And they need in Canada, in my opinion, to liberalize some of the rules, like the 10 milligram of THC per package maximum. That’s killing it.
And the edibles in Canada are way below where they should be or where they are in the United States. And so if something like that happens, I think it will really help. But I think Canada’s biggest problem right now is there are too many LPs. And a lot of them are really struggling, and they’re just low price. And it really weighs on good companies. I have in my model portfolio, my largest position’s Organigram (NASDAQ:OGI), which is 20% owned by BAT, which could buy them, I don’t know. But they have cash and no debt.
I have Cronos Group (NASDAQ:CRON), which I’ve wrongly said Altria (MO) is going to buy them. I still think Altria could buy them. Their warrants are gone now. It’s trading also below tangible book value like Organigram. But they’re not generating positive cash flow. And then I wrote about Village Farms (NASDAQ:VFF). And then I added to it right afterwards, actually. And it was — I think at the max 12% or 13% of my model portfolio. Now it’s 9%. I did trim it near $1.20. A little bit above, a little bit below. And that’s trading way below tangible value.
I think these companies should be in a position to repurchase stock if the Canadian cannabis market gets more profitable.
RS: So can you speak to that a little bit the Canadian market and how you’re seeing it grow and whether or not you think that there’s room for much optimism?
AB: So my wife and I used to do a prayer on Friday nights, Shabbat. We would pray to Canada because we were so grateful of the impact Canada had on our lives. And we enjoyed visiting there. And I really liked it. And we have no Canadian clients in New Cannabis Ventures right now, which I take is a big contrarian signal. Everyone should buy Canada. I don’t own that much. In Canada. I’m actually a little underweight. I really don’t like Canopy Growth and Tilray. And I think Sundial (NASDAQ:SNDL) is really cheap, but hard to figure out. And HEXO (HEXO), RXO. And so I think…
RS: I’m going to pick apart, Sundial hard to figure out in what sense?
AB: Well, it’s very diversified and complicated. It’s cheap. It trades way below tangible book value. But it’s really hard to figure out what they owe, what it’s going to do. It’s non cannabis, a lot of it, it’s alcohol. I liked who they bought Alcanna. But do I like it now? I don’t know. And so I don’t really follow. It’s not on my 31 stock focus list. But it could do better. And so anyway, I do follow Canada. I don’t pray to it anymore. But or pray for it. But I do follow it closely and I have access to High Fire. And they use POS data to kind of predict to predict what the numbers are going to be.
The actual year-over-year growth has slowed down to low double digits. And so it is maturing market, it’s not growing rapidly. And that’s just sales. The profitability is not there. And this week Canopy Growth and Aurora (NASDAQ:ACB) are both going to report. They’re both losing money hand over fist. And so I think that the profitability is more challenged and I don’t really have any access to that beyond looking at the companies. But I can’t tell that Canada is chopping licenses. People are handing them back. And so they’re going down from that, but they’re giving new licenses. The number right now it’s about 950. That’s way too many.
And I think, and we heard Tilray when they merged with Aphria talk about how they were going to be 20% share. No. And we’re looking at Canopy Growth get out of retail now. And so it’s really hard, I think, and the profitability is just not there.
RS: So what — like a company like Organigram, what is it that you’re bullish on aside from their cash levels and no debt?
AB: So and yeah, and trading below tangible book value. I think they’re going to be profitable. And I think they’re growing and if you look at the revenue, everybody’s losing share, but not Organigram, and then you can say, well, wait, but are they cutting their prices too low? No. They’re not cutting their prices too low. And they did an acquisition that was smart in Quebec. And I think I like Beena. I don’t think I’ve ever met her face to face. But we’ve interviewed her. And I think she gets credit for fixing Supreme so that Canopy could buy them. I don’t think that’s right. I don’t think she just walked in at the last minute. Got lucky, in my opinion.
So — but I think she’s very bright. She worked with this guy from Tilray. Irwin [Simon, Tilray CEO]. Yeah. And she ran the Canadian portion of his business, Hain-Celestial. And I think she’s a bright person. And I’ve listened to her. And I think she’s doing things the right way. And so you have a chance to buy a company below its tangible value, that’s going to be profitable. And they’re not losing money now. And I think that they’re one of the top companies in Canada, and nobody cares. I don’t ever see anybody out there. Yeah, buy Organigram, no, because it’s down and everybody hates cannabis stocks.
Nobody’s saying buy anything and by the way, when they say sell them SOS, then I’m going to be a buyer of what MSOS is selling.
RS: Fair enough. So contrarian — so a contrarian signal and also you feel like there’s going to be a player or two to reach the top of that market, even though it’s not necessarily an exploding market.
AB: And I think that the part that we haven’t talked about now that we should never forget, the rest of the world is going to legalize. And being legal in Canada at a federal level for medical and adult use, may open the door to other places, like your Israel. I know that some of these companies are exporting there, but there’s German. And in the past, there have been some things that have happened, and I’m not sure how that’s going to play out for adult use. The Germans seem to want to keep that in internal. We’ll see. It could work out very well for the Canadian LPs. And we’ll see.
RS: And what are your thoughts about I mean — you’ve stated that you’re bearish on them, but what are your thoughts about some of the Canadian LPs optionality into the U.S.? Is that something that you look at with optimism in any way?
AB: The opposite. So on Canopy Growth — so I own Cronos. I’ll say about them next, but Canopy Growth is the big guy in the room. And they announced these acquisitions. The three pending acquisitions, and the second one, I was kind of negative on Wana because they paid 85% of the purchase price upfront. And I’m thinking to myself, wow. Now I like the people at Wana but what incentive do they have to do well in the future. And that was a bad deal. But they’re talking about closing these three deals, Acreage, nobody cares about Acreage, Wana, and the third one California company.
And but they’re at a risk of losing the NASDAQ listing. And people are hopeful that NASDAQ will say, yes. And I don’t think NASDAQ will say yes, but I’m not an expert. If they don’t say yes, it’s bad, in my opinion, because Canopy Growth is bleeding to death. And their change of story won’t play out and they’re still going to be bleeding to death. If NASDAQ says yes, yay, Canopy, no, because people don’t like Canopy Growth as an operator. They do like Curaleaf (OTCPK:CURLF), GTI, Trulieve, Cresco and Verano. And those companies, in my opinion, would follow the Canopy example and change their structure to be able to be NASDAQ. That would be a big game changer and everybody would forget about Canopy real fast.
RS: You’re saying that. But what about the time that it takes? Well — I guess is the question if NASDAQ says yes to Canopy, does that open the floodgates for those MSOs to get on board at the NASDAQ?
AB: I think it does.
RS: The fact that Canopy Growth like rang the bell, does that seem like it’s a given that it’s going to happen or not necessarily?
AB: I don’t think so. I don’t know. I’m not an expert…
RS: No, no, I’m not either. I’m just curious what your thoughts are, as an observer.
AB: I’m thinking that if it doesn’t happen, it’s terrible. If it does happen, it’s not good, right? And I want to go back to Cronos, because I talked to the world, November a year ago about how Altria should buy them and could buy them. And the stock shot up, I think about six at the time. I don’t know if it was just because I said that or maybe I just happened to get lucky. But now it’s at $2.50 and it’s trading below tangible value. So I just want to talk about their American strategy. So Tilray, by the way, really doesn’t have an American strategy. And they’ve had to back off of what they were saying.
But Cronos owns 10% of — the ability to own — they have the ability to own 10% of PharmaCann. They don’t actually own it, but they’ve paid for it. And so they’re not risking their listing. And I think A, PharmaCann is a good company. It’s not public, but it’s a good company, and they bought LivWell in Colorado. And so I think that what they’ve done is actually pretty good. And they seem to get in at a good price. I don’t know. I don’t follow it that closely. It’s not that big of a deal yet. But they haven’t spread themselves too thin. And I think that Cronos has a lot of cash and no debt. And Cronos has a big investor in Altria with no warrants anymore. And they have this one stake in the U.S.
And I think, their strategy is when they can get in the U.S., they’re going to do it. And so if Canopy Growth is successful, well Cronos will follow. And I think that they have a better setup to buy 10% of PharmaCann than what Canopy Growth is trying to do.
RS: Interesting. Interesting. The other questions I wanted to ask, you mentioned that you like Verano, is at the top of your list for MSOs. I wanted to ask you about Verano, and I wanted to ask you — well, let’s let me ask you that first.
AB: Were you going to ask another question?
RS: I’m going to leave — I won’t ask the question before I get your answer here. Yeah, I’m going to…
AB: So I own Verano. And to backtrack for your audience, I liked it a lot year ago, but I exited in January or February, about where I owned it. And then the stock collapsed. And then I started to like it a little bit too early in 2022, because it was cheap relative to peers. And I think there’s some controversy there. And I’m not — that it’s all warranted, I will tell you, their expected adjusted EBITDA is too high, in my opinion. And same with Trulieve, by the way. So I do my numbers for my buy and sell decisions. I lower that. And but I’m aware that the stock looks really cheap, and not as cheap as Ayr, not as cheap as Ascend, not as cheap as Columbia Care, but really cheap.
And I think that their controversies are pretty much related to their M&A strategy. And they have some debt. So I don’t think that there is a really big, but I think that they’re relatively new compared to their peers. They’re not as widely followed, but they are better followed today than they were a year ago. And I think the stock is cheap. And my negative about them in Trulieve is that they’re very exposed to Florida. And I know a lot of people are focused on Florida’s going to legalize. And that could be true, but it’s not going to happen instantly number one. So you’ll have a chance to buy into it at some point. And even if it pops up first.
And number two, Florida is vertically integrated, almost 100% and the margins there are consequently very high. And I don’t know if this is going to happen, but I fear that they could become like other states and allow wholesaling between. And this would be really bad for Trulieve, I think, and not so good for Verano. And I think Verano is really big, as well in Pennsylvania, in Arizona, and those states are struggling right now. So it’s not just, oh, you got to buy Verano. So I own a little bit more than its percentage in the index. But I’m not in love with it enough at this point.
And the stock is up a little bit year-to-date. Trulieve, and Curaleaf are down and GTI is down a little. And so it’s not jumping out at me as a must buy. It’s just if you’re going to control your risk, and you want exposure to the largest MSOs, but you don’t love them, who do you buy? So you buy Verano. And do you buy? Cresco, you could but no, you buy Columbia Care.
RS: And you’ve mentioned a few different metrics that you’re looking at companies. Are there are variety that you’re looking at? Would you advise investors to look at a number of different metrics? How would you advise investors? Like what are the top metrics to look at and mentioning, adjusted EBITDA? Is that something — is that one of the top things to look at? Yeah, talk to me about that.
AB: Yeah, so first of all, I want to commend you and Nick last week. That was a great video. I love that guy.
RS: He’s awesome.
AB: And I think he’s — like you said, he’s awesome. He’s a good person too. And I agree with almost everything he said, believe it or not. And I know he — and the reason I’m saying that now is, he was talking about how he had adjusts adjusted EBITDA, and basically, for the people that didn’t listen, he said that he looks at EBITDA and adjusted EBITDA, and he gets worried about big differences. And I think I’m saying that accurately. So I do use adjusted EBITDA. I am aware that, of course, the companies can screw that up in either mathematically or ethically, but I don’t really put that much into it.
So for your investors in the audience that are wondering, how do I look at these, I think price to sales can make sense. I pay attention to that. I think price to adjusted EBITDA. And when I say price, I think enterprise value is the right way to do that. And enterprise value, for those that don’t know, is market cap plus debt, minus cash. And so I think those are that — now for MSOs it doesn’t really help. But I think price to tangible book, very important metrics.
Right now in Canada, the three that I own are all training below price to tangible book, and they all have net cash. I think Village Farms has net cash, it’s close. Organigram, Cronos, big time net cash. In the United States, the tangible book values for the MSOs are negative. So it’s not really helpful. Is that bad? Not necessarily. It’s not the only metric, but it just kind of kills using that metric. For the ancillary, I can find companies that are trading way below price to tangible value, so I’m going to have some debt.
So like CEA that I mentioned earlier, no debt, lots of cash. Cash — trading below cash is a good deal, I think. But it doesn’t necessarily work out all the time. It may not be the best deal. So I think those are really it. And so that’s three, enterprise value EBITDA, enterprise value sales, and price to tangible book. Any others? I know people talk about as kind of a joke. I don’t ever look at PE. They’ll look at things like oh, this company has positive earnings. I’m like, yeah, their price went down. And so they have earnings because of that. Do you really care? Is that really important that they have warrants that are out of the money and they’re less out of the money now? No.
RS: And also, as the MSOs, once they do uplist, and once 280E and things like that, then you start kind of reconfiguring things more the way you do generally.
AB: And thanks for bringing up 280E. We haven’t talked about that. I did not get caught up at all in late 2022, with all the talk about Safe Banking…
RS: You did not and I think about it often when I would find myself getting caught up in it and I would think about your words.
AB: So but I will say and there was some legislation introduced in Congress by some Congressman I’ve never heard of, about moving from Schedule I to Schedule III, which would get ready 280E, if it were to pass? Will it pass? I don’t think so. But if it were, it would be good from that regard. But I want to warn your listeners that changing the scheduling brings a risk to the cannabis market in the United States. The FDA could become the regulator and they might do to THC when they did to CBD, haunt. And so the it’s not a good thing if the FDA…
RS: Even if it’s descheduled completely?
AB: Descheduled, no, but well, yes, possibly, but reschedule? It’s a Scheduled III drug. We have to regulate it.
RS: Well more reason for us to demand it being descheduled as if our demands have any weight. But descheduled is really so much better than rescheduling it.
AB: Yeah, I think it’s really tricky. And I’m not sure if descheduling would solve that problem. And I — but I want to warn people. Legalization. I’m for legalization for a lot of reasons. But as an investor, it might not be good. You need to really think about it. And I would probably — if it ran up a lot, but 280E going away would be huge. And being able to list on the NASDAQ would be huge if that were to happen.
RS: Yeah, yeah. Well, I’ve taken much more of your time than I was expecting. My last question to you was about kind of companies that you’re most worried about in terms of their debt levels. And then anything else you think that we may have missed or that you’d like to share?
AB: So I do pay attention to debt? I think companies have and can choke on debt. If we stay in a depressed market, like it’s been, it could become a problem. I don’t really — I don’t short stocks, professionally or personally, except non-cannabis stocks. And I am paying attention to a few companies, I think they’re going to be okay. And I hate to like — your question was, what are the bad companies? So no, neither of these companies are bad in my opinion. And when I look at the largest companies I already talked about, Ayr. I’m not that concerned about their debt. It’s not due imminently. And compared to the market cap, it’s high compared to the revenue. It’s not that high.
But the two companies I’m concerned, one is an NCD client and one what used to be an NCD client, I like them both. They’re both in my model portfolio. So if that should really tell you, I’m not that concerned, but I do pay attention. And those two companies are Lowell (OTCQX:LOWLF). They have — I used to not worry about it, because it was so low. Now. It’s way above. They have convertible debt. And their business is just terrible right now, I can tell you some good things. But their numbers are not great. And they’re in California. And their debt looks like a problem.
Unlike some of the other problems that we’ve seen, like with HEXO, their debt is not held by enemies. It’s held by friends and family. And I don’t think that they’re going to stick it to the company. But it’s a risk. And I think that company has engaged Canaccord Genuity as an investment banker. And that debt may lead to the sale of the company I don’t know. But they’re working on something.
And then the other company’s top holdings and total earnings is up a lot year-to-date. And they are a client of NCV. And I when I look back to the March of 2020, the all time low. There they fell by two thirds. Now they’re back there up that much. They’ve gone from three to nine basically. And so they’re back and I think that with TILT Holdings (OTCQX:TLLTF), they are waiting on a sale leaseback with IIPR to close. It’s been delayed a lot. I’m pretty sure it’s going to go through and with that, they’re going to pay off the rest of their small amount of short term debt that’s due to an outsider. And that’s going to be the end of their debt. They still will have debt, but it’s to the guy that sold them their ancillary business, Jupiter. And I don’t think that’s a problem and it’s not going to be due. It’s going to be restructured and not due in the short term.
So I think people don’t pay attention to TILT because of its market cap and I think if you go back, the guy that ran it was not good news. He’s gone. And I think that as well the company did not do a good job ever before of explaining their business model, which is to be an MSO, and to be a big ancillary company, CCELL. And the guy they brought in, their CEO was an investor relations professional. And I liked him from day one. But I just told you don’t trust financial professionals or lawyers to be the CEO or investor relations they are a notch below.
I think people were rightly worried. But wow, has Gary done a good job of stepping up and explain the story better and running the company well. So no, I’m not worried about the debt. But those are the two that I follow — that I worry about the most.
RS: So important to contextualize the debt, not just look at it as…
AB: And I think, back to Ayr, I think that people look at like, oh, look at how big the debt is compared to their market cap. My answer is the market cap is too low. And that’s not due immediately anyway, and things will change. They probably will change. So I think that, yeah, you can get really overboard looking at a statistic now instead of looking out in the future.
RS: Context is important. Alan, anything else before we leave you for now?
AB: No, I’m still really bullish. I know. I said, I have 19% cash right now. But I’m very optimistic that this year plays out very well. And I’m also optimistic about being at Seeking Alpha, which, yeah, will be no later than mid-May. And I’m really looking forward to it. I have been at Seeking Alpha as a writer since 2007. And I started writing again. I’ve written nine, am working on my 10th article for Seeking Alpha readers. And I’m enjoying that a lot.
RS: Yeah, it’s great to have you. I mean, I feel like I’ve been at Seeking Alpha for a really long time and you predate me. So you’ve been here as long as I’ve been here and even longer. So yeah, to me, you go together. So it’s great to have you and we’re excited to have you.
AB: Well, thanks for having me today. And as always, I enjoy being with you. And I enjoy the work you do.
RS: Thank you, Alan, and back at you. It’s always a pleasure. It’s an honor to have you on and thanks for all the work that you do — and for the industry. It’s always great to have you on the show.
AB: All right. Thank you.
RS: Thanks, Alan.
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