By Chris Roberts
Traditional vice sectors like tobacco and alcohol are investing heavily in the emerging legal cannabis industry, but commercial cannabis companies can’t quite act like they’re selling cigarettes or beer.
Maybe they should think more like ice-cream companies.
On a trip with his children to visit the Ben & Jerry’s ice cream factory in Vermont, Bradford Sodowick, who teaches entrepreneurship at Drexel University, realized that the privately held operation is a perfect model for how to run a cannabis company. Ben & Jerry’s produces a perishable product, delivered nationwide, of reliable quality, while complying with a complex set of rules that can shift from state to state.
If a company’s leadership team can do that with ice cream — or beer, or tobacco, or health foods — it’s reasonable to expect they should be able to do that with cannabis, Sodowick said.
“In the food and beverage business, there is a huge amount of crossover with the legal and regulatory requirements of the cannabis industry,” Sodowick told MarketWatch. “You should see the microbiological requirements they have, all the requirements to sell food to the public and assure safety.”
Likewise, investors need to look beyond just cannabis to figure out how to invest in pot companies. Legal cannabis in America has created a patchwork of multibillion-dollar markets in states that have legalized commercial production and sales of adult-use marijuana, as the federal government creeps toward potential decriminalization of the drug . States’ legalization efforts have already created billion-dollar companies, some of which are publicly traded — though, for now, all on Canadian exchanges — which in turn means opportunity for retail investors.
See also: Schumer, other Democrats unveil draft bill for cannabis decriminalization
There is also risk: Early blue-chip stocks like Canadian giant Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC +3.57% , which rewarded investors who bought in 2016 with 20x returns and still trades at around $22 a share. On the other side of the coin is MedMen /zigman2/quotes/206551904/delayed CA:MMEN 0.00% , a U.S. company very briefly considered a billion-dollar unicorn before unsustainable growth and questionable management practices crashed share prices to 25 cents from a high of $6.49. More in the middle are companies like Curaleaf /zigman2/quotes/205334348/composite CURLF +1.88% , which has seesawed from a $8.43 debut, to a $2.79 floor in March 2020, and now trades at around $14 a share.
With Canadian-based cannabis companies already cycling through a boom-and-bust routine, attention has shifted to the U.S., where value in some companies’ stock has more than tripled since the beginning of 2020.
So how do you pick a winner?
Know the companies, and keep an eye on their cash
The largest U.S. pot companies are known as “multi state operators,” or MSOs for short, the preferred descriptor for a cannabis company with operations — be they retail dispensaries, cultivation, processing or all of the above — in multiple states. An MSO might have licenses for both medical marijuana and adult-use cannabis commercial activity.
Distinct from cannabis companies with state-sanctioned activities in individual states, an MSO will possess licenses in a patchwork of states — all with different regulations. For this reason, they’re considered to be the likeliest candidates to become the “Budweiser of Marijuana” whenever the federal government legalizes cannabis — and, with it, interstate trade. Until then, MSOs can share capital and expertise, but product must be produced and sold within each state’s lines.
There were nine U.S. MSOs with market caps in excess of $1 billion as of the end of 2020, according to New Cannabis Ventures’ Alan Brochstein.
|Company||2020 revenue||2020 net income|
|Ayr Wellness Inc. /zigman2/quotes/201137876/composite AYRWF /zigman2/quotes/213754805/delayed CA:AYR.A||$155.1 million||$16 million|
|Columbia Care Inc.||$179.5 million||-$133.2 million|
|Cresco Labs Inc. /zigman2/quotes/205276242/delayed CA:CL /zigman2/quotes/200392306/composite CRLBF||$476.3 million||-$81.9 million|
|Curaleaf Holdings Inc. /zigman2/quotes/203485866/delayed CA:CURA /zigman2/quotes/205334348/composite CURLF||$586.2 million||-$61.7 million|
|Green Thumb Industries Inc. /zigman2/quotes/200716694/composite GTBIF /zigman2/quotes/206151134/delayed CA:GTII||$556.6 million||$15 million|
|Jushi Holdings Inc. /zigman2/quotes/210374425/composite JUSHF /zigman2/quotes/215485579/delayed CA:JUSH||$80.7 million||-$211.9 million|
|Planet 13 Holdings Inc. /zigman2/quotes/202325829/delayed CA:PLTH||$70.5 million||-$7.8 million|
|TerrAscend Corp.||C$211.8 million||-C$167.2 million|
|Truliev Cannabis Corp. /zigman2/quotes/207658767/composite TCNNF /zigman2/quotes/210560499/delayed CA:TRUL||$521.5 million||$63 million|
At first blush, picking the right stock seems obvious: find the big profitable companies, and steer away from the firms deeply in the red. But it’s not where the companies are that matters, but where they’re going.
While some traditional methods of analysis used to judge the value of other publicly traded companies do apply, cannabis investors can’t rely solely on what they discover after poring over quarterly reports and other filings, looking for numbers like debt and Ebitda, according to investors, analysts, and academics contacted for this article.
“I am not sure I would use the traditional methods, because the industry is still at an early stage,” said Ralf Wilhems, a professor of Strategic Management and International Business at Lake Superior State University in Michigan, who teaches in the school’s Cannabis Business program. U.S. business still have problems the Canadian licensed producers, or LPs, do not.
A guide to pot stocks: What you need to know to invest in Canadian cannabis companies
Federal law still precludes most banks from accepting cannabis clients; cannabis companies still can’t deduct certain business expenses due to a quirk in tax code aimed at 1980s cocaine kingpins. But one number to consider is cash flow.
A viable cannabis business just might not have had healthy cash flow prior to 2020— when, declared essential businesses and handling an onslaught of customers eager to stock up for the pandemic, sales boomed to record levels. “I would look at cash flow for sustainability in the market, and for the ability to execute strategy,” Wilhelms added.
That said, a good cannabis company may still be posting numbers that would look troubling for Ben & Jerry’s. Capital expenditures and low revenue may not be nearly as problematic for a mature company as they would be for someone like Chicago-based Green Thumb Industries, particularly if the company is spending money — on licenses or capital improvements like cultivation hubs — that will mean revenue later.
With more states legalizing recreational cannabis and other states shifting regulatory requirements every few months, the framework used to judge a cannabis company shifts more quickly than a CPG firm — or almost anything else.
“You can look at numbers. The numbers are out there,” said Morgan Paxhia, a partner at cannabis-focused private-equity firm Poseidon Asset Management. “But how do you attribute quality?”