“There are times […] when even being right feels wrong. What do you say, for instance, about a generation that has been taught that rain is poison and sex is death? If making love might be fatal and if a cool spring breeze on any summer afternoon can turn a crystal blue lake into a puddle of black poison right in front of your eyes, there is not much left except TV and relentless masturbation. It’s a strange world. Some people get rich and others eat shit and die.”
– Hunter S. Thompson
I’ve been writing about cannabis companies on the public exchanges since the days before cannabis companies were technically allowed on public exchanges. During that time, I’ve seen many stages of the cannabis industry come and go, and I’ve seen people get rich, and I’ve seen plenty eat shit.
I’ve probably existed somewhere in the middle.
There have been numerous ‘phases’ of the cannabis industry’s rise. Among them were:
- The ‘We found a weed guy and he’s agreed to join our advisory board but we’re not technically a weed company yet because we don’t want to do a change of business’ phase.
- The ‘Thank fuck the CSE has showed up so we can avoid those change of business halts, buy our 3c stock now!’ phase.
- The ‘place your bets on who will get a rare and largely unseen Health Canada license’ phase.
- The ‘We got a license, now what?’ phase
- The ‘We’re building 100k sq ft, no 200k, no 500k, no..’ phase
- The ‘we’re going to squeeze out some oils as soon as it’s legal’ phase
- The ‘maybe hemp would be a good thing’ phase
- The ‘holy shit, full rec, who knows how to run the labeling machine?’ phase
- The ‘nobody can have a dispensary… hey, why is it so hard to buy weed’ phase
Coming soon, we’re all looking forward to the beverage rush, the gummies rush, the ‘maybe Ontario would like to have more than 4 dispensaries, even if it harms the business model of the Mayor’s old gang’ rush, the ‘I can finally buy this shit in a pharmacy, I’m buying everything on the shelf’ rush, and the ‘grandma doesn’t have pain now, thanks weed!’ conclusion to it all.
But the most important phase of all is one that could tear the entire industry apart, and it just took its first big scalp.
We have entered the ‘we’re selling drugs here, ya think maybe we could actually turn a profit sometime?‘ era.
“Yesterday’s weirdness is tomorrow’s reason why.”
– Hunter S. Thompson
Bruce Linton has been cast aside as Canopy Growth (WEED.T) CEO, almost entirely because, while he’s obviously a ‘visionary’, and built his company to a size where it’s nigh impossible to justify, he also clearly has no idea how to actually balance a cheque book.
I mean, to justify a $20 billion market cap, you have to at least remove the minus symbol from your net income line.
More than anything else, WEED’s stock has always gone up based on the fact that it was the one going up. When investors enter an industry and have no idea what they’re actually getting into, buying the biggest market cap out there gives them comfort that, ‘other guys have done the research and bought into this, the biggest guy must be good.’
See Tilray (TLRY.Q). See Canopy.
But not anymore.
Three years ago, profit was an idea that was laughable because nobody was growing anything. Last year, profit was something sneered at by investors more interested in growth of facilities. But this year, folks have finally found the religion of profitability and are chanting in unison such that its gods may bless them with riches.
One group demanding a shift towards profitability is Constellation Brands (STZ.Z), which has basically assumed control of Canopy after it dropped a $670 million quarterly net loss, including $282 million in share-based compensation, $154 million on sales and marketing costs, and $168 million in general https://equity.guru/wp-content/uploads/2021/10/tnw8sVO3j-2.pngistration costs.
$253 million in revenue just aint gonna cut it on the back of that much back-end bleeding.
Folks invest for a lot of reasons and profitability isn’t always one of them. Losing money while jamming your share price upward was a play Amazon and Tesla have made famous, leading to every company on the exchange using that concept as a partial out when folks ask them about profit.
“We’re in a growth phase,” is the most common answer. “We think we’re a year from break even,” is another. “We’re spending on infrastructure” is another still.
Let’s be clear; none of those excuses are necessarily bad. But they have a limited lifespan. Eventually, you need to show the size of your junk.
The cannabis industry, today, wants revenues up, and profits to follow, and the time left to make that happen is zero.
“For every moment of triumph, for every instance of beauty, many souls must be trampled.”
-Hunter S. Thompson
What we’re discovering is, there just aren’t a lot of companies out there that are ready to hit those goals, now or in the near future.
If we’re using ‘adjusted operating income’ as a guide, and you’ll probably find plenty of balance sheet wonks suggesting we shouldn’t, seven companies currently have positive figures in that column.
- Trulieve (TRUL.C) sits atop the market with $16.5 million AOI on $44.5 million in sales
- Innovative Industrial Properties (IIPR.NYSE) boasts $3.4m on $6.8 million in sales
- Organigram (OGI.V) slides in with $6.3 million on $26.9 million in sales
- Village Farms (VFF.T) does $3 million on $5.4 million revs
- Charlotte’s Web (CWEB.T) does $2.6 million on $21.7 million sales
- Planet 13 Holdings (PLTH.C) knows $0.3 million out on $13.8 million sales
- GrowGeneration (GRWG.OTC) manages $0.3 million on $13.1 million sales
There are some companies edging towards this list. Medipharm Labs (LABS.V) is almost break even on $22m in revs, and C21 Investments (CXXI.C) is also not far off, on $7.8 million in sales.
Going on the above numbers, I’m picking the following three as being outperformers:
“A man who procrastinates in his choosing will inevitably have his choice made for him by circumstance.”
– Hunter S. Thompson
Planet 13‘s numbers are rock solid considering they’re in just one location. Granted, that location is Las Vegas, and the store in question is the size of an aircraft hangar, but they’re doing more sales in that one store than MedMen is doing in six. And they’re not losing money while MedMen is tossing it out the back of trucks all over the country.
The $200m market cap is bigger than I’d like, as a value investing guy, but they just announced growth plans in California, where the superstore model will go down a treat.
The dispensary is an eye popper.
The next outperformer is Trulieve.
I know it’s an easy pick to lay down the biggest profiteer on the list as one to watch, but those numbers are filthy.
Dispensaries in four US states, with a whopping 29 in Florida, one in California, one in Connecticut and Massachusetts coming soon.
To be clear, not all of those dispensaries are created equal.
It’s easy to go for cheap laughs, obviously, but respect is due to a company that has maxed out its growth quickly, is driving significants revenues, and actually pulling in more dough than it’s spending.
MedMen stores may look nicer, but that company couldn’t run a boy scout troop. iAnthus (IAN.C) has scaled responsibly and, for mine, is one to watch, but doesn’t have Trulieve’s numbers.
That said, at a $454 million valuation, there’ll need to be a lot more growth to double that market cap.
My third outperformer pick is Organigram (OGI.V):
“There he goes. One of God’s own prototypes. A high-powered mutant of some kind never even considered for mass production. Too weird to live, and too rare to die.”
-Hunter S. Thompson
Let’s be honest, some of us never saw this turnaround coming. After years of poor management, being dragged into lawsuits over poor standards and pesticide use, and even ditching out on the occasional unpaid bill (it still hurts, Denis), current boss Greg Engel has made this place sing.
I’m a big fan of real management, of making sure every dark corner has a light shone upon it and every surface is sparkling clean, of figuring out how to make the machine run on high octane, and Engel has done that with this company.
The numbers don’t lie.
$6m in profit on $23m in sales? That’s bad ass. Organigram product is selling, which is impressive because most government liquor distribution channels, which run Canada’s online sales, have no means of searching for organic product on their site. If people are finding OGI’s products, that’s a great sign.
In addition, organic product doesn’t have near the yield that non-organic plants have, so if Engel is making his facility profitable regardless, that’s a real achievement.
And, lastly, organic isn’t cheap to grow. So how Engel is spending more, getting less from his efforts, and making more money than his competitors is some serious juju.
I hated on Organigram for years, and was always justified in doing so. But hot damn, they good.
After them, it gets ordinary quick.
“Tune in, freak out, get beaten.”
-Hunter S. Thompson
MedMen’s (MMEN.C) $57m loss on $32m in sales is a big woof, made louder because so much of it comes from management’s largesse.
Tilray’s (TLRY.Q) $27m loss on $17m in quarterly sales, with just 9% quarterly growth is a big concern, especially for a $3.8 billion market cap.
GW Pharma’s (GWPH.Q) $51m loss on $39m revenues would be less of a concern if it wasn’t a $64.7 billion company.
Yes, you read that right… $64.7 billion.
Acreage Holdings (ACRG.C), a company Bruce Linton wanted to buy for US$3.4 billion, lost $34.3 million on $12.9 million revs in their last quarter. Linton’s bright idea was to pay a 41% premium for them, and add their losses to his own. You’ve got to wonder if that deal is dead in the water…
Other big LPs aren’t exactly in a place to brag wen comparing with WEED. Aphria (APH.T) and Aurora Cannabis (ACB.T) both drew $94-95 million losses last quarter, on $17.9 million and $65.1 million in sales respectively. Aphria’s 18% reduction in revenues, quarter over quarter, is a cause for concern.
You’ve all grown up with certain companies in your mind as ‘leaders’, and that was fine in 2016 and 2018, but right now, today, there’s a changing of the guard taking place.
Don’t get caught parking your money with the big guys, as they struggle to contain their internal financial bleeding. Find the value. Find the real managers.
“In a nation run by swine, all pigs are upward-mobile and the rest of us are fucked until we can put our acts together: not necessarily to win, but mainly to keep from losing completely.”
-Hunter S. Thompson
FULL DISCLOSURE: The only companies mentioned in this story that are Equity.Guru marketing clients are C21 Investments and iAnthus.
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