If you think you’ll day trade your way into a better zip code, think again. Thousands of hedge funds across the globe employ millions of sneaky little AI algorithms that monitor the world’s big data. All that data exhaust being generated by alternative data providers is ingested to provide signals for trading strategies that generate alpha. The words you are reading right now are being analyzed for meaning, and the authority of those words measured by who reads them. As soon as information becomes available, it gets priced in – the efficient market hypothesis hard at work.
Industries with lots of external uncertainties are inherently riskier. That rocket you sent up with $20 million worth of equipment on it could just blow up. The quantum computer you’re trying to build may or may not be entirely useless. Or the regulators may lax rules on a Class A drug you currently sell in the United States in places where its been legalized. That’s what we’re hoping for as we dip our toes into the warm soothing water of U.S. cannabis stocks.
It’s High Time We Invested in Cannabis
Having toiled covertly on the black market for many moons, we understand cannabis like few others do. We also smoke a metric ton of the stuff every year, so the two sort of cancel each other out. What’s left is the critical eye we cast on any investment thesis we’re eying up, and that tells us now may be a good time to invest in U.S. cannabis companies. Size matters, so we’ve decided to vet the six biggest multi-state operator (MSO) stocks as seen below.
Our most recent piece on the topic – GTI Stock vs Curaleaf Stock: And the Winner Is? – looked at how cannabis companies have been loading up on goodwill and debt while expanding just as fast as their stoned little legs will carry them. Now that the music has stopped, it’s time to demonstrate some financial conservatism. While revenue growth trumps all, in the risky world of cannabis, we’re also considering burn rates and debt loads. So far we’ve taken a good look at the top-three multi-state operators, and our conclusion looks something like this:
Rather than jump right into analyzing the merits of Green Thumb Industries as a stock we might like to love, we thought it would be useful to take a closer look at Verano Holdings Corp (VRNO.CN). It’s particularly relevant when you consider that Harvest Health & Recreation (acquired by Trulieve) attempted to acquire Verano and wasn’t able to.
Verano and Harvest
In April of 2019, Harvest Health & Recreation announced their intention to acquire Verano Holdings for consideration of $850 million. Almost a year later, the deal fell through, and both companies cordially exited citing prolonged regulatory hurdles to jump through and a challenging environment. Verano then moved quickly to expand by closing at least 10 deals so far this year.
All those rapid acquisitions have resulted in a great deal of intangible assets and goodwill.
Our previous piece on GTI vs. Curaleaf looked at some important financial metrics which gauge business health. Holding a great deal of intangible assets on the balance sheet along with goodwill shows that perhaps these companies may have overpaid in their mad scramble to scoop up every single license they could get their hands on. For their size, Verano has nearly as much intangibles as Curaleaf does.
When it comes to financial stability, we like to aggregate both short-term and long-term liabilities, then subtract cash. This provides some indication of whether a company might be able to expand by taking on more debt or even manage the debt they currently have. Verano doesn’t have much cash on hand though they claim to not be seeking equity dilution by funding their capital needs through debt and positive cash flow.
One argument to be made here would be that the licenses being acquired which are reflected as intangible assets should be ascribed a value that reflects future expansion possibilities.
The Value of Licenses vs. Stores
Incredibly, Verano Holdings spent just over a billion dollars acquiring licenses this year. A reader recently asked how we might go about valuing licenses that cannabis companies hold as intangible assets (aside from the value being ascribed by the purchaser). We would start by looking at how many available licenses there are by State. In places like California, they pretty much issued a license to anyone who could fog a mirror. Other states might be more restrictive as to how many total dispensaries they ever want to see being operated. But supply and demand are only part of the picture, and every state is sure to handle things uniquely.
For now, we’re focused on what’s happening today. How many stores do you have open right now selling cannabis products and in how many states? Here’s the answer to that question for the four MSOs we’ve been talking about today.
|Green Thumb Industries||73||15|
Again, these metrics don’t give us enough information as to which states these stores live in. More stores and fewer states should generally make it easier to capture market share and dominate the local markets (Trulieve seems to support this theory with market leadership in three states, or so they say). At some point in time, these companies need to stop acquiring new things and focus on growing the assets they have, especially all those intangible licenses.
Verano Holding is also unique from other MSOs in that they went public quite late – just over a year ago. They’ve only recently arrived to the market and now they’re making lots of small acquisitions. This late in the game, effort should be spent on capturing bigger fish. Doing back-to-back small acquisitions means a ton of due diligence needs to be performed for each company. The pressure to get through all these deals may result in less-than-optimal prices being paid without having enough time to figure out where all the bodies are buried. At a minimum, let’s give Verano a few quarters so we can see that all these financials have been aggregated upwards appropriately – unless of course they keep purchasing companies at the pace they have been. The dust needs to settle before they’re worth another look.
Based on what we’ve seen of Verano Holdings so far, it isn’t a cannabis stock that will find a place in our own portfolio. With just several open slots to be filled, any company we add needs to be a compelling way to play the cannabis theme with minimal risk. We’re ogling Green Thumb Industries right now but may go on a research date with Cresco Labs (CL.CN) first just to make sure we’re vetting all possible options. As risk-averse investors, we’re approaching the cannabis space with even more caution than usual.
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