Cannabis Sector Teach-in Call Today
Today at 10 AM, we are hosting a teach-in call for the cannabis sector to help investors new to the sector understand the fundamentals.
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CLICK HERE for event details (includes video, dial-in, and materials link) Participating Dialing Instructions Toll-Free: Toll: UK: 0 Confirmation Number: 13712765 |
Cannabis 101 – A look at the current setup for the Cannabis industry and how we see the industry playing out over the next few years.
Summary thesis:
- Full descheduling of Cannabis, a Schedule 1 drug, will not happen until at least 2026. A triggering event may happen by 2023, but changes to the Controlled Substance Act will take years.
- Given this timeline, the US MSO will build a substantial moat around their business, making it expensive for the larger Canadian player to enter the U.S. market. We are long a basket of US MSO focused on the limited license states.
- There are some signs of life in the Canadian market as a retail presence grows across the country. Unfortunately, ATMs have saved some of the weaker players, adding to a prolonged clearing period. We have a LONG bias the two most expensive companies on an E.V./Sales basis (CRON & CGC), but they also have the best balance sheets to survive and win in a prolonged downturn. Or focus on the SHORT side in Canada is on ACB, TLRY, and APHA.
We believe the U.S. cannabis sector is poised for significant growth in the years ahead and that the industry is misunderstood by new people analyzing the space. Things move fast in the Cannabis industry, and that also may be a hurdle to invest in the space. Over the past few years, some consumer analysts (beverage and tobacco) have been exposed to the group as STZ and MO have made significant investments in the space. As those analysts know, legalized drugs make for some of the best consumer businesses, and Cannabis is becoming the fourth such industry. Just in the past nine months, we are seeing an increase of institutional investors into space.
To lower the hurdle that some may have, we are hosting a call to teach investors the terminology, metrics, supply chain, and fundamentals to lower the knowledge bar to invest in the sector. Unlike most new industries, we already have excellent visibility into demand with tremendous growth drivers with proven historical results. Investing in Cannabis while currently in federal prohibition is a once in a lifetime opportunity, as the industry is just getting started. Given the November election results, it is increasingly likely that legalization (STATES/MORE Act) will occur in the next few years, opening up the space to new capital and new investors. When Cannabis is legalized, the demand drivers from medical use, recreational use, and edibles are predictable. The market will more appreciate this in the months to come.
The winner of the election was not "blue" or "red," but "green." Four more states just voted to allow adult use of marijuana. One in three Americans now live in states where marijuana is legal for anyone over 21. The election showed there is broad public support for cannabis legalization. Just like other industries, not all of the companies benefit similarly from legislative changes. We think the market is extrapolating the election's outcome too far into the future for some companies, while other companies have a head start and are positioned well for years to come.
Columbia Care Earnings (CCHWF)
CCHWF is on the Hedgeye Cannabis LONG Bias list.
The company reported revenues of $54.5 million versus FactSet Consensus $53.4 million, an increase of 64% QoQ, and 145% YoY. The company’s Q combined and reported results to include one month of contribution from The Green Solution (TGS) in Colorado, the state’s largest vertically integrated cannabis operator, which was acquired on September 1, 2020. With their acquisition of TGS, the company crossed a critical operational milestone, generating positive adjusted EBITDA. Columbia Care reported adjusted EBITDA of $4.2 million, an increase of $9 million QoQ, and $16 million YoY. Adjusted gross margin was a record 39%, representing an increase of 299bps and 1515bps YoY. Arizona, Colorado (pro forma), Massachusetts, Ohio, and Pennsylvania were the top five markets by revenue for the company, generating positive adjusted EBITDA.
The company reaffirmed its 2020 guidance of revenues between $155 million and $180 million. Management noted that they’d be focusing on driving scale in core markets, transitioning away from activating licensed jurisdictions, and capitalizing on opportunistic M&A.
Columbia Care is one of the most extensive US MSOs with a footprint of 76 dispensary and 23 facilities with over 1 million square feet of cultivation and production capacity and over 300 acres of outdoor cultivation capacity. In total, its facilities are located in markets projected to achieve over US$9 billion in 2020 cannabis sales.
Israel announces a plan to legalize adult-use within nine months.
The country of close to 9 million is planning on legalizing recreational before the end of 2021, according to Justice Minister Avi Nissenkorn. Nissenkorn stated, “It’s time to make progress and legalize cannabis in Israel. This is a significant, holistic, and responsible reform, which shows the State of Israel isn’t ignoring reality and is going in the footsteps of developed countries.” An explanatory memorandum of a bill for legalization is slated to be published by the month’s end, with legalization going into effect nine months after it is approved.
The new law would allow adults over the age of 21 to purchase cannabis at specialized stores. Cannabis retailers would be allowed to make deliveries. Edibles resembling candy would be barred. The government implied that it would regulate the market to “ensure prices are reasonable” to prevent customers from entering the illicit market.
