When I finished our October letter last Thursday, things were dreary. Eight months of pain for the sector and a tough opening month for Green Giants. Things can change quickly in cannabis investing and they started to on Friday, November 5th. Over the last week, a combination of political and earnings news has driven the the model portfolio up 25%.
Prior to the bounce, much of the persistent pain was coming from bearish sentiment over lack of political progress and persistent shorting. In this environment, it was a slow bleed…down 50bps one day, down a point the next. Nothing fundamentally had changed, but the price action was fatiguing.
This suddenly switched last Friday, November 5th, when news leaked of a Republican-sponsored bill to legalize cannabis. It is led by Rep. Nancy Mace (R-SC) and the key components include:
- Rescheduling cannabis and treating it similar to alcohol, with a 21 age requirement for recreational use.
- A 3.75% excise tax on sales.
- Regulation by The Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB) and limited FDA involvement.
The combination of bipartisan legal support, and a potentially more palatable approach from republicans set the sector on fire. It would be a big plot twist if the republicans took the legalization issue and used it to buoy their hopes in the 2022 mid terms.
Heading into this week, there were looming concerns about earnings season. Coming off last years lockdowns, comparisons were going to be tough. When people were stuck at home and getting stimulus checks, cannabis consumption increased to unsustainable levels. This year, we have seen more normalized usage rates, less stimulus and a more “normal” environment.
Curaleaf kicked off the week with a lackluster report. They missed on revenue and adjusted-EBITDA, in part due to slower rollouts in New York and New Jersey and a couple of chunky one-time write-off. Green Thumb Industries announced on Wednesday and continued to deliver the most consistent results in the sector. They beat on revenue for the tenth-consecutive quarter, preserved 50% plus margins and had their seventh-consecutive quarter of positive cash flow from operations. The stock, and entire sector, soared in response.
Cresco came in Thursday morning with largely inline numbers and reaffirmed full year guidance. Later that day, California's Glass House and east-coast focused Ascend reported.
Glass House’s weak report showed how tough California is right now. The state has issued too many grow licenses and not enough retail, causing an excess of flower production and too few places to sell it. Consequently, wholesale flower has fallen 47% this year and Glass House (the number one flower brand in California) is suffering. The thesis on the stock is that over the next few quarters more retail will come online and the supply/demand imbalance will correct. Plus, Glasshouse owns the largest grow facility in the country and is positioned to be the dominant national exporter when we eventually see interstate commerce.
Ascend operates in more limited-license enviroments and painted a prettier picture. Total revenue increased 7.7% quarter-over-quarter, 131.4% year-over-year and adjusted EBITDA increased 15.9% quarter-0ver-quarter. Ascend operates primarily in less mature, east coast markets and illustrates how much limited licenses matter in cannabis investing. While Green Giants has exposure to California and other unlimited-license states, they are relatively small positions when compared with limited-lincense environments.
Sentiment is rapidly shifting, shorts are scrambling to cover and optimism is abound. As we suspected, the businesses in the cannabis sector are performing and demand for the product remains strong. Sentiment and political concerns have been holding back prices. If we got further positive political movement, sentiment will only accelerate and we could be in the early stages of a bullish run.