On May 18th, I anxiously pressed publish on an article about Ayr Wellness. I say anxiously because it's gotten hard for me to write during this extended downturn, and I'm not big on short-term predictions. Sharing any opinion with thousands of people makes me nervous, but a bullish idea in a sixteen-month drawdown seemed borderline stupid. Thankfully, we got lucky and the trade has worked out well.
I won't go deep on the original thesis (the full article is here). The short version is that Ayr Wellness is a top-ten MSO that had become disconnected from peers and was drastically underperforming. Much of the downside came after they were the only operator not permitted to begin adult-use sales in New Jersey at the April 11th New Jersey CRC meeting. The result was Ayr appeared undervalued, oversold, and there was a catalyst coming (the next New Jersey CRC meeting on May 24th) that could quickly change sentiment.
New Jersey Approvals
I built a position over three days before publishing the bullish piece. My average cost is $4.96, which is almost identical to the price of Ayr stock when I pressed publish. I knew it was important to get in several days before the potential catalyst, as news often leaks and the biggest move happens before the announcement.
During the first two days, Ayr outperformed peers with above-average volume. The big move happened on Friday, May 20th. The MSOS ETF had a big end-of-day ramp and Ayr was on fire, finishing up over 17% on the day. The following Monday was the New Jersey CRC vote, so either news got out, or people were placing bullish bets.
Monday, May 24th was the New Jersey CRC meeting and I was glued to the Zoom. First, Ayr received approval to expand its cultivation from 24k square feet to 100k. This will help them feed their stores and also allow wholesaling opportunities, which is key. Minutes later they received approval to transition all three stores from medical to adult-use. This gives them three of the five stores in central New Jersey, a region with 3.2 million people. It was the best-case scenario and the stock surged higher.
Thursday, May 26th Ayr released first-quarter earnings. I did not expect great results, especially given what we had seen from peers and state-level data. However, I thought there was potential for a positive second-half outlook given the New Jersey approvals and new assets turning on in Boston, including a flagship Back Bay location next to the Apple store.
Results for the quarter were lackluster, with flattish revenue and lower adjusted-EBITDA. Relative to guidance, the GAAP EPS of -$0.11 beat by $0.17, and revenue of $111.2mm missed by $1.53mm. But, the bigger story is what is coming next. Due to the new retail and expanded cultivation, Ayr expects $200mm in fourth-quarter revenue. This is an $800mm annual run rate on a stock with a $500mm market cap and $800mm enterprise value (market cap + debt). It was a good-enough earnings call and the stock climbed another 2.7%, despite MSOS falling -0.43% on the day.
From publishing my article on May 18th to the close on May 27th, AYR is +24.54%, while the MSOS ETF is -0.51%. Below is a graph of the performance over the period.
Due to the speculative nature of this idea, I started a smaller-than-average position in Ayr. Thanks to the strong appreciation, it has become the second-largest position in the Green Giants portfolio. Over the next couple of weeks, I will likely trim it and strive for a more average weighting. While I still like the stock, I view Ayr as a more speculative opportunity. Plus, Ayr's higher volatility makes the impact bigger on a risk-weighted basis.
Ayr remains the cheapest MSO on an enterprise value/sales and enterprise value/adjusted-EBIDTA basis. This, coupled with the potential for a strong second half of the year makes it an attractive opportunity. I would keep an eye on their debt, it's the highest of the top-ten MSOs, and monitor execution as they roll out in new markets. Any stumble could cause a revision of their optimistic guidance and a correction in the stock.
Ayr Wellness has been an undervalued stock for months and got much cheaper after they were not approved with the other MSOs at the April 11th New Jersey CRC meeting. It was going to take a catalyst to unlock the value and we got this from their approval at the May 24th meeting and confirmation with acceptable earnings on May 26th.
In this case, it was important to be in a few days before the catalyst, as most of the move happened one day before the announcement. This is a good reminder to set up several days, or more, prior to any anticipated events. I don't expect to take many trades like this, but if I find another undervalued situation with a clear catalyst on the horizon, perhaps I'll be less nervous to share it next time.
Disclosure: As of 05/31/22 Ayr Wellness is a member of the Green Giants portfolio. I was not compensated to write this report.
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