Although the cannabis sector has been under considerable pressure since early 2019, the industry has recorded impressive growth during this time as demand for cannabis products remains strong.
During the last year, we noticed a shift of interest and of capital from the cannabis market in Canada to that in the US. We believe that the transition is partly related to Canada’s recreational cannabis market generating less traction than anticipated and will monitor how cannabis 2.0 will support growth in the region.
Cannabis is still considered to be illegal in the US and this has served as a speedbump for broker-dealers and investment banks that are interested in the sector. Once cannabis is legalized at the federal level in the US, we expect to see major investment firms enter the sector and for this to be a catalyst for companies that are levered to it.
When it comes to the US cannabis market, one factor that our readers need to be aware of as it relates to the structure of the industry. Due to cannabis being illegal at the federal level, the state is responsible to manage the market. Each state, therefore has its own set of regulations for the cannabis industry and we find this to be significant. Certain states are set up better than others from a regulation standpoint and we expect this to play an important role in how companies are able to capitalize on the opportunity.
Today, we want to focus on 3 of the most significant cannabis markets in the US and highlight a company that is focused on the opportunity. We believe that these markets represent attractive growth opportunities for the companies that are levered to them and these are businesses that our readers should be aware of. Please make sure to read each section as we may not be excited about some of the companies that are highlighted in the article.
Nevada: A Tourism Driven Cannabis Market
Last year, we visited the Las Vegas cannabis market on a number of occasions and continue to be impressed with how the market has evolved. Following the legalization of recreational cannabis in Nevada, Las Vegas has transitioned into a cannabis town and the market has benefited from the number of tourists that visit it.
During the last year, Nevada focused cannabis companies have come under pressure and this occurred while the market continued to record impressive growth. We find this trend to be significant and have been focused on identifying a business that has been impacted by this.
1933 Industries (TGIF.CN) (TGIFF) has substantial leverage to the Las Vegas cannabis market and we believe that the business has visible catalysts for growth. Last year, the company moved into a production facility that can produce 5 times more cannabis than the previous facility and we expect production numbers to ramp higher throughout the year.
Based on the size of the production facility, 1933 Industries will be able to generate incrementally more revenue once the facility is operating at full capacity. We have visited and toured the state-of-the-art facility and believe that the market does not fully appreciate this aspect of the story. Later this year, we expect the market to become more aware of this opportunity as the increased production capacity should translate into better revenues from its premium brands and white label partners.
At current levels, 1933 Industries has a favorable risk-reward profile and is trading at a considerable discount to its peers. An analysis of the company based on simple valuation metrics (revenue/market capitalization or current assets/current liabilities), shows that it represents a compelling long-term opportunity. 1933 Industries has visible catalysts for growth and has attractive leverage to the California market and the CBD opportunity. We consider the company to be a multi-faceted opportunity and is one that our readers should be aware of.
California: The Largest Cannabis Market in the World
California is the world’s largest cannabis market and is an opportunity that we have been bullish on since we began to cover the cannabis sector. During the last two years, we have seen a significant increase in the number of premium brands and dispensaries that are levered to the market and believe that our readers need to be aware of this.
Although the California market has become saturated, the state generated more than $3 billion from the sale of cannabis in 2019 and we find this to be of the utmost significance. The size of the market makes it feasible for legitimate companies to capitalize on the opportunity and we are bullish on the long-term growth prospects associated with the market.
When it comes to the California cannabis market, MedMen Enterprises Inc. (MMEN.CN) (MMNFF) is one of the best known brands and the business has been laser focused on the cannabis retail opportunity in the state. Last week, MedMen released second quarter financial results and we were impressed with the numbers that were generated in California.
During the second quarter, MedMen reported an adjusted EBITDA loss of $35.1 million on more than $44 million of revenue. When compared to the same period last year, revenue increased by 50% and we find the reported loss to be significant. In California, gross margins declined slightly when compared to the prior period and this is a metric that we continue to closely follow.
From a performance standpoint, California is by far the strongest market for MedMen. During the quarter, California retail revenue totaled $32.4 million (an 8% increase over the prior quarter). Same store sales have been strong in California for MedMen and we will monitor how the stores continue to perform in the market.
Although MedMen has been nothing short of an execution story in California, the same cannot be said for the other markets that the business is focused on. These markets are failing to live up to expectations and the market has punished the company for it. Over the next year, we would not be surprised to see MedMen acquired by a leading US multi-state-operator and continue to monitor the opportunity from the sidelines.
Earlier in the article, we highlighted 1933 Industries as an attractive play on the Nevada market. In late 2019, the company announced a strategic agreement with a leading operator in California and we expect the market to prove to be a major value driver for the business in the back half of 2020. 1933 Industries is an opportunity that is flying under the radar and we are bullish on the markets that it is levered to.
Colorado: A Massive Market that Flies Under the Radar
Although Colorado was the first state to legalize recreational cannabis in the US, the market seems more focused on the opportunity in California and Nevada. Since inception, Colorado’s cannabis market has generated more than $6 billion of revenue and we find this to be significant.
One of the reasons for the lack of activity in the Colorado cannabis market is related to the regulations that were enacted by the state. The regulations significantly impacted the growth of the market at the company level and in 2019, the state removed these regulations. The change is expected to lead to significant consolidation in the Colorado market and this is a trend that we are excited about.
According to the Colorado Department of Revenue, Colorado cannabis dispensaries have set a new sales record for the sixth consecutive year, while that commercial cannabis sales accounted for over $141 million in November, state data shows. The tally pushes Colorado’s 2019 overall sales total past $1.6 billion, breaking 2018’s record of approximately $1.55 billion. The 2019 numbers do not take into account the month of December and we are favorable on the results.
Pure Harvest Cannabis Group, Inc. (PHCG) has been highly focused on the Colorado cannabis market and is an opportunity that we are excited about. The company is in the middle of a major expansion and is focused on making accretive acquisitions in the state. Last week, the company announced its intent on rapidly expanding operations in Colorado with near-term acquisitions and buildouts.
A key advantage for Pure Harvest is that the management team and the advisors have extensive cannabis and capital markets experience and have been instrumental in financing four other private and public cannabis companies focused on various aspects of the industry. The management team’s record of success, coast-to-coast cannabis experience, and network of contacts provides the business with a major advantage as it relates to advancing the operation.
From edibles to oils and cannabis flower to cultivation technology, Pure Harvest is levered to several high growth verticals within the cannabis industry and represents a multi-faceted growth opportunity. We believe that the company is led by a management team that has had its finger on the pulse of the Colorado market and are bullish on the verticals that the business is focused on.
Pure Harvest intends to develop into a large scale vertically integrated multi-state operator and distributor in well-established and growing markets. The company is focused on developing precision dosed cannabinoid health and wellness consumer products. The management team intends to establish the operation as a leading consumer product brand that offers a wide variety of cannabis products that can be sold in markets across the globe. We plan to keep an eye on Pure Harvest and monitor how the story advances from here.
Pursuant to an agreement between StoneBridge Partners LLC and 1933 Industries we have been hired for a period of 180 days beginning January 15, 2020 and ending July 15, 2020 to publicly disseminate information about (TGIF) including on the Website and other media including Facebook and Twitter. We are being paid $5,000 per month for a period of 6 months. We own zero shares of (TGIF), which we purchased in the open market. We plan to sell the “ZERO” shares of (TGIF) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (TGIF) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.