Where might we find opportunities these days? Perhaps in the beaten-down marijuana sector? It’s awfully hard to say, since every sector is really “beaten down” this month, but let’s look at the latest pitch from Cabot Marijuana Investor ($497/yr), since they’ve been touting a hot idea that editor Timothy Lutts is calling the “Apple of Cannabis.”
The big picture spiel is about finding companies who do things differently — like Apple did with the iPhone in getting rid of the buttons and the restrictive hardware, caring less about battery life and tradition and more about future functionality and ease of use… opening the world up to the potential flexibility of touchscreen controls and a heretofore unimaginable range of applications and uses for what we somehow still call “phones.” Here’s a taste of that reasoning from the ad:
“To identify these leaders we need to look for those that do the most important things differently.
“To do that, we should first understand what the industry norm is, so that we can tell what ‘different’ even looks like.
“What are the “long battery life” and “mechanical keyboards” of the marijuana industry today?”
And as that applies to the marijuana business…
“There are two things that are happening in the marijuana industry today that are considered to be the right way of doing business…
“Number one — nearly every sizable player wants to be everything and everywhere at the same time…
“And number two — which is really a consequence of number one — to fund their unrealistic growth plans, nearly all marijuana companies are issuing stocks as if they are Monopoly money….
“Most of the time when a marijuana company raises capital, it has to do it via a highly dilutive stock offering…which, to put simply, shrinks the wealth of existing shareholders.
“The SAFE Banking Act will certainly alleviate a lot of this issue once signed into law…
(Since it will give marijuana companies more options when it comes to getting growth capital)
“Until then — careful capital management is the cornerstone of shareholders’ wealth in this market…
“And the companies that do it well will reward their shareholders handsomely….
“The ‘long-battery life’ and ‘mechanical keyboard’ of the marijuana industry is being unprofitable and diluting your shareholders.”
I guess that makes some logical sense — it’s hard to say that being fiscally responsible is going to be an enduring advantage for a participant in a commodity business, but it’s certainly not a bad thing to be profitable and shareholder-friendly. Especially these days, when raising money via share sales is going to be a lot more dilutive for almost everybody than it was even a month ago.
And, of course, we then get to the point… more from the ad:
“There is one stock that fits the bill…
“In fact — after further analysis I’m confident in saying that today it’s the strongest stock in the entire cannabis universe!
“Not only does this company do things differently from the crowd, but it also checks off all the requirements of the All-Weather strategy…
“There’s tremendous revenue growth, healthy earnings, proven management, valuation, growing institutional support…”
All of those are good things, no complaints. But how about some actual clues? He does oblige, to some degree…
“The stock is currently trading above its 25- and 50-day moving averages, and the chart has a clear pattern of higher lows and higher highs since its most recent bottom….
“In the latest quarter alone the company has booked over $70 million in revenue…
“This translates to over 150% growth from the year before and 20% from the preceding quarter.
“The triple-digit top-line growth is particularly impressive considering that this company is profitable…
“The operating profits came just under $40 million…”
The ad, which we started seeing on March 15 in our email, also includes a chart — so I can tell you that the data he’s using in this pitch is not from this week, it’s about six weeks old. The chart he uses in the ad goes from October 1 to just about the end of January. Which means that I’d guess this might have been a February recommendation from that newsletter, and they’ve repurposed that recommendation into a “special report” to sell the newsletter (that’s just a guess, of course, I don’t subscribe to these letters so never know exactly what subscribers see). That’s common practice, and usually it still results in interesting ideas that are still active, but given the past couple weeks of market turmoil it’s also worth noting that this stock could already have been “stopped out” of any portfolio Cabot might be recommending. I don’t know what stop-loss strategies they might follow in this letter, but my understanding is that Cabot is generally a growth-focused shop that does not hold on to positions whose charts begin to look bad.
But with that caveat, we do still want to ID this stock — the chart he shared will help us confirm our answer, but how about some other clues to feed to the Thinkolator?
“… the institutional ownership here is less than 10%!
“This means that even though the stock is heading up…
“(Rallying more than 65% since its bottom just a few months earlier)
“The overwhelming majority of the profit is yet to be made here as big money will potentially start buying out 20%, then 30%, and eventually 50%+ of all outstanding stock…
“Making this stock a great candidate to be what we call a ten-bagger! (stocks that go up at least 10X)”
And then a bit more about what this company does “differently” …
“This company has chosen to start by dominating only one highly lucrative geography and one highly attractive product category.
“The single market this company currently operates in is projected to grow to over $1.09 billion by 2020…
“And the best part is that they’re consistently selling 60% to 80% of the entire volume in that market.”
And a few other clues…
“… they are already in the top 3 of the highest volume U.S. producers today….
“This year the company is expected to book almost $250 million in revenue…
“And as much as $400 million the year after…
“All this while maintaining a fat 40% margin!
“Such high cash flows combined with a laser-focused market strategy allows this company to self-fund its growth…”
And a few more details that will help us get it right:
“When this company IPO’d just over a year ago, it had around 109 million shares outstanding…
“As of today, that count is around 110 million shares… less than 1% of new shares issued — very, very impressive!”
And though we might not know what optimism they’re holding about this stock even just four days after they sent the promo email, given the shifting stock price, this is what they said about it on March 15:
“This is a highly opportune time to buy into this stock…
“This is because this company is now preparing to expand into new markets!
“This is huge because unlike any other company in this industry — our “Apple of Marijuana” has a profitable business model and lots of cash on hand.
“That’s right — while almost every other company is petering out and desperately scrambling to find any cash to fund their unprofitable operations…
“Our cannabis “Apple” is only at the beginning of its growth cycle…
“And as one of the early investors getting in before big Wall Street — we expect to make as much as 500%+ here…”
Well, even if I don’t end up wanting to buy this stock, I must say that it’s refreshing to read a little optimistic language like that… I need a little of that “500% gains are coming” language to offset the emotional tsunami that’s washing up on the shores on Gumshoe Island this week.
So what’s the answer? Cabot is teasing Trulieve Cannabis (TRUL.CX in Canada, TCNNF OTC in the US), a large multi-state cannabis operator that is indeed profitable and fairly inexpensive at first glance, at least going by the trailing financials.
And in case you’re wondering what I mean by “maybe their opinion has changed” since this ad started running a few days ago, here’s my version of the October-January chart that they used in the ad:
And here’s a more updated version, through to today:
That doesn’t mean the story has changed for Trulieve specifically, of course, essentially every speculative stock has fallen by at least 30-40% in the past month, but it might change the technical aspects of the argument — the share price is no longer, for example, above the 25 and 50-day moving averages, though the price is roughly the same as it was on March 15, the day we got this ad.
As with most stocks right now, pretty much all the technical and momentum indicators would come under the “bad” category — if you want to like this stock, it will have to be because you think the fundamental performance of the company is strong and will continue, and that the stock price has overreacted to the downside and will eventually recover. Which it might, though that’s rarely a Cabot argument (they do have one value-focused newsletter, but they are generally growth and momentum folks, trend followers — a hugely successful strategy for the past five years, but one that leaves you few places to turn for buying at the moment).
So what do those financials look like?
Well, the teaser does match on those fronts as well — they have 110 million shares outstanding, which has been mostly unchanged since they went public a year and a half ago. And they have been profitable since the beginning, with operating revenue in the September quarter last year coming in at $70 million and growing about 20% sequentially (“sequentially” just means “from the previous quarter” instead of compared to the same quarter a year ago). They were not particularly cash-rich as of September, but thanks to some of their financing decisions (including doing sale/leaseback transactions on some facilities as well as using debt instead of equity) they have been able to grow without issuing new shares.
And, if you happen to browse Trulieve on any financial website, you’ll see pages and pages of “class action lawsuit!” press releases from different attorneys, dating back to way before the coronavirus clobbered the share price… so what’s going on there?
Well, the initial pressure came from a short report by Grizzly Research in December, so that was well before the Cabot recommendation. That report did call into question some of the shady-sounding back story for the company, particularly as relates to management and the land sales and initial license grants and possible local corruption, but I didn’t find those complaints particularly compelling even though they sounded bad in the narrative of the short-seller — and the arguments about the facilities and the product quality and financial reporting seemed pretty off-base to me, I found Trulieve’s detailed response letter pretty reasonable on those fronts.
I can’t say with any expertise that the accusations of fraud are without merit, of course, I haven’t investigated the company, and I do pay attention to well-reasoned short attacks because short-sellers often do identify truly fraudulent companies, but in this case my first read-through was that the company’s response fairly addressed the short-seller complaints. You can take that for what it’s worth, which is probably not very much.
But that short report was the spur for that December dip in the share price, a dip which seems almost quaint now, and also the impetus for all the shareholder lawsuit press releases — every time there’s a short attack on a stock, there are a bunch of law firms who specialize in class actions who try to get out there first to put together a cohort of complainants who believe they lost money because of fraudulent behavior by the company, because the law firm that can run a class action suit can earn huge fees if they get a class action certified and are able to either win a case or get the company to settle. It’s a race to sign up shareholders who lost money, so the press releases are unrelenting even if most of these class action lawsuits never actually make it very far (much of the time they fail to sign up enough shareholders, or are laughed out of court by a judge, but it presumably works often enough to be worth the effort). And, of course, those press releases also help to escalate the bear case, because investors who look at their quote screens see unrelenting lawsuit announcements.
The deadline for gathering plaintiffs and designating a lead plaintiff for the class action attempt was February 28, so that’s when the press releases dried up, but I haven’t looked to see where things stand in the courts (maybe nowhere important at this point, these take time to work through even if the class action is never certified, which I assume is what happens most of the time, and if the action actually goes to trial it can take years — there’s a worthwhile summary of what these cases actually look like here if you’re curious, though I’m sure the perspective of a class action plaintiff firm would be different).
(I’m not completely anti-lawsuit, by the way, though I do think shareholder lawsuits like these are often manipulative and meaningless… sometimes short attacks and lawsuits help to identify and publicize real fraud, like Enron, which is a huge public service, but we also see these lawsuit announcements whenever a company just announces that “things have changed and the business is not going as well as we thought it was last quarter” or “we messed up our accounting and have to restate.” I would generally not react to those “investigating claims” and “class action deadline coming” press releases from law firms, but it is important to look at short reports and consider the points they’re making as objectively as you can, and to see how the company responds — it often bothers me when larger companies just ignore short attacks, though that’s probably fair sometimes given the absurdity of some such allegations, but I think smaller or more vulnerable companies really need to issue detailed rebuttals to calm shareholders, as Trulieve tried to do.)
And Trulieve did sue Grizzly for libel earlier this year, so they continue to take this seriously — I don’t know if that will go anywhere, that’s a tough case to prove, and it’s separate from the class action attempts.
Since the last earnings report (from September), they have put some additional debt on the balance sheet with a $60 million offering (in October, like their previous offerings it was senior unsecured debt at 9.75% with warrants as a boost, the warrants have a strike price of C$17.25 and expire in June of 2022). So that’s not cheap debt, and the sale/leaseback transactions they’ve done are likewise not cheap financing, but their strong position in Florida has still made the financing seem worthwhile — particularly if they can grow as well in other states as they have in Florida (they’ve acquired licensed companies in Connecticut, California and, most importantly, Massachusetts).
They haven’t filed their end-of-year financials yet, but their investor presentations made in March give the projections — they expect 2019 to end with $220-240 million in revenue, and for that to bump up to $380-400 million in 2020, with EBITDA margins staying near 40% and bringing in about $100 million in 2019 and $150 million in 2020. So that sounds pretty impressive, though we should remember the “I” in EBITDA is going to grow more substantial as their debt has picked up (EBITDA is a made-up cash flow number that companies like to use, it stands for Earnings Before Interest, Taxes, Depreciation and Amortization, and adding a bunch of debt, though it adds to that “I” cost, can boost the EBITDA nicely).
I don’t know whether these numbers will change appreciably when they report their actual 2019 results, which will probably come out in about three weeks (they’re not late or delayed, to be clear, they reported on April 10 last year). I would assume that they’ll insert more caution due to the coronavirus situation and the impact that is going to have on all retailers, including cannabis retailers, but that’s just a guess. If they don’t change from that presented guidance from earlier this month, and if Florida remains strong for them (they do have a very strong “next day delivery” network in Florida, with 100+ vehicles so people don’t have to visit dispensaries, so maybe that will help), then the financials do look pretty compelling as long as you believe medicinal marijuana demand will continue to grow. They certainly have kept the cash flow more positive than a lot of pot stocks I’ve looked at, and that provides for some reassuring flexibility during crazy market swings… though who knows, it might also be that they’ll announce some restatements as a result of their investigation of those short attacks — the accounting for agricultural products in process is pretty inscrutable for us normal human beings, and I would not be at all surprised if I misunderstand something there.
I’m not buying Trulieve, personally, though the financials look better than any other US marijuana cultivator I’ve analyzed (which isn’t all that many, to be fair) — I continue to expect, in general, that marijuana growing will be a marginally profitable commodity business, and that value will come from brands and/or control over distribution, so maybe they’ll have an edge there with their strong distribution and their “first mover” licensing status in Florida, which has also presumably given them some brand recognition there, but such edges can be eroded fairly quickly sometimes and they won’t have that same advantage in Massachusetts, Connecticut or California.
So what do you think? Ready to jump on Trulieve as a leader in marijuana, or even as a survivor as the industry gets clobbered in the stock market? Have other favorites you think are better positioned? Let us know with a comment below. Thanks for reading!
Disclosure: Of the companies mentioned above, I own shares of Apple. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.