September 2, 2019 BARRON’S 29
“There’sa
hugemarket
growthoppor-
tunityfrom
disrupting
othercon-
sumercatego-
ries,likealco-
hol.Cannabis
canbevery
disruptivein
treatingopioid
addiction.”
RobFagan
PotStocks
ThatCanGo
Higher
Green Thumb Industries.................
GTBIF
RecentPrice:
$9
TargetPrice:
$24
TrulieveCannabis
TCNNF
RecentPrice:
$8
TargetPrice:
$22.50
Curaleaf Holdings........................
CURLF
RecentPrice:
$7
TargetPrice:
$18
Source: GMP Securities
You focus on the U.S. multistate operators,
instead of Canadian producers like Canopy or
Aurora Cannabis [ACB]. Why?
To be super honest, it just was a greenfield
opportunity, where there was less competition
for an up-and-comer like myself.
It’s true that very few analysts cover U.S. oper-
ators. And they are Canadian stocks. Why?
Because of the federal illegality of cannabis in
the U.S., these operations have not been able
to list their securities on federally-regulated
U.S. exchanges. One of the smaller exchanges
in Canada—the Canadian Securities Ex-
change—did let them sell stock. It was the
only place that these U.S. companies could
access public markets, although they’ve since
cross-listed on the OTC [over-the-counter]
market in the U.S.
How can a U.S. resident go about buying one
of these stocks?
The easiest way is to have a brokerage ac-
count that can access the OTC Markets
Group in the U.S., or the Canadian Securities
Exchange. Last I checked, there were a
handful of self-directed brokers that could
access the Canadian Securities Exchange for
U.S. residents. But it’s broadening out.
There’s now an ETF listed on the NYSE, the
AdvisorShares Pure Cannabis exchange-
traded fund [YOLO] that has exposure to the
U.S. multistate operators through an equity
swap arrangement.
Are stocks of these U.S. operators underpriced?
I strongly believe so. Just compare the mar-
ket capitalizations of the U.S. and Canadian
pot sectors, and the sales opportunity of
each.
What are those numbers?
For most of Canada’s licensed producers,
you’ve got an aggregate market cap of 50
billion Canadian dollars [$31 billion], even
after the group’s selloff. They have a C$5
billion sales opportunity in Canada that they
can readily address in the next few years.
So that is a price-to-sales multiple of 10
times.
The U.S. operators have a market cap of
$20 to $25 billion. Counting only the states
that already have some form of medical or
recreational access, their sales opportunity is
around $22 billion within the next three to
four years. So that’s one-times sales.
Not only is the U.S. a larger opportunity,
but it has a better economic model. In most
states, you’re allowed to go direct to your
customer—from production right up to re-
tail—cashing in on more of the value chain.
There are also fewer restrictions on product
forms and advertising than in Canada.
When will more states approve recreational
sales?
In 2020, you might have an Arizona ballot
initiative, a Florida ballot initiative. Connecti-
cut has a chance of passing legalization.
Maryland and Pennsylvania, too. New Jersey
couldn’t get enough votes in the legislature,
but they will try again. That will put pressure
on New York.
Read more : Marijuana Company Harvest
Health Is Bullish on a Legalization Vote in
Arizona
The markets where these companies oper-
ate are fantastic. Massachusetts converted
from medical to recreational sales and is
growing above a 500% annualized clip right
now. Even a mature market like Arizona is
still growing at a better than 30% annual
rate.
Which of the U.S. operators interest you?
Green Thumb Industries [GTII.Canada or
GTBIF]. It is one of the best operators.
They get things done, quickly and efficiently.
They expanded their footprint across 10
states, while generating positive Ebitda
[earnings before interest, taxes, deprecia-
tion, and amortization]. That’s much better
than many Canadian operators, some of
whom have large Ebitda losses every quar-
ter.
And they are known for having high
product quality. Their product was tested by
High Times magazine—an authority in the
space—and certain of Green Thumb’s propri-
etary strains tested at a total THC level of
38%. It was the most potent cannabis strain
ever tested by High Times. That product is
in such high demand in Massachusetts that
some stores limit your purchase quantities.
How do you value Green Thumb?
I project the companies’ revenues and Ebitda.
Not too far in the future—I use a 2020 esti-
mate. Then I apply a fair multiple. In the case
of Green Thumb, it’s 20 times Ebitda.
Yikes!
Yes, that could be considered elevated. But
there are factors that argue for a strong val-
uation multiple on a U.S. cannabis stock.
There’s the huge market growth opportunity
from disrupting other consumer categories
like alcohol. Another area where cannabis can
be very disruptive is in treating opioid addic-
tion.
OK. What Ebitda do you project for Green
Thumb?
I estimate the company will generate $485
million of revenues next year, from organic
growth and already-announced acquisitions.
The company can go from a 13% Ebitda
margin now to a 35% margin and $172 mil-
lion in2020—driven by what I expect will be
scale benefits and vertical integration. I also
include some contribution from future M&A.
So that’s how you get to your target price of
$24, for this $9 stock. Can they earn 35%
Ebitda margins?
The benchmark for fully-integrated cannabis
businesses is a company called Trulieve
Cannabis [TRUL.Canada or TCNNF]. It
operates almost exclusively in Florida, where
vertical integration is mandated. Trulieve
just reported a quarter with 55% Ebitda
margins.
So you like Trulieve?
Yes, that’s another favorite. It was one of the
first companies to open dispensaries in Flor-
ida in 2016, so it had almost 90% market
share. Even after competitors have opened
over 100 stores, Trulieve still has more than a
50% share on a dollar basis.
Does Trulieve operate outside of Florida?
They have acquired the holder of a provi-
sional license in Massachusetts, where they
plan to open three stores in the recre-
ational channel. Given the kind of growth
coming from the Massachusetts recre-
ational market, it’s going to be a nice state
for Trulieve. They’ve also got a small foot-
print in Connecticut and a retail store in
California.
Trulieve’s last quarterly results were in-
credibly strong. I forecast $400 million in
revenue for 2020. They’ve not gotten a fair
valuation. The stock is trading below 6 times
their 2020 Ebitda of $146 million; other large
players are 9 to 11 times. The stock is $8 to-
day. My target for Trulieve is $22.50, using a
17½ multiple.
Who else do you like?
I would direct you to Curaleaf Holdings
[CURA.Canada or CURLF]. After some re-
cent M&A, Curaleaf is by far the largest
player in the U.S. cannabis industry. This
year alone they deployed $2 billion on a
number of transactions. They are under con-
tract to acquire a company called Cura Part-
ners, which manufacturers the Select brand
of vaporization products—it’s the biggest-
selling vape brand in California, Nevada,
Arizona and Oregon. They have the poten-
tial to be a huge vertically-integrated player
that can spread its products across the en-
tire nation.
Curaleaf could exceed $1.1 billion in reve-
nue next year, with a 34% Ebitda margin
generating $390 million. That gets me to an
$18 target for a stock that sells below $7 to-
day.
Thanks, Rob.