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  • Writer's pictureAdastra

Cannabis Portfolio

Updated: Nov 14, 2023

This page presents thoughts on creating a Cannabis Portfolio built on the methodology and analyses in this blog. As mentioned in other pages of this site, prior to investing in individual stocks, it is recommended to study the sector as done in the articles in the INVESTING category, and to analyze multiple stocks as done in the ANALYSIS category to determine which stocks are ranked best using a data-driven methodology.

Each investor should invest in individual stocks or ETFs based on their goals and risk tolerance. The easy way is to invest in an ETF and own multiple stocks all at once. A starting point for ETFs would be the analysis presented for Cannabis ETFs which includes six of the largest Cannabis ETFs by Assets Under Management (AUM).Before investing in an ETF you must look at the holdings and determine if you like the individual stocks held and percentages allocated. You must also consider the management fees and expenses, which typically for Cannabis ETFs is around 0.75%.

Alternatively, investors can invest in a portfolio of individual stocks and/or ETFs to get the investments they want. Low (sometimes free) trading fees minimizes the cost of building a portfolio. There are pros and cons to each stock or ETF and the goal should be to find the balance that (hopefully) works out favorably. The AdvisorShares MSOS ETF is well managed, as can be seen in the correlation between holdings % and fundamentally strong MSOs. The highly weighted MSOs in the fund have experienced impressive growth in revenue and multiple quarters with positive AEBITDA. They have strong prospects as more states legalize and as there is progress in legislation (descheduling, banking/tax reform, uplisting, legalization, etc). These MSOs are also highly ranked in the Best Cannabis Stocks analysis, and the three largest by revenue have a page in this blog with scenario analyses and investment thesis.

But these stocks are like gladiators listed on the OTC (Colosseum) and may trade at lower valuations than Nasdaq/NYSE (Senate) listed stocks, primarily because of limited institutional ownership. While long term prospects post uplisting and with institutional participation are strong, these stocks might underperform relative to Nasdaq/NYSE listed stocks which will likely be favorites among investors during a bull market. The ETF does have Nasdaq/NYSE listed stocks in the ancillary and real estate categories like Innovative Industrial Properties (IIPR) and GrowGeneration. These were excluded from the Best Cannabis Stocks Analysis, with the focus of the analysis on companies with primarily cannabis production, distribution, retail, ecommerce, technology and/or pharmaceutical segments contributing to revenue.

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The ETFMG MJ ETF, in contrast to MSOS ETF, is a passive ETF. The advantage of this ETF is that the stocks are listed on Nasdaq/NYSE and some of these might get disproportionate gains during a bull run. The fund is heavily weighted with licensed producers (categorized as plums). Many of these have had lackluster or stagnating revenue growth, and multiple quarters of negative AEBITDA. There is no correlation between ETF holdings % and company revenues, growth or AEBITDA. This is evident with the high weightage for stocks with low revenue and often negative AEBITDA compared to High Tide, in spite of High Tide having higher revenue, revenue growth and all positive AEBITDA quarters in the decade. The ETF also has large holdings in ancillary and tobacco stocks, like Philip Morris and Altria. In spite of these factors on fundamentals, there is a probable scenario where this ETF outperforms the MSOS ETF, primarily because the stocks are on Nasdaq/NYSE and hence will benefit from institutional participation, and hype from name recognition and high volumes traded.

A portfolio that picks stocks based on a balanced methodology that factors in fundamentals and hype might give the best results. While analyzing individual stocks, two important questions need to be asked:

1. Will this company survive (with limited share dilution) till the next cannabis bull market?

2. Will this company thrive when legislation allows uplisting, institutional ownership and Nasdaq/NYSE listed companies to sell THC products in the US?

Regarding survival, a lot depends on the timing of the bull market, which nobody can predict. Companies that have stagnating revenue growth and consistently have negative AEBITDA quarters, like several licensed producers (plums), may need to resort to dilution to survive. This is detrimental to shareholder value and share prices might keep falling unless the dilution is used for growth rather than to maintain operations. Some of these companies might not survive till the next bull market. The same challenges are faced with smaller US operators.

In contrast, those that have strong revenue growth and consistently posted positive AEBITDA quarters, have a good probability of surviving till the bull market, with limited dilution to shareholder value. These include several vertically integrated apriums and apples (cannabis tech), such as the US MSOs included in this blog’s ANALYSIS category, High Tide and WM Technology.

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Regarding survival, in the short term there are many challenges on the macro scale that need to be considered. I have experienced first-hand the impact of inflation to consumer activity. Costs are rising for even the basics like food and transportation. Consumers are reducing expenses where possible and switching to cheaper alternatives, including white label products and cutting down on non-essentials. In my case, given the prices of alcohol and cannabis in Toronto, I have saved money by eliminating hard liquor and beer, and switching to cannabis. I have also switched where reasonable to white label products.

I bring up this point to highlight that consumers will look to save money with the rise in inflation. Cannabis companies that sell good quality products with reasonable prices should do well, and might see sales increase rather than decrease in a high inflation scenario. This again favors the vertically integrated apriums, especially those with a strong retail dispensary/store presence and their own white label brands.

Regarding which companies will thrive post positive legislation/reform, the companies with a strong US presence have the highest growth potential. Canada is a mature market for cannabis with lower growth prospects compared to the US. Higher growth potential exists in the US and other countries like Germany when they legalize cannabis. Although there will still be growth in Canada with the transfer of market share from the illicit to the legal cannabis market, and with consumption trends from alcohol/tobacco to cannabis, especially in beverages.

Also regarding thriving, my analysis indicates that the two important factors for success are a strong retail (physical brick and mortar and/or ecommerce) presence and vertical integration through distribution and production. The Retail segment is an underappreciated segment in the industry. But history shows that retailers like Walmart and Costco experienced phenomenal growth and valuations when they were growing stores globally. As they grew, they took market share from the small operators (mom and pop shops), many of whom shut down. Eventually these companies reached a point of slowing growth. But the wealth of Walmart’s Walton family, the richest family in the world, is a reminder of the wealth generation possible when a retail company grows and owns significant share of a market. The cannabis industry is one of the few industries in the world experiencing phenomenal growth rates, seen during the growth phase of companies like Walmart and Costco.

Several vertically integrated apriums analyzed in the ANALYSIS category have a large corporate owned (as opposed to franchise model) retail store presence with dispensaries across multiple states (US) or provinces (Canada). Trulieve, High Tide, Curaleaf and Verano each have more than 100 such dispensaries/stores. The true competitive advantage of retail comes from white label branded products. This has been a source of strength and superior margins for many retail companies like Costco (Kirkland brand) and Walmart (Great Value, etc). Inflation has and continues to be a burden on customers globally, and many customers (myself included) shop white label products where possible to save money. Vertical integration and white label products are moats that strengthen apriums, and are not available for smaller operators and growers without a retail presence. These are some factors to consider while picking individual stocks.

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The articles in the INVESTING category have covered topics like the timing of the next cannabis bull market and the importance of seeing the big picture in the cannabis investment thesis. I cannot predict the timing of the next bull market. But the logical thing to do would be to focus on the numbers and data and to make data driven decisions based on fundamentals. Companies with strong fundamentals, management, strategy and execution, should continue to thrive in a sector with markets growing globally. In the growth phase, good companies will redeploy funds for growth and success will be demonstrated with revenue growth. The best companies will grow with a combination of organic growth and accretive acquisitions, with limited share dilution to maximize shareholder value. Net income is important but will be impacted when the focus is growth over profitability. We have seen this historically with Amazon in the first decade of this century, where Amazon traded at a PS ratio as low as 1.8 in 2003, which was an incredible investment opportunity.

But a point will come when growth becomes less of a priority and companies focus on profitability. The profits can lead to multiple ways to boost shareholder value, even if there is no bull market. One would be share buyback programs or Normal-Course Issuer Bids (NCIB). With these the companies can buyback and cancel shares, reducing the share count and increasing Earnings Per Share (EPS). The other way to increase shareholder returns would be to offer dividends, as done by the best in the retail sector like Walmart (NYSE: WMT), Costco (NASDAQ: COST) and Dollarama (TSE: DOL). In essence, strong fundamentals are the key to success.

There are many parallels to the Cannabis sector and the Tech sector’s ecommerce (Dot-com) boom/bust at the start of the twenty-first century. Many Cannabis companies have failed and many more probably will. But the companies with the strongest fundamentals have a good probability of thriving long term like Amazon. The following short video featuring Jeff Bezos is well worth watching.

“The stock is not the company. And the company is not the stock. And so, as I watched the stock fall from $113 to $6, I was also watching all of our internal business metrics, number of customers, profit per unit, everything you can imagine defects, etc, every single thing about the business was getting better and fast. And so, as the stock price was going the wrong way, everything inside the company was going the right way.”

- Jeff Bezos

In the current phase of the Cannabis sector, with both growth and uncertainty, it makes sense to learn about and track the relevant numbers, data and business metrics. This blog, especially the multiple analysis pages in the ANALYSIS category, will be revised frequently. Feel free to add pages of interest to your browser favorites, and to follow me on Twitter or Stocktwits.

Based on the thoughts and factors presented on this page, I have shortlisted 5 stocks for now and prepared a detailed scenario analysis and investment thesis for each one. 2 of these stocks are Nasdaq listed, while 3 are OTC listed, to find a blend of the two exchanges.

The four stocks (with links) selected from the Best Cannabis Stocks Analysis are:

This is in no way an exhaustive list. But based on the analysis and methodology used in this blog, these are stocks well worth due diligence and potential inclusion in a cannabis portfolio. When time permits, I would like to include more stocks with similar analysis, including smaller companies. But for now, I have done the best I can with limited resources and time available to me.

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The format used for each stock’s page includes:

1. Overview and investment thesis

2. Bull and bear scenario analysis using 5% quarter over quarter (QoQ) revenue growth and 10% annual share dilution

3. Additional thoughts

4. Information sources and charts

The overview includes the links to the company’s investor presentation and financial reports. These should be reviewed by every current and future investor.

Nobody can predict the future. But I have presented multiple bull and bear scenarios for each stock over a timeline that goes to 2026. It is my belief that at a minimum, the investment horizon for cannabis stocks should be 2026 or beyond. If you cannot hold for the next bull market, this may not be the sector for you to invest in. If you can hold, you get to ride the waves of the rising tide of cannabis, which will lift all boats (that survive). The rising tide will be not one but two waves – the revenue growth wave and the bull market valuation wave. The combined effect of these two waves can magnify the potential gains in share price appreciation, making this potentially one of the great investment opportunities of the century. Each stock’s page includes bull and bear scenario analysis and price targets modelling the two waves of revenue growth and bull market valuation.

Seven scenarios are presented for bull market and bear market scenarios for each stock with a dedicated page in this blog. The PS Ratio driven scenarios include a baseline (PS 5), three bull market scenarios (Moon PS 10, Mars PS 15, Stars PS 20) and three bear market scenarios (Koala PS 2, Panda PS 1, Polar PS 0.5). As mentioned in the disclaimer posted on every page, I am not a financial advisor, and hence my methodology is different than that of the analysts at Financial Institutions. Analysts typically have price targets and Buy/Hold/Sell ratings based on multiples to either revenue of AEBITDA. During a bull market they use high multiples. When the market turns to bear market, they keep revising with lower multiples. From bear to bull market, similarly they will revise with higher multiples. This way, irrespective of company fundamentals, price targets and ratings are revised with optimism and pessimism influenced by external market conditions. This they do because analysts typically set price targets 12 months in the future. In my approach I present 7 scenarios formulaically driven by PS Ratio valuations. The bull market scenarios would be achieved when the market gives bull market valuations to the stocks. The analysis tables in this blog will be revised frequently, and so will the various scenarios with price targets. Feel free to add pages of interest to your browser favorites, to monitor the dynamic changes in analysis and targets.

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As explained in my About Adastra page, this blog is the product of significant personal resources, including time and expense. If you find any article here worth sharing, please share via the social media share options. If you find this Blog worthy of your support, you can support me using the affiliate links and via Patreon.

The cannabis industry is still in its early stages and impacted by misconceptions rooted in stigma and ignorance. Many people still associate cannabis with tetrahydrocannabinol (THC), the main psychoactive compound in the miracle plant. But this original medicinal plant, used for thousands of years, provides more than a hundred compounds, called cannabinoids. Research on the health benefits of cannabinoids is on the rise, as is consumption of non-psychoactive cannabinoids including cannabidiol (CBD), cannabinol (CBN), cannabichromene (CBC) and cannabigerol (CBG).

This blog has several affiliate links to non-psychoactive cannabinoids, with the goal of spreading awareness and monetizing this blog’s content. Feel free to check them out as part of your research. You might find something that helps improve your physical, mental and/or spiritual wellness; and you would be supporting my analysis and efforts in the process.

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If you find any article here worth sharing, please share via the social media share options. If you are interested in connecting, you can do so on Twitter (@numbersnarrati) and Stocktwits (@AdastraYOLO). To support, please check out the affiliate links (especially CBD and other cannabinoid products) or become a Patron via the Numbers Narrative Patreon Page.

Disclaimer: All content and analysis on this Blog/website is information shared for educational and entertainment purposes only. The content creator(s) of this Blog are not financial advisors and the content is not intended to provide advice or recommendations for any security, investment product or any other product or service mentioned on this Blog. You should not use this Blog to make financial decisions and you should instead seek advice from professionals who are authorized to provide investment advice. Although best efforts have been taken to keep the information on this Blog accurate, this Blog may contain errors and inaccuracies. You alone assume the sole responsibility of the risks associated with the use of any content on the Blog. In no event shall any of the content creators be liable for any damages in connection with the information contained in this Blog or links provided.

Disclosure: I (username Adastra) am an investor not a trader. I am bullish on the Cannabis sector as a long-term investment (2026 and beyond), provided stocks/ETFs are carefully picked based on data-driven due diligence. Of the 16 stocks covered in the Best Cannabis Stocks analysis, I have invested only in my top 3 picks: High Tide, Green Thumb and Curaleaf. But my analysis indicates (without any guarantees) that there is a potential for impressive gains in investing in the stocks best ranked in the analysis, including WM Technology, and Trulieve, which have a dedicated page with detailed analysis in the STOCKS category. I reserve the right to buy or sell at any time any of the stocks mentioned in this blog. I do not short stocks and never will short any stock in a company that makes the world a better place. I do not have insider knowledge of any company covered in this blog. All data used for analysis is from public sources. I have received (as of last update date of this page) ZERO funding for this blog from any of the companies featured in this blog.


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