I know Mr Market currently hates cannabis companies but I could care less what Mr Market thinks. I’ve been buying companies like OGI and CRON and plan on holding them for quite some time. I’m specifically sticking with companies with great balance sheets just because I don’t know the potential short term outcome with the cannabis industry specifically the tax.
I don’t see how in the long-term the market doesn’t keep on growing and eventually become an incredible investment.
I think the most interesting thing is to see which companies get the most brand recognition and eventually become the “Coke and Pepsi” of the cannabis industry.
I think bigger companies have a massive advantage now to grow their brand recognition while the industry is struggling (financially).
Specifically, Cronos as they already charge a premium over most other edibles and have such a high market share.
To my understanding, they’re able to charge us premium because the edibles actually taste good and don’t taste like cannabis like most edibles do. This is very enticing for most people who are trying for the first time and then they end up sticking with the brands they’ve already tried despite the more premium price.
I find it funny how many value investors like to find hated industries but will stay away from cannabis companies. Again great write up and I appreciate the coverage on an industry so hated most value investors, won’t touch it.
Great write up Jake! Really like OGI (and CRON) for all the reasons you mentioned. The excise tax is one that bothers me however, do you see that being removed/diluted in the coming years? Can’t help but feel the winds are beginning to change re punitive taxes like that…
I agree with your thesis and own OGI myself, but I am constantly amazed that you can find even better deals in the Canadian space among microcaps. Avant Brands, Decibel, Rubicon, Simply Solventless and Cannara, to name just a few, are all already profitable at EBITDA level and trade at even lower EV/EBITDA and EV/S multiples. Now, how is it possible these clearly sub-scale players can be so lean & mean? In fact OGI looks decidedly expensive compared to them on almost every single metric, so you can certainly call a valuation absurdity but it's not like there are not even more outrageous ones served up by Mr Market. I do get it that the space is prone for consolidation and that the above mentioned small players may not have the scale (and certainly no big boys' backing from the likes of BAT), but they seem to be doing just fine and in fact growing impressively, either organically or through accretive M&A. As absurd as it sounds, OGI still has a somewhat premium valuation in the sector compared to those I mentioned.
On your point of how these players can be more profitable despite being more subscale, this is all capital cycle theory. All of the legacy players went public with way too much capital and it basically caused diseconomies of scale; it's been a decade long process of right sizing. It's what I like about the thesis; the earnings power is totally masked by disaster overinvestment. These companies that emerged later were not capitalized with unreasonable expectations.
On valuation, I own a couple of these names (Cannara and Avant) you list but disagree that any of them are cheaper; maybe Cannara if you use asset value as your metric. Using multiples in isolation is not really that instructive. All of these companies have debt. Is Decibel even solvent? You're likely getting diluted into oblivion owning that. Avant similarly has diluted shareholders into oblivion and its debt is not exactly low risk. There's not necessarily anything wrong with having debt obviously, but I think this industry remains way too competitive and unpredictable to be comfortable owning things with meaningful leverage. Call me cynical but HASH.V could blow up, couldn't it? I do think Cannara is very attractive and have been buying it.
The question that really needs to be asked with all of these is what is the moat? These smaller companies remind me of wineries or craft brewers which have notoriously been difficult businesses. They might make money now, but what are they doing that is sustainable? Can they develop brands? Cannara I think has a real moat from its geography. Not sure about the others. What happens to e.g. Avant when export channels get oversaturated just like the domestic market was? That's not to suggest they won't work and maybe they all go on to outperform OGI but I don't think looking at the here and now is going to be where the money gets made in this sector.
I'd rather just own the companies that could buy these players. CRON could buy all of these entities and still have a pile of cash left over.
I will just mention that one name you could consider looking into is Auxly. Absolutely bombed out in terms of valuation but their growth rates are impressive, and they do also have big tobacco backing from Imperial Brands. A very messy history of dilution, and still a lot of debt on balance sheet - not a pretty sight - but inflection seems very much in sight.
Fair points, Jake, and I appreciate your takes. I think I just have a soft sentimental spot for underdogs, no other explanation. That being said I have hedged my bets by spreading capital around. I basically run a Canadian cannabis ETF within my portfolio now!
Thanks for the write up. Really interesting. I like that investors have lost lots of money in he space. Hated industries are usually good hunting grounds. How do you think about insider holdings here. Seems sparse except for Mario (Naric) who is/was CEO of Motif Labs. Other than that the CEO for example only owns 47k shares which doesn't inspire a lot of confidence vis a vis skin in the game. Thanks again. Really enjoying your writings.
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I think you can play around with the multiple as you see fit and it doesn't really change the thesis. I think a growing market leader with scale and a debt free balance sheet should trade at a fairly high multiple. I think Glass House is >20x EBITDA, for example. When these start to work, I have no doubt we will see multiple expansion. But in any event, I don't see this as some price target investment; if this works it should grow for a long time. The valuation exercise I did is just supposed to be illustrative - i don't think trying to come up with a precise value for something like this is a good use of time (you're bound to be wrong).
Glass House trades at low/mid single digits on run-rate EBITDA exiting '25 when you account for the current phase of their expansion, even if you model it with recent trough wholesale pricing. I'm not saying that's the right/fair multiple and I'm with you otherwise!
Yeah that's fair, and it sort of gets to the underlying exercise of throwing a multiple on a grower - it's not all that illustrative. The reason I'm using a high multiple on earnings a year or two out is that I am expecting growth rates to be strong through the decade. If Glass House trades at mid single digits on its current run-rate, that seems cheap. How easy is the path to achieving that growth?
Well, they're "just" doing more of what they're already doing, taking capacity utilization at Camarillo from 40% to 60% or so. It's more about uncertainty about the exact regulatory pathway than execution risk / finding a market for the incremental biomass, because even at full capacity they're ~1-2% of the existing national market (and likely deep in the cost curve for good weed). And the main uncertainty right now is whether they'll sell "hemp" interstate (see eg DeSantis blessing intoxicating hemp while crushing FL regulated rec “marijuana” last fall) for something like ~$800-1000/lb flower vs. being stuck in the CA regulated market at ~$500/lb (and they'd be pushing up against 20% share of the total CA wholesale market at that point, and I'm not sure they could take it further than that without some form of interstate). My best guess is inertia / red state antagonism to "marijuana" wins out and so "intoxicating hemp" isn't going away - and Glass House's tested CA product should command a premium. Again, best guess.
If you get comfortable that they have a real cost advantage, and if CA (and national) wholesale equilibrium pricing for good flower ends up closer to $700/lb than ~$300/lb through cycles, then they're at a massive inflection point for earnings without requiring much incremental capital to get there. I think many observers miss that point or believe that wholesale pricing (and basically everything else!) will remain totally destructive and take everyone down with it.
They've also recently gotten traction with Allswell ($10 out the door 8ths, after ~35% taxes), and so their stores are now doing +10% SSS vs the CA market -6%, suggesting they've successfully dialed in the branded value proposition in a truly competitive wild west market (arguably the locus of this industry) after some early missteps.
So I wouldn't say the growth will be easy, but they have multiple pathways to keep winning despite black market competition and both state and federal clusterf*cks. Can't say that about many other US publics right now.
I commented about GLASF on your CRON write-up, not sure if you read it. It's my favorite Cannabis play. Assuming the price recovers to $300 they should do at least $1 EPS in '26 and $2-$2.5 in '27 (on diluted share basis).
They have very strong operating leverage and due to their low cost of production they should be able to survive any downturn. The market has been very volatile though so I don't know if / when we'll we see stable prices. But on the other hand they don't rely on any regulatory changes to do extremely well. Could easily be a 4-5 bagger in a few years.
Great write up!
I know Mr Market currently hates cannabis companies but I could care less what Mr Market thinks. I’ve been buying companies like OGI and CRON and plan on holding them for quite some time. I’m specifically sticking with companies with great balance sheets just because I don’t know the potential short term outcome with the cannabis industry specifically the tax.
I don’t see how in the long-term the market doesn’t keep on growing and eventually become an incredible investment.
I think the most interesting thing is to see which companies get the most brand recognition and eventually become the “Coke and Pepsi” of the cannabis industry.
I think bigger companies have a massive advantage now to grow their brand recognition while the industry is struggling (financially).
Specifically, Cronos as they already charge a premium over most other edibles and have such a high market share.
To my understanding, they’re able to charge us premium because the edibles actually taste good and don’t taste like cannabis like most edibles do. This is very enticing for most people who are trying for the first time and then they end up sticking with the brands they’ve already tried despite the more premium price.
I find it funny how many value investors like to find hated industries but will stay away from cannabis companies. Again great write up and I appreciate the coverage on an industry so hated most value investors, won’t touch it.
Nice article. Couple of questions:
- Doesn't the BAT raise price need to be adjusted somewhat for the ongoing dilution that it came attached with (the 7.5% p/a in preferred shares)?
- Why 15x EBITDA? What PE multiple does that imply?
As an aside, there seem to be a lot of adjustments in its adjusted EBITDA. Excluding R&D in particular seems a bit cheeky.
Great write up Jake! Really like OGI (and CRON) for all the reasons you mentioned. The excise tax is one that bothers me however, do you see that being removed/diluted in the coming years? Can’t help but feel the winds are beginning to change re punitive taxes like that…
I agree with your thesis and own OGI myself, but I am constantly amazed that you can find even better deals in the Canadian space among microcaps. Avant Brands, Decibel, Rubicon, Simply Solventless and Cannara, to name just a few, are all already profitable at EBITDA level and trade at even lower EV/EBITDA and EV/S multiples. Now, how is it possible these clearly sub-scale players can be so lean & mean? In fact OGI looks decidedly expensive compared to them on almost every single metric, so you can certainly call a valuation absurdity but it's not like there are not even more outrageous ones served up by Mr Market. I do get it that the space is prone for consolidation and that the above mentioned small players may not have the scale (and certainly no big boys' backing from the likes of BAT), but they seem to be doing just fine and in fact growing impressively, either organically or through accretive M&A. As absurd as it sounds, OGI still has a somewhat premium valuation in the sector compared to those I mentioned.
Good comment. Would say a couple things:
On your point of how these players can be more profitable despite being more subscale, this is all capital cycle theory. All of the legacy players went public with way too much capital and it basically caused diseconomies of scale; it's been a decade long process of right sizing. It's what I like about the thesis; the earnings power is totally masked by disaster overinvestment. These companies that emerged later were not capitalized with unreasonable expectations.
On valuation, I own a couple of these names (Cannara and Avant) you list but disagree that any of them are cheaper; maybe Cannara if you use asset value as your metric. Using multiples in isolation is not really that instructive. All of these companies have debt. Is Decibel even solvent? You're likely getting diluted into oblivion owning that. Avant similarly has diluted shareholders into oblivion and its debt is not exactly low risk. There's not necessarily anything wrong with having debt obviously, but I think this industry remains way too competitive and unpredictable to be comfortable owning things with meaningful leverage. Call me cynical but HASH.V could blow up, couldn't it? I do think Cannara is very attractive and have been buying it.
The question that really needs to be asked with all of these is what is the moat? These smaller companies remind me of wineries or craft brewers which have notoriously been difficult businesses. They might make money now, but what are they doing that is sustainable? Can they develop brands? Cannara I think has a real moat from its geography. Not sure about the others. What happens to e.g. Avant when export channels get oversaturated just like the domestic market was? That's not to suggest they won't work and maybe they all go on to outperform OGI but I don't think looking at the here and now is going to be where the money gets made in this sector.
I'd rather just own the companies that could buy these players. CRON could buy all of these entities and still have a pile of cash left over.
I will just mention that one name you could consider looking into is Auxly. Absolutely bombed out in terms of valuation but their growth rates are impressive, and they do also have big tobacco backing from Imperial Brands. A very messy history of dilution, and still a lot of debt on balance sheet - not a pretty sight - but inflection seems very much in sight.
Fair points, Jake, and I appreciate your takes. I think I just have a soft sentimental spot for underdogs, no other explanation. That being said I have hedged my bets by spreading capital around. I basically run a Canadian cannabis ETF within my portfolio now!
love the write up
Thanks for the write up. Really interesting. I like that investors have lost lots of money in he space. Hated industries are usually good hunting grounds. How do you think about insider holdings here. Seems sparse except for Mario (Naric) who is/was CEO of Motif Labs. Other than that the CEO for example only owns 47k shares which doesn't inspire a lot of confidence vis a vis skin in the game. Thanks again. Really enjoying your writings.
Yeah this is by far my biggest knock on the story. The lack of insiders putting their own money behind this is really weak.
Thanks for the response. Have you spoken to mgmt/ raised this ? I'll likely do the same.
Not about this specifically
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Why do you think 15x EBITDA is right when transactions are going for 1x sales ?
I think you can play around with the multiple as you see fit and it doesn't really change the thesis. I think a growing market leader with scale and a debt free balance sheet should trade at a fairly high multiple. I think Glass House is >20x EBITDA, for example. When these start to work, I have no doubt we will see multiple expansion. But in any event, I don't see this as some price target investment; if this works it should grow for a long time. The valuation exercise I did is just supposed to be illustrative - i don't think trying to come up with a precise value for something like this is a good use of time (you're bound to be wrong).
Glass House trades at low/mid single digits on run-rate EBITDA exiting '25 when you account for the current phase of their expansion, even if you model it with recent trough wholesale pricing. I'm not saying that's the right/fair multiple and I'm with you otherwise!
Yeah that's fair, and it sort of gets to the underlying exercise of throwing a multiple on a grower - it's not all that illustrative. The reason I'm using a high multiple on earnings a year or two out is that I am expecting growth rates to be strong through the decade. If Glass House trades at mid single digits on its current run-rate, that seems cheap. How easy is the path to achieving that growth?
Well, they're "just" doing more of what they're already doing, taking capacity utilization at Camarillo from 40% to 60% or so. It's more about uncertainty about the exact regulatory pathway than execution risk / finding a market for the incremental biomass, because even at full capacity they're ~1-2% of the existing national market (and likely deep in the cost curve for good weed). And the main uncertainty right now is whether they'll sell "hemp" interstate (see eg DeSantis blessing intoxicating hemp while crushing FL regulated rec “marijuana” last fall) for something like ~$800-1000/lb flower vs. being stuck in the CA regulated market at ~$500/lb (and they'd be pushing up against 20% share of the total CA wholesale market at that point, and I'm not sure they could take it further than that without some form of interstate). My best guess is inertia / red state antagonism to "marijuana" wins out and so "intoxicating hemp" isn't going away - and Glass House's tested CA product should command a premium. Again, best guess.
If you get comfortable that they have a real cost advantage, and if CA (and national) wholesale equilibrium pricing for good flower ends up closer to $700/lb than ~$300/lb through cycles, then they're at a massive inflection point for earnings without requiring much incremental capital to get there. I think many observers miss that point or believe that wholesale pricing (and basically everything else!) will remain totally destructive and take everyone down with it.
They've also recently gotten traction with Allswell ($10 out the door 8ths, after ~35% taxes), and so their stores are now doing +10% SSS vs the CA market -6%, suggesting they've successfully dialed in the branded value proposition in a truly competitive wild west market (arguably the locus of this industry) after some early missteps.
So I wouldn't say the growth will be easy, but they have multiple pathways to keep winning despite black market competition and both state and federal clusterf*cks. Can't say that about many other US publics right now.
I commented about GLASF on your CRON write-up, not sure if you read it. It's my favorite Cannabis play. Assuming the price recovers to $300 they should do at least $1 EPS in '26 and $2-$2.5 in '27 (on diluted share basis).
They have very strong operating leverage and due to their low cost of production they should be able to survive any downturn. The market has been very volatile though so I don't know if / when we'll we see stable prices. But on the other hand they don't rely on any regulatory changes to do extremely well. Could easily be a 4-5 bagger in a few years.