What a difference a year makes. Last summer, cannabis stocks got pummeled as investors hoped that September would ease the pain with fresh inflows. Then the controversy around vaping hit, Pershing pulled the custody plug, tax-loss selling kicked-in, and the bottom fell out of the market. Those were some lean times for the cannabis industry and not everyone made it out on the other side.
2020 has been a different story, across the world and in particular, for U.S cannabis operators. After coming public into the teeth of a brutal two-year bear market, COVID-19 catalyzed the sector when it demonstrated the need for a legal and regulated cannabis marketplace. Social justice initiatives helped shape the dialogue, and regulatory arbitrages are now littered across the near-term horizon.
But that’s not what has tongues wagging across Wall Street. Small-cap growth managers have singularly focused on the improving fundamentals, which boast huge margins and an expanding total addressable market (TAM). “I’ve never seen growth like this at these multiples,” as one veteran fund manager said to me, “I’m buying these names in my personal account until compliance let’s me do it for the fund.”
If the current landscape has demonstrated anything, however, it’s that the recovery has been uneven; and the chasm between the haves and have-nots has seemingly widened. A fortunate few are generating free cash flow and have already invested in the production capacity needed to achieve operating leverage at scale. Others are close behind, while still others have already become historical footnotes.
We’ve long spoken about the FANGification of U.S cannabis and the emergence of a modern-day four horsemen. Most of us still remember how Intel, Dell, Microsoft and Cisco drove the dot-com era, only to be replaced by Facebook, Amazon, Netflix and Google in Tech 2.0. Or how Canopy Growth, Aurora Cannabis, Aphria Inc. and MedReleaf were the main attractions in Cannabis 1.0 (Canadian cultivation).
With the release of second quarter earnings last month, we’ve gained further clarity on U.S cannabis’ Fab Four. They are, in no particular order:
- Curaleaf ($165.4M pro-forma revenues; $28M adjusted EBITDA)
- Green Thumb Industries ($119.6M revenues; $35.4M adjusted EBITDA)
- Trulieve ($120.8M in revenues; $60.5M adjusted EBITDA)
- Cresco ($94.3M revenues; $16.5M adjusted EBITDA)
To be sure, there are other quality U.S operators— Terrascend, Columbia Care and 4Front Ventures, among others, come to mind—and with an estimated $85 billion TAM by 2030 (per Cowen Research), there will be plenty of opportunities to go around. Further, if we’re correct that March was a cyclical bottom within a secular bull market for cannabis, we’re in the early innings of this move.
There were other notable happenings last month. Pennsylvania Governor Tom Wolf’s legislative agenda for the fall included adult-use cannabis sales, Florida announced that edible cannabis products are now legal in the Sunshine State, and Arizona officially qualified for the November ballot. While we don’t yet know if the Pennsylvania Senate will give the people what they want, the U.S momentum is clear.
While risks remain for the sector, society and broader markets but our bullish base case is the status quo: federal illegality, continued state adoptions and still-onerous regulatory and tax frameworks. U.S cannabis leaders put up some gaudy numbers despite the artificial impediments they’ve been forced to endure; just imagine what they’ll do with an even playing field and access to capital markets.
At the beginning of July, I wrote a note and taped it to my monitor: “Don’t sell the winners; come back in a few years no matter what happens with the broader tape.” I still spend each session monitoring risk and looking for opportunities on behalf of our investors, but those words serve to remind me of where we are in this cycle and what the recipe for generational wealth will entail.