The MSOs Have Plunged – New Cannabis Ventures
You’re reading this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Friends,
Cannabis stocks have given up a lot of their early 2024 gains, but they remain up year-to-date by 8.5% and since the prior all-time low set for the NCV Global Cannabis Stock Index in late August and the lower-low set in late October:
We warned two weeks ago that MSOs were quite risky. Since then, most are down a lot. Here are the 5 Tier 1 and 4 Tier 2 MSOs:
In the past two weeks, the average decline has been 14%,with 5 of the 9 down double-digit. Of course, they are up a lot still. The main driver has been and remains the potential rescheduling of cannabis by the DEA, which was announced in late August. The investment community has no timeline to work with, and it’s not clear that cannabis will be rescheduled to Schedule 3, which is what is required for 280E taxation to go away.
Investors have also been a bit overly excited about the potential for Florida to legalize cannabis for adult-use. We looked at that market in our newsletter a bit over three months ago, and we suggested that the medical market there is very mature. We discussed the slowing patient growth, which was then 11.6% from a year earlier. It’s now closer to 10%.
While prices are lower than they were two weeks ago for the MSOs, we continue they could fall a lot if 280E elimination doesn’t play out. The balance sheets remain strained, and cash flow generation on an after-tax basis pales in comparison to the debt levels. As we have shared previously, most of the MSOs have little or no tangible equity, and it will be difficult for them to extend their debt unless things change.
Investors looking for how things might play out in the failure of 280E to go away should look at the recent experience of AYR Wellness. The Tier 2 MSO pushed out the maturity of some of their debt from 2024 to 2026. This process boosted the share-count, and the company also issued warrants. AYR Wellness still has a lot of debt and negative tangible book value, and it has dropped 44% in February.
Net debt is still large at most of the MSOs, and this could lead to equity sales, at likely higher prices, if 280E goes away. On the other hand, if 280E remains, many of these companies will need to raise equity to handle their debt outstanding. Cannabis investors should be sure that they understand the cash flows and balance sheets of MSO investments.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Financial Reports
Organigram Q1 Revenue Declines
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Sincerely,
Alan & Joel
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email
