Took the weekend to revisit and write down my #cannabis thesis.

Company commentary at the bottom. $AYRWF $GTBIF $VRNOF $TCNNF $CRLBF $CURLF

Best ETF: $MSOS

(This post is not investment advice)

TL;dr:

- Cannabis should grow durably over the next 3-5 years
- Several potential catalysts on the come from new states legalizing cannabis to Congressional action (SAFE Banking, decriminalization, legalization)
- Attractive valuations, especially for the growth...

1) According to @NewFrontierData, cannabis is a $80Bn market today, but only $20Bn are legal sales and $60Bn are illicit. Legal sales are estimated to grow to $41.5Bn in 2025 (mid-teens CAGR) assuming no new states legalize in the future, which is very conservative...

2) 35 states + DC have legalized medical sales and 15 states + DC have legalized recreational/adult-use (AU) sales to date. Within these, the limited license states (East Coast, Midwest, and AZ) are the most attractive and should grow faster than the market...

3) Seeing strong momentum in several states for AU legalization. VA is very close (bill on governor's desk) and NY could be close behind. In addition, CT, PA, MD, FL, MN, NM, and others could legalize AU over the next 1-2 years...

4) Why are so many states talking about cannabis? 3 major reasons:

a) States need the tax revenues (especially after COVID)
b) Desire for social justice
c) People want it. Cannabis is drawing support from across the political spectrum... https://www.cnbc.com/2021/03/05/virginia-gets-close-to-legalizing-recreational-weed-as-other-states-eye-cannabis-tax-windfalls.html

5) Taken together, the cannabis market is positioned to see sustainable (and as COVID showed us, durable) growth over the next several years, driving revenue/profit growth for the US operators. Importantly, the industry will grow even without movement at the Federal level...

6) Speaking of Congress, there are a couple key catalysts that could manifest over the next 12-18 months. In my mind, the most important is SAFE Banking. I think of "SAFE Banking" addressing 3 components which may or may not all come in the same bill...

7)

a) Access to capital markets (most important for the stocks). Would allow MSOs to up-list on major US exchanges, greatly increasing the visibility and liquidity of these stocks, and allowing institutions to invest in US cannabis. Also opens up lower-cost debt options...

b) Waiving IRS Tax Code 280E. Because cannabis is considered a Schedule 1 Controlled Substance, operators cannot deduct SG&A expenses from their pre-tax income for tax purposes. It means US cannabis companies are paying effective tax rates of 50%+ in some instances...

8)

c) "Operational improvements" such as allowing consumers to use credit cards at dispensaries (revenue driver) and allowing US operators to streamline their banking operations (margin driver)...

9) In addition to SAFE Banking, there is a lot of talk about Congress decriminalizing or legalizing cannabis at the Federal level. Both will likely reduce penalties for small possession of cannabis and introduce several social justice initiatives, with the key difference being...

10) ...decriminalization will push the power of legalization down to the states while Federal legalization would make cannabis legal across the US. Legalization would also open the door for broad inter-state commerce while a decriminalization bill may not necessarily do so...

11) The Risks:

a) Broader market concerns
b) Regulatory changes that hurt existing operators. Possibilities include high taxation, changes to vertical integration rules, and potentially interstate commerce
c) Competition (longer-term). The brand vs. retail debate to continue...

12) It's been said before but I'll say it again: the US multi-state operators (MSOs) - and not the Canadian players -are the most direct beneficiaries of the trends outlined above...

13) I expect the top 10 US MSOs to grow sales at a 50%+ CAGR off of their run-rate 2020 sales for the next 2 years. Half of these companies operate with 30%+ EBITDA margins today and all 10 should be at that level by 2022...

14) Despite this strong growth and margin profile, the group trades at only 24x and 14x 21/22 EBITDA. There is room for multiples to expand as cannabis is a consumer staple still in its early innings of growth.

Lastly,

A few companies to follow:...

15) $AYRWF. Growing at 100%+ CAGR from 20-22 (organic is 40-50%), 40%+ EBITDA margins, trading at 6.6x 22 EBITDA. 7 state footprint incl NV, MA, FL, and PA with pending acquisitions in AZ, OH, and NJ. ~20% insider ownership. Best risk/reward in US cannabis IMO...

16) $GTBIF. Regarded as the "highest quality" US MSO. 12 state footprint with a strong presence in IL, PA, NV, OH, NJ and NY. Low-30% organic growth with mid-30% EBITDA margins trading 25x/18x 21/22 EBITDA. Could be first MSO to up-list...

17) $VRNOF. Just went public and under the radar. Their operational metrics suggest they are of same quality (maybe better) than $GTBIF. IL, FL, PA, AZ, NJ, MD. 75%+ sales CAGR over next 2 years w/ 40%+ EBITDA margins. 15.6x/10.5x 21/22 EBITDA. Trading at a big discount...

18) $TCNNF. Mostly a FL operator but with ~50% market share in the state. FL asset generates a lot of cash that the company is using to expand into other states (PA, MA). mid-30s sales CAGR, 45%+ EBITDA margins. Trading 15x/12x 21/22 EBITDA...

19) $CRLBF. Company has retail operations but focused on brands and wholesale. IL, PA, CA, MA, OH, MI, and NY. Mid-30s growth and EBITDA margins. Trading 19x/13x 21/22 EBITDA...

20) $CURLF. Largest operator in the US by footprint (23 states) and sales. $CURLF's strategy is to create the first nationwide brand in cannabis. 50% CAGR, low-20s EBITDA margin improving to low 30s. 24.5x/14.5x 21/22 EBITDA...

21) Did I miss anything?

@todd_harrison @budflight @S_Andreoni @cashflow_free @HammanShares @B_Funk_ @mayortoby

#MSOGang