Cannabis Stocks: Low Valuation Multiples And Leverage Are A Winning Combination

It is no secret that 2022 was unkind to cannabis. Many of the tier one and two MSOs are trading at multi-year lows.

The environment is unlikely to improve anytime soon, and investors must have a long-term horizon.

• Neither SAFE, Rescheduling/Descheduling, or any 280e relief is likely in 2023.

• Commoditization-based wholesale price declines will continue. The honeymoon period between the opening of a new rec market and the onset of excess supply is shrinking.

• Inflationary cost increases will continue to pressure margins.

• New investors will slowly creep into the market, but capital will remain tight.

• A record number of U.S. cannabis companies are likely to fail in 2023.

Against this backdrop, Investors should err on the side of caution. There is a massive upside in nearly all of these names; however, they are not equally attractive.

The chart ranks the MSOs from most attractive to least attractive based on a combination of low consensus EV/ 2023 EBITDA multiples (red line) and low consensus Net Debt/ 2023 EBITDA ratios (black) line. 

We ranked each company on the valuation and leverage measures and averaged their ranks to create an indicator of Less Expensive / Less Risk shown by the green bar. Companies are arranged from most attractive on the left to least attractive on the right.  

Based on this methodology, MariMed (OTC:MRMD) ranks as the most attractive investment because it has the 4th lowest EV/EBITDA and the 2nd lowest Net Debt/ EBITDA. Green Thumb (OTC:GTBIF) ranks 5th. It has a relatively high 6.2x valuation but compensates for this with net leverage of only .3x EBITDA. AYR (AYR.A: CSE), ranked 7th, is particularly interesting. It has the lowest valuation multiple of the group but the second-highest leverage. Investors are being paid fairly for taking higher credit risk. 

TerrAscend (OTC:TRSSF) and Jushi (OTC:JUSHF) appear the least attractive. Each of these companies suffers from a high valuation multiple and high leverage. Both have taken appropriate steps to assure liquidity, and we see no imminent issues ahead; however, we think better opportunities are available.

Investors should look for companies with reasonable leverage and attractive valuations.

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors – from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.