Over the past couple of months, the cannabis sector has faced many challenges resulting in marijuana stocks dropping.
Some of the factors include a slowdown in January sales, rising interest rates, continued supply chain disruptions, delays in New Jersey launching its recreational cannabis program, as well as other geopolitical issues and weaker stocks in general.
However, over the past two weeks, New Cannabis Ventures Global Cannabis Stock Index has risen 22% off of recent lows set on March 14, resulting in the index being down 9.2% year-to-date.
Moreover, after a sharp drop in the first month of 2022, adult-use cannabis sales spiked in February in states like Illinois, Michigan and Arkansas, to name a few.
"Seasoned investors understand the concept of the stock market "climbing a wall of worry," so all of this negativity may actually prove to be a good thing," New Cannabis Venture's Alan Brochstein said.
In his recently published piece, Brochstein stressed that investors are not "giving enough credit" to businesses that have strong balance sheets, adding that his focus during the heightened risks was on "identifying debt-free companies with substantial cash balances."
Brochstein urged investors to take into account the cash on the balance sheet over enterprise value. He explained that the equation for the enterprise value includes adding debt to the market cap then subtracting cash.
"A debt-free company with a lot of cash will look favorable under this scenario, as the enterprise value will be less than the market cap," Brochstein said, adding that "debt-free balance sheets with substantial cash offer additional benefits during challenging times."
This allows the company to enter strategic partnerships and put money into capital projects that industry peers may not be able to fund as well as repurchase shares if needed.
Ancillary Companies
Among ancillary companies with high levels of cash and no debt are CEA Industries Inc. (NASDAQ:CEAD) (NASDAQ:CEADW) - formerly known as Surna – GrowGeneration Corp. (NASDAQ:GRWG), urban-gro, Inc. (NASDAQ:UGRO) and WM Technology Inc. (NASDAQ:MAPS).
CEA Industries' current market cap is 'only' $20 million, but it has $22 million pro forma cash as of the end of September. The company announced recapitalization in February, selling units at $4.13, ahead of securing a contract for $2.1 million with a facility in Maryland.
GrowGeneration, a chain of specialty hydroponic and organic garden centers and also a debt-free company, has a market cap of about $620 million and ended the year with $81 million cash and an operating cash flow of $5 million. The company's stock spiked 10% following the news of the federal marijuana legalization bill being scheduled for the House floor vote this week. Currently, it trades 5.22% down at $9.14 per share.
As of the end of September, urban-gro's cash balance surpassed $40 million, ahead of making a $2.5 million strategic investment. The company has a share repurchase program as well. During the first three quarters of this fiscal year, urban-gro generated a slightly positive operating cash flow with a current market cap of roughly $137 million. Earlier this month, urban-gro inked a definitive agreement to acquire Emerald Construction Management Inc., a 37-year old Colorado-based construction management firm providing comprehensive construction and supervisory services, for $7 million.
WM Technology Inc., the parent of Weedmaps, wrapped up 2021 with $67.8 million in cash and no debt. Its operations generated $23 million over the same period. The company's market cap totals $1.3 billion. Last month, WM Technology released its fourth-quarter earnings report revealing its biggest quarterly revenue of $54 million, representing 39% year-over-year growth in its U.S. business. Cantor Fitzgerald's analyst Pablo Zuanic said earlier the company's stock looks "attractive."
American Cannabis Operators
Out of US cannabis MSOs, which typically have debt, Brochstein singled out Planet 13 Holdings Inc. (CSE:PLTH) (OTCQX:PLNHF), "which has repeatedly expressed a disdain for debt."
According to its latest financial report, the company's cash balance totaled $73 million. At present, the market cap is around $600 million. In March, Planet 13 acquired all issued and outstanding common shares of Next Green Wave, thereby significantly improving its position in the California market.
Canadian LPs
In Canada, publicly-traded LPs faced struggles related to declining market share, which resulted in many companies taking on substantial debt. Brochstein recently wrote that Canopy Growth Corporation (TSX:WEED) (NASDAQ:CGC) and Tilray Inc. (NASDAQ:TLRY) might follow Aurora Cannabis' (NASDAQ:ABC) footsteps and opt for selling shares to "shore up their respective balance sheets ahead of large debt maturities."
In the meantime, according to the analyst, the two Canadian cannabis LPs with substantial balance sheets are Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) and OrganiGram Holdings Inc (NASDAQ:OGI) (TSE: OGI) are also underappreciated.
Cronos Group, which has operating losses that investors should factor into their analysis, currently has a market cap of $1.5 billion. The company's cash and marketable securities balance at year-end was $1 billion.
The company's fourth-quarter 2021 results indicated a "positive momentum," said Kurt Schmidt, former president and CEO, who recently retired, adding that the management plan to "realign Cronos Group's organizational structure to match our strategy, with a primary focus on adult-use products and elevating our brands through rare cannabinoids."
In addition, Cronos recently appointed Mike Gorenstein as chairman, president and CEO, effective March 21, 2022, in connection with Schmidt's retirement.
Organigram - which has been a strategic investor in British American Tobacco (NYSE:BTI) since early 2021 – ended its first quarter in November free of debt with cash and short-term investments of CA$168 million.
Earlier this month, the company revealed that BAT had invested an additional CA$6.3 million ($4.97 million) into Organigram to enhance its equity ownership position in the company from 18.8% to 19.5% as of December 31, 2021, by exercising its rights pursuant to an investor rights agreement.
In February, Organigram reported record-breaking results in the first quarter of fiscal 2022, with net revenue increasing 57% to $30.4 million, from $19.3 million in the prior year's first quarter.
To hear more about the important and fascinating breakthroughs and meet face-to-face with some of the cannabis industry's professionals & market leaders, join us at the Benzinga Cannabis Capital Conference, which returns on April 20-21at the Fontainebleau Miami Beach, where we are gathering top CEOs, investors, and leaders of the space.
Tickets for this first-of-its-kind gathering are still available here.
Photo: Courtesy of Yiorgos Ntrahas on Unsplash
