The Disconnect Between Reality and Perception in Cannabis

Business level fundamentals have only improved but the market doesn't care anymore

In 2018, cannabis was viewed as the next gold rush in public equities and everyone wanted to get a piece of the action before it took off like a rocket ship.

Fast forward to today and the number one thing holding that back from becoming a reality is……drum roll…..government policy.

Many investors saw the possibility of Democrats winning the presidency and senate in 2020 as a catalyst that would finally bring legalization to the industry. Democrats have historically been friendly toward the cannabis industry so it was safe(ish) to assume that they would take steps to make it a reality.

With the current administration dragging its feet, all hope was officially lost a few weeks ago, at least in the short term.

While many are throwing in the towel, looking at how the space has performed over the last few years is quite interesting.

Enterprise Value vs. LTM EBITDA

Stocks: GTBIF, CURLF, TCNNF, CRLBF. Source: Koyfin.

Take a look at the chart above. I’ve only outlined some of the bigger MSOs (multi-state operators) on two metrics: enterprise value and LTM EBITDA.

Looking at the end of 2018 to now, the enterprise value for these four names is up 90.6%. Not bad, but LTM EBITDA has grown 5,683.8% during the same timeframe.

Name literally any other industry that has grown LTM EBITDA that much in the same time period because I can’t think of one.

The industry has done so well that these four names started this chart at 278.0x EV/LTM EBITDA but ended this past Friday at just 9.2x.

Insanity if you ask me.

So while policy continues to drive the price narrative, there has to be a point where paying to wait becomes worth it. Is it now? Soon? Two years from now?

Who knows, but based on the chart it looks like the valuation of these bigger names looks mighty tempting in starting a position again.

What do you think though? Is now the time or is it just dead money? Leave a comment below.

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Until next time,

Paul Cerro | Cedar Grove Capital Management

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm

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