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

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.

If you enjoyed today’s post, please take 2 seconds to like it or share it with someone you think might enjoy it.

Until next time,

Paul Cerro | Cedar Grove Capital Management

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm

Share

Disclaimer: All information provided herein by Cedar Grove Capital Management, LLC (“Cedar Grove Capital”) is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.

Cedar Grove Capital may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Cedar Grove Capital may buy, sell, or otherwise change the form or substance of any of its investments. Cedar Grove Capital disclaims any obligation to notify the market of any such changes.

The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of Cedar Grove Capital. The information in this material is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Cedar Grove Capital which are subject to change and which Cedar Grove Capital does not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment.