Thursday, December 23, 2021

Doug Kass: The Case for Cannabis Stocks Has Strengthened Considerably; Pandemic update; Lamu Island

By Whitney Tilson

1) Despite the continued weakness in the sector, I continue to share my friend Doug Kass' bullishness on pot stocks.

It reminds me of a little more than a year ago, when we were both pounding the table on bank stocks – and, sure enough, they quickly doubled!

Here is what Doug published last week...

The Case for Cannabis Stocks Has Strengthened Considerably

  • MSOS [AdvisorShares Pure US Cannabis ETF] is my "Trade of the Month"... and for next year
  • Fundamentals are strong and valuations are attractive
  • Legislation will likely move in the right direction in 2022
  • Yesterday's announcement that Curaleaf (CURLF) has raised $425 million in debt, the largest cannabis raise in history, underscores the industry's declining cost of capital – and EPS-accretive refinancing opportunities – and vastly improved accessibility to the capital markets
  • The rising probability of inclusion in ETFs, NYSE up-listings, merger and acquisition activity, and pent up demand for cannabis shares – as custodian issues are resolved – could combine to lead to sizeable share price gains over both the near and intermediate term

Cannabis stocks have succumbed recently following the non-inclusion of the SAFE Act in the NDAA [National Defense Authorization Act] bill.

Exacerbating the decline has likely been end-of-year tax-selling pressure.

As discussed in this column, I view the recent fall from grace as an unusually attractive short- and intermediate-term opportunity.

As background, the MSOS ETF debuted on September 1, 2020 at $25 – virtually the exact price where the ETF closed on Monday:

Source: Todd Harrison, CB1Capital

In this column I will summarize the industry's meaningful fundamental progress over the last 2+ years. This, coupled with low valuations, form the foundation of my upbeat view on the cannabis sector.

As a consequence of these and other factors, I believe there is a reasonable chance, that by January 2022 month end, cannabis stocks could rise by +25% and that over the next 6-12 months a +50% rise is possible.

Given the relatively shallow downside risk in the group, I believe the reward vs. risk is superior to any other market sector that I follow.

Growing Moats as State Level Share Gains Intensify

Regardless of the temporary delay in federal legislation, progress on the state level continues apace.

Individual companies are moving forward competitively in states that have sanctioned cannabis use – and their competitive moats are deepening.

Even without passage of the SAFE Act, cannabis industry sales are projected to grow at a 20% compounded annual rate to over $30 billion in revenues. (Note: If we go back to 2018, this represents +30% projected compounded annual growth in revenues.)

As Stifel research noted recently:

Considerable upside remains over a multi-year period with NJ, NY, CT, VA and NM recreational sales, which are not being included in our estimates. Combined, these markets could generate a potential $20 billion of industry sales at maturity, equivalent to the entire country in 2020. During this period, growth is seldom in a straight line but rather a step function with the current period of normalizing trends offering investors an attractive entry point at valuation levels nearing all-time lows while company fundamentals are at all-time highs, encapsulated by the decreasing trend in debt costs.

Accessibility and Cost of Capital Have Improved Measurably

The debt markets often lead the equity markets.

So, here is an updated chart on the improving and lower trend of the cannabis industry's capital costs:

In terms of access to capital, late yesterday Curaleaf announced the largest debt financing in industry history, a $425 million private placement (8% senior secured notes):

"We are pleased to announce what we believe is the largest debt financing of any publicly-traded MSO to date," said Joseph Bayern, Chief Executive Officer of Curaleaf. "This offering will allow us to refinance our existing debt at a materially lower interest rate and provides us with additional financial flexibility to execute our strategic growth initiatives. While this initial offering provides more than enough liquidity to refinance our existing debt and meet current needs, the new Indenture provides us a new degree of flexibility to raise debt financing to ensure we have ample liquidity to meet our needs now and into the future."

Most importantly, the transaction was very accretive to earnings and I see other multi-state operators following Curaleaf in refinancing their debt at attractive and earnings accretive levels...

Inexpensive On Fundamentals

While the cost of capital has moved steadily lower and access to the capital markets has markedly improved, valuations have plummeted:

Source: Factset consensus, Stifel GMP; MSOs=CURA, GTII, TRUL, VRNO, TER, CL

Sources: Factset consensus, Stifel GMP; MSOs=CURA, GTII, TRUL, VRNO, TER, CL, and Company documents, Bloomberg, Stifel GMP

Cannabis Inclusiveness

Cost of capital and ability to be part of ETFs are parts of the proposals delivered by the Canadian Securities Exchange last week.

Demand for Cannabis Shares Is Pent Up (Not Spent Up)

Custody issues, Canadian (non-U.S.) listings and other factors have contributed to cannabis industry stocks being neglected by institutional investors, and by many retail investors.

SAFE Bank legislation would change the game overnight...

In my view, 2022 may mark important legislative wins for the cannabis industry – that could materially change the profile and share price standings of industry participants.

Here is what I wrote last week:

The failure of SAFE to be included in the NDAA this week was initially interpreted by many as negative for cannabis stocks.

I respectfully disagree.

Rather, I see the sequence of events now unfolding:

  • Led by initiatives by the Senate, House and President, there will likely be an agreement/legislation to pardon jailed cannabis felons in the (reasonably) near term. 
  • This could be quickly followed by passage of a comprehensive SAFE banking act – sooner than the consensus expects.

I am of the view that, on an upside reward vs. downside risk analysis, U.S. cannabis stocks – specifically the principal constituents in the MSOS ETF – are now as or more attractive than any market sector extant.

The multi-state operators, in particular, benefit from a continued deepening in their competitive moats as the longer reform takes the better off the early adopter [companies] are in expanding their state franchises.

I see 2022 as a year of legislative breakthroughs, NYSE up-listings, M&A activity, and pent up institutional demand for cannabis stocks.

Meanwhile, over there (outside of the U.S.), the legalization of cannabis is proceeding rapidly. The U.S. is likely to follow and, if I am correct that SAFE could occur sooner than the consensus projects, my expectation for a valuation reset, and a +50% rise in industry share prices, may be understated.

Thank you, Doug!

2) I sent another in-depth missive yesterday to my coronavirus e-mail list, which you can read here. Excerpt:

I'm pleased to have scooped the mainstream media, which is just starting to report on what I've been saying for nine days: there's increasing evidence that the omicron variant is milder than delta (though we still can't say this with certainty)...

It's now clear that the "case hospitalization rate" is going to be much lower (I'd guess 80% lower) in countries that are either young and have high rates of prior infection (like South Africa) and/or are highly vaccinated (like the U.K., Denmark, Australia, and the U.S.).


It's still unclear how much of this huge decline in severity is due to omicron being milder than delta versus other factors. Every day, there's more evidence that it's milder, but right now we don't know for sure – and, if so, how much milder. It's important to know this because billions of people around the world remain unvaccinated...

I think Pfizer's new pill, which the FDA approved yesterday, will be a total game-changer – imagine that people who catch COVID right now (almost certainly the omicron variant) have an 80% lower chance of being hospitalized or dying AND now will soon be able to take a pill that reduces those odds by ANOTHER 89%!

3) We flew to the coast today and will spend the next 11 days at my parents' beach home on the idyllic Lamu Island...

Best regards,


P.S. I welcome your feedback at [email protected].

P.P.S. The Empire Financial Research offices are closed tomorrow and Monday in observance of the Christmas holiday. Look for my next daily e-mail in your inbox on Tuesday, December 28. Have a great holiday!

 Whitney Tilson's Daily >

Get it delivered straight to your inbox.

Empire Financial Research

Whitney Tilson

Empire Financial Research founder and CEO Whitney Tilson is the editor of the Empire Investment Report, a monthly investment advisory that focuses on cheap, high-quality stock ideas.

Whitney graduated with honors from Harvard University and Harvard Business School, where he earned an MBA and was named a Baker Scholar. Whitney spent nearly 20 years on Wall Street, during which time he founded and ran Kase Capital Management, growing assets under management from $1 million at inception to a peak of $200 million.

Once dubbed "The Prophet" by CNBC, Whitney predicted the dot-com crash, the housing bust, the 2009 stock bottom, and more. Now, he's sharing his secrets and strategies with followers of his latest endeavor, Empire Financial Research.

Read more