The Big MSO to Buy
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Friends,
Well, I appear to have been wrong last week saying that Tilray Brands is a dangerous stock! The stock rallied more. Obviously, it is a cheap stock, as it will no longer be facing delisting for being below $1. Whoops!
I don’t actually think that I was incorrect. Cannabis stocks are very volatile right now, and TLRY is benefitting from a more bullish tone. I continue to hope that rescheduling takes place and that 280E taxation is wiped away, but I don’t think that people should be counting on this. Again, TLRY gets nothing from 280E going away, if it goes away.
I am not real bullish on MSOs right now, but I have 2 of them in my model portfolio at 420 Investor, including Green Thumb Industries, which is in the index. Unlike Tilray, GTI will benefit from 280E taxation going away. The stock has rallied slightly year-to-date, but the 8.5% gain is slightly higher than the Global Cannabis Stock Index increase of 8.3% and the TLRY gain of 3.0%. GTI, though, is lagging other MSOs.
In Q3, GTBIF has soared, but it has trailed TLRY and MSOS:
The Global Cannabis Stock Index has gained “only” 48.3% in Q3. Tilray doing so well makes little sense to me, who really liked it in June.
While I think that there is a lot to like about GTI, there are some risks. If 280E sticks around, it will keep their tax-rate very high. In Q2, it reported in its 10-Q an effective tax rate of 96.7%.
Another risk to GTI is its involvement with Agrify, which is changing its name to RHYTHM, Inc. on 9/2. As yesterday’s news revealed, GTBIF has loaned the company another $45 million. What a tough decision for the Board of Directors to choose between funding this related party or buying their own stock! Agrify has an extremely high market cap in my view and has done very little to prove itself. Again, I am all for the idea of THC beverages from hemp, but I am not a fan of this venture or its valuation.
Another risk to GTBIF is that MSOS holds so much of it, though it has reduced its stake. As of 8/27, MSOS controlled a stake of 20.82 million shares, making GTBIF its third-largest position. MSOS has seen its own shares soar recently to 172.775 million, up 32.3% year-to-date. Since 6/30, its shares outstanding have increased by 30.8%. At the same time, its stake in GTI, which is currently 19.5% of the ETF, has increased by 10.5% since 6/30. The current stake in GTI has declined by 5.6% since year-end, when the stock represented a stunning 36.4% of the ETF. If 280E does not go away, I expect MSOS will see redemptions like it did earlier this year and also in late 2022 and early 2023. While GTI is smaller now, it is still very large, and it will come under pressure if MSOS needs to reduce exposure.
When it comes to 280E taxes, GTI does a much better job than its peers of paying those taxes. At the end of Q2, it owed just $39.9 million in income tax payable with deferred income taxes at $78.6 million. Some of its peers have much larger exposures on their balance sheets. The GTI balance sheet stands out from its peers for its strength. Most MSOs have negative tangible equity, but GTI ended Q2 with $757.5 million and net debt of only $73 million.
To me, this strong balance sheet with lower exposure to unpaid 280E taxes makes GTI safer than its peers if 280E taxation sticks around. The current valuation of all MSOs seems very low if 280E taxation ends, but many MSOs will drown in debt if it remains. At $8.86, GTBIF is trading at an enterprise value to projected adjusted EBITDA for 2026 at 6.6X, which is lower than a few peers like CURLF at 9.7X and TSNDF at 8.4X. While there are some with lower valuations, their balance sheets are more questionable.
The company faces several risks, and I think that there are some better ideas outside of MSOs than GTBIF, but I view the stock as looking good relative to other MSOs.
Sincerely,
Alan
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is what we published this past week:
Exclusives
Canadian Cannabis Sales Grew Slowly in June
Capital Raises
GTI Lends Another $45 Million to Agrify
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