Canadian LP Bargains

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Friends,

Four weeks ago, I discussed why I thought a few Canadian LPs are attractively priced to investors. I disclosed that my model portfolio at 420 Investor had a 28.6% total investment in Cronos Group, Organigram and Village Farms at that time. They are lower a bit in price now, and I want to reiterate my view that some Canadian LPs make a lot of sense to include in a cannabis portfolio.

Since that article, the New Cannabis Ventures Global Cannabis Stock Index has dropped 4.3%. The main challenge occurred after the market closed on 8/26, with the DEA announcing a December 2nd hearing regarding its rescheduling of cannabis, which remains on track. Canadian LPs have no exposure to this big issue, but they are down the most of the three sub-sector indices that we offer. The Canadian Cannabis LP Index has lifted off of the all-time closing low set on Friday the 13th, but it has declined 10.1% since 8/21. The American Cannabis Operator Index has declined by 6.1% since then and is now down year-to-date. The Ancillary Cannabis Index has rallied by 0.6% and is up now 18.8% year-to-date.

So, what is going on with Canadian LPs? There has been no news-related issue except a very weak June reported on August 23rd. We will get another update tomorrow, as StatsCan will report retail sales for the country for July. I don’t believe that the weakness in the LPs is tied to the continuing trend of the maturing adult-use legalization in Canada. Instead, I believe that two overpriced and popular stocks, Canopy Growth and Tilray, are pulling the sector back.

Here is the action over the past four weeks for the five LPs that I include on my Focus List at 420 Investor:

Over the past four weeks, all have declined, especially Canopy Growth. Tilray, which is down the least, converted some debt (promissory notes) and issued 13.3 million shares.

Here is the year-to-date action:

The two that are expensive in my view are both down year-to-date. The rest are up more than the GCSI, which is up 5.3% so far in 2024.

I currently include Organigram and Village Farms in the model portfolio I share with subscribers to 420 Investor. The total investment represents 29.7% of the model portfolio, while the six Canadian LPs, which includes Organigram but not Village Farms, in total account for 22.5% the index. They are both up year-to-date but down a lot over the past few years. My largest position in the model portfolio is Village Farms, which trades at 55% of tangible book value and an enterprise value of just 6.6X projected adjusted EBITDA for 2024.

I remain optimistic about American cannabis companies, who should benefit substantially from 280E being eliminated. I think that Ancillary companies too should benefit indirectly due to the improving financial position of their customers. As I have said in the past and even up above, the Canadian LPs don’t have a benefit from rescheduling. Still, though, rescheduling and the wipeout of 280E is not a done deal. There are lots of ways to win, and I think that cannabis investors should take advantage of the very cheap Canadian LPs.

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Sincerely,

Alan

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