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I last wrote about Trulieve (OTCQX:TCNNF) in mid-November, saying it was still a buy. At the time, I owned a very large position in my Beat the American Cannabis Operator Index model portfolio. This past week, I sold a lot of it. I still like it relative to the other MSOs, but I don’t like it so much at this higher price. I have reduced my rating from Buy to Neutral, which I explain in this update.
The Chart
Trulieve is near a one-year-high:
Chales Schwab
To be near the one-year high isn’t so unusual for MSOs, but the New Cannabis Ventures Global Cannabis Stock Index is nowhere near its one-year-high. It has dropped 15.5% over the past year. Trulieve has done better, dropping just 1%, but it hasn’t done better than the Tier 1 MSOs. In fact, it is the only one to decline:
YCharts
What about a longer time-frame? Since the market peaked, it has fallen about the most. Measured from the end of 2020, Trulieve has dropped 85.7%:
YCharts
Here is the chart since it began trading in 2018:
Charles Schwab
From a technical perspective, I see support near $5 and at $3.50, close to the all-time low set last year. I see resistance at $7.50, which is up only 10.6%.
The Outlook
In the last write-up, I discussed Q3, which was reported on November 9th. The release for Q4 hasn’t yet been scheduled, but it should happen before the end of March.
Analysts were projecting 2024 revenue of $1.114 billion in mid-November. They were projecting then adjusted EBITDA of $313 million. This outlook for flat revenue and 2% higher adjusted EBITDA hasn’t changed. Neither have the estimates for 2025, which I use for my own target projection. Revenue is expected by 5 of the 14 analysts to grow 4% to $1.157 billion, while adjusted EBITDA is expected to increase 2% to $320 million. So, sluggish growth is expected over the next two years.
Trulieve remains highly dependent upon the Florida cannabis market, which is a mature medical-only market currently. In the event the state legalizes for adult-use, it could be good for the company, which is a leader in the number of stores. If it remains medical-only, though, I am concerned. The Florida market is slowing its growth in patients. In the week ended 1/18, the state reported 870,458 patients, and this was up only 10.4% from a year ago. According to BDSA, the state’s cannabis revenue grew just 8.6% from a year earlier in November. Florida has been a great market, but the patient-count is a very high percentage of the population now at 3.8%.
The Valuation
In my view, Trulieve and all of the Tier 1 MSOs are cheap relative to where they have traded historically. The market tends to use enterprise value, which is market cap plus net debt, relative to projected adjusted EBITDA to assess valuation. Here is the current valuations for the top 5 MSOs:
Alan Brochstein using Sentieo
This is more expensive than in mid-November, when it was 4.7X for 2024. Whether 280E goes away or not, the adjusted EBITDAs won’t change, as taxes are not included in adjusted EBITDA. I have written recently about the two expensive ones, Curaleaf (OTCPK:CURLF) and Green Thumb Industries (OTCQX:GTBIF). I have a strong sell on Curaleaf, which is a bad investment. I like GTI better, but it’s not the best way to invest in cannabis. I wrote that Cresco Labs (OTCQX:CRLBF) could be a buy in early October, and I had a big position in both of my model portfolios. Now, I have none. Verano (OTCQX:VRNOF) was bothering me in late July, and I still am not a fan of its valuation. I rated it a sell in late November, suggesting investors avoid it.
A key metric in my view is price to tangible book value, and Trulieve isn’t as bad as its peers, though it’s not as good as GTI. At just $12 million, the Trulieve tangible book value is essentially zero, which is much better than Curaleaf, which is very negative. In the event 280E doesn’t go away, the MSOs will struggle with their debt in my view. Tangible book value can help investors assess downside risk. I also monitor the current ratio, and Curaleaf has higher current liabilities than current assets. Trulieve’s liquidity is better.
In the mid-November piece, I shared a range of targets that depends upon the elimination of 280E or the continuation of it. In the event 280E goes away, my target was $11.31, based on 8X projected adjusted EBITDA for 2025. The negative scenario officered a potential decline to $2.93, a new low. This was based on 3X. I am sticking with these targets for now, which means potential upside of 67% but potential downside of 57%. This is better than its peers, but not great.
Conclusion
I had a buy on Trulieve in mid-November, when it was $5.61. It hasn’t outpaced its peers, but it is higher by 20.9%. I have sells on several of its peers, and I worry about what will happen if rescheduling doesn’t happen precisely. If it takes a long time or goes to Schedule 2 instead of Schedule 3, which would wipe out 280E taxation, MSOs, including Trulieve, will likely decline.
There are some MSOs that I like better right now than Trulieve, but I still own it in my Beat the American Cannabis Operator Index. It is the smallest of the 5 names that I include, currently at 9.2%.
I think that cannabis investors will fare better with some diversification beyond MSOs. My Beat the Global Cannabis Stock Index model portfolio that I share with my investment group has only 11% in MSOs, well below the index at 40%. I am overweight Canadian LPs Organigram (OGI), Village Farms (VFF) and Cronos Group (CRON). My largest holding, OGI, is 20.5% of the model portfolio, and it is up almost 42% year-to-date. I explained why Organigram is my favorite cannabis stock recently.
I have 34% of my model portfolio in ancillaries, which is slightly higher than the index exposure. I have been reducing WM Technology (MAPS) but still have a large position, though it is up 20.7% since I raised it to a strong buy a month ago. My largest ancillary position is now Hydrofarm (HYFM), which I wrote about in September, when it was a bit higher but a strong buy. It was 9.3% of my model portfolio then, and now it is 13.0%.
So, I like TCNNF more than many MSOs, especially the other large ones, but I like some Canadian LPs and ancillary names more. Its future performance is highly dependent upon whether 280E ends.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
“Discover the Hidden Risks of Trulieve’s Low Prices: What Investors Need to Know (OTCMKTS:TCNNF)”
When it comes to investing, it’s natural to seek out opportunities with low prices and high potential for growth. For investors eyeing the cannabis industry, the temptation of Trulieve’s low stock prices may be hard to resist. However, beneath the attractive facade of low prices lies a number of hidden risks that investors should be aware of.
Trulieve (OTCMKTS:TCNNF) is a vertically integrated cannabis company that operates in the United States, mainly in Florida and California. The company prides itself on its strong financial performance and has been labeled as one of the most profitable cannabis companies in the U.S. However, despite its profitable image, there are several underlying risks that investors should carefully consider before jumping on the Trulieve bandwagon.
In this article, we will uncover the hidden risks of Trulieve’s low prices and provide valuable insights for investors.
1. Regulatory Risks
The cannabis industry is highly regulated, and any changes in laws or regulations can have a significant impact on a company’s operations and financial performance. Trulieve operates in states with strict regulations and laws surrounding the production, distribution, and sale of cannabis.
For example, in Florida, the company’s largest market, the state has limited the number of licenses for medical cannabis dispensaries and has strict guidelines for product testing and labeling. Any changes in these regulations can potentially disrupt Trulieve’s operations and earnings.
In addition, the federal government’s stance on cannabis remains murky, and any changes in federal laws or policies may also affect Trulieve’s operations and profitability.
2. Dependence on Limited Markets
Trulieve primarily operates in Florida and California, which are both medical-only cannabis markets. This means that the company is restricted to selling only to patients with a valid medical marijuana card. While both states have large populations, the limited customer base can hinder Trulieve’s potential for growth.
Moreover, Trulieve’s dependence on a handful of states means that the company is vulnerable to any changes in regulations or market conditions in those specific regions. This lack of diversification can be a significant risk for investors, as any negative developments in these markets can have a significant impact on Trulieve’s financial performance.
3. Reliance on High-THC Products
Trulieve’s business model is heavily focused on selling high-THC products, which are often considered to be more potent and have a higher potential for abuse. While this may produce higher profit margins in the short term, it also leaves the company vulnerable to potential legal and reputational risks.
Any incidents related to the misuse of high-THC products could potentially lead to lawsuits and damage Trulieve’s reputation, which could ultimately impact its bottom line.
4. Intense Competition
As the cannabis industry continues to grow and evolve, the competition within the market is becoming increasingly fierce. Trulieve is facing competition from both established and emerging players in the industry, and this can hamper its potential for growth and profitability.
In addition, as more states legalize cannabis, Trulieve may face increased competition in its limited markets from new market entrants. This intensifying competition can put pressure on Trulieve’s prices and margins, making it difficult for the company to maintain its profitability in the long run.
5. Financial Concerns
Despite Trulieve’s profitable image, the company has raised concerns with its financials in the past. In 2019, an audit conducted by short-seller Grizzly Research raised red flags about the company’s accounting and financial reporting practices.
The report alleged that Trulieve inflated its revenue and profit numbers and failed to disclose related-party transactions. While Trulieve has denied these allegations and addressed the concerns, this incident highlights potential risks for investors in terms of the company’s financial transparency.
Practical Tips for Investors
Now that we have uncovered the hidden risks of Trulieve’s low prices, here are some practical tips for investors to consider before investing in the company:
– Research and stay updated on the laws and regulations regarding cannabis in Trulieve’s key markets.
– Keep an eye on any developments in the federal government’s stance on cannabis.
– Diversify your investments in the cannabis industry rather than solely relying on Trulieve.
– Monitor Trulieve’s financial reports and watch out for any concerning financial practices.
– Keep an eye on the company’s competition and potential market entrants.
Case Study: Trulieve’s Stock Performance
To get a better understanding of the potential impact of these hidden risks on Trulieve’s stock, let’s look at the company’s recent stock performance. In the past year, Trulieve’s stock has fluctuated significantly, dropping by 35% in March 2020 due to market volatility.
While the stock has since recovered, it is still trading at a 12% discount to its 52-week high. This volatility could be a reflection of the underlying risks that Trulieve faces, highlighting the need for investors to carefully consider these factors before investing.
First-Hand Experience: The Trulieve Purchase
Investor’s first-hand experiences can also provide valuable insights for others. For example, an investor who purchased Trulieve’s stock at its all-time high in 2019 would have experienced a 64% drop in value before the stock’s recent recovery. This experience highlights the risks involved in investing in Trulieve, as well as the importance of conducting thorough research and understanding the potential risks involved.
In conclusion, while Trulieve’s low prices may seem attractive, investing in the company comes with a number of hidden risks that investors should carefully consider. From regulatory risks to financial concerns, it is crucial for investors to conduct thorough research and monitor any developments in the market before making a decision. By staying informed and alert, investors can make well-informed investment decisions and minimize their risk exposure in Trulieve’s stock.
