You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015.
With the big rebound over the past two weeks, the New Cannabis Ventures Global Cannabis Stock Index has lifted 22% off of the recent lows set on March 14th, leaving the index down 9.2% thus far in 2022.
We aren’t here to tell investors whether or not they should invest in cannabis stocks, but we do want to discuss a strategy that we have been pursuing in our model portfolios at our premium subscription service 420 Investor, which we have been offering since 2013.
A debt-free company with a lot of cash will look favorable under this scenario, as the enterprise value will be less than the market cap.
Beyond the exercise of factoring in cash to the valuation process, we think investors should consider that debt-free balance sheets with substantial cash offer additional benefits during challenging times.
We think it’s important to understand demands on the cash, and investors should be aware of not just current cash levels but also projected cash levels.
The current market cap of the company is just $20 million, which is less than the $22 million pro forma cash as of the end of September and slightly above the $19 million pro forma equity.
The debt-free company, which has a market cap of about $620 million, ended the year with $81 million cash.
It also has a share repurchase program and may have spent some of the cash buying back stock.
The MSOs typically have debt, but an exception is Planet 13 Holdings, which has repeatedly expressed a disdain for debt in the interviews we have conducted with the company.
We wrote several weeks ago about how we expect Canopy Growth and Tilray to possibly sell equity to address their looming debt maturities.
With strategic investor Altria running out of time on its out-of-the-money warrants, we continue to view the low price relative to the high cash balance as a favorable consideration for their potential acquisition of the rest of the company.
Organigram, which has a strategic investor in British American Tobacco from early 2021, ended its Q1 in November with cash and short-term investments of C$168 million and no debt.
We have been emphasizing the importance of strong balance sheets for many years, but the current environment argues for closer scrutiny more than ever.
We aren’t sure how sustainable the recent rally may prove to be, but we are hopeful that the 13-month decline has ended.
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