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PI Financial Corp Analyst on the Advantages of Florida Market

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

PI Financial Corp Special Situations Analyst Jason Zandberg, CFA shares his take on recent developments in the cannabis space. Zandberg addresses the glut of companies that have gone public recently. He highlights names like OrganiGram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA:0OG) and the Supreme Cannabis Company Inc (TSE:FIRE) (OTCMKTS:SPRWF) (FRA:53S1) that he thinks have performed well in the Canadian recreational market. Zandberg examines the advantages of the Florida market in terms of size, recent regulatory changes, and its possibility of going recreational. The PI Financial Corp analyst notes Trulieve Cannabis Corp (CNSX:TRUL) (OTCMKTS:TCNNF) caught the market by surprise, winning a ruling that allows the company to secure the state’s maximum 30 cannabis retail licenses in addition to its 14 retail locations that existed before the regulations were introduced. Zandberg highlights that Florida’s repel of its ban on smoking cannabis will increase the number of patients in the state and drive retail progress. He discusses US multi-state operators with market caps between $2 and $5 billion dollars like Acreage Holdings Inc (CNSX:ACRG.U) (OTCMKTS:ACRGF).

Transcript:

Brandon Colwell:   Joining us live from Vancouver is Jason Zandberg, special situations analyst at PI Financial Corp. How are you doing today, my good man?

Jason Zandberg:    Fantastic, thanks for having me on.

Brandon Colwell:   Absolutely. And you know, myself and Ed have been talking about what’s been happening in the market all throughout today, and especially in the cannabis space, but this is somewhere you specialize in. what have you seen the last little while, and where are your thoughts right now in the situation of the cannabis space?

Jason Zandberg:    Yeah, there’s definitely been a huge number of companies that have gone public in the last year, and quite honestly, it’s, you know, you definitely have to look at the quality of these companies, because there are a lot of either me-too companies or companies that really don’t have a lot behind them. So your diligence is extra important right now.

Brandon Colwell:   Absolutely. You actually cannot emphasize that even more. One of the talks we’ve been talking about all afternoon is that, a lot these companies, even with good intentions, I think a lot of them, what you’re going to start seeing at the latter parts of this year, especially next year, are unfortunately not going to meet their milestones; they’re not going to keep going, and you will start seeing some delinquencies and some people falling off.

So it really, really is important to pick the right ones. On that exact note, are there a few LPs that currently stand out to you as those companies that you do think will pass the test of time?

Jason Zandberg:    Yeah, well, you know, I’ve been looking at some of the names that have been outperforming in the rec market. When I say outperforming, I mean, you know, we’ve got a fairly good track record of those that have been selling medicinal cannabis for a few years, and the names that really stand out when we monitored their rec launch, for me is Organigram and Supreme Cannabis. So two that are not in the top tier at this point, but getting great reviews, being able to execute and get products to market and I think there’ll be some nice surprises here coming up in earning.

Brandon Colwell:   Yeah, I’ve always been a really big fan of Supreme Cannabis Company: OGI, I’m liking to see that they’ve made a lot of progress since the 2017 or maybe even ’16 now, time flies by. But with FIRE, even on a charting perspective, they’ve really been crawling back, because they were in the high 1s, mid 1s for a while there; I think at the last check they had just breached $2 by a little bit. That’ll be an interesting one. You’re thinking that the rec market is going to have a big reflection on the next quarter?

Jason Zandberg:    No, absolutely, they’ve been getting great reviews on their Jean Guy and Wapa strains, and just being able to, you know, they have actually outperformed a later stage of the medical market. They don’t get enough credit for that, and we expect the numbers to climb. We’re looking at about 9 million in sales; now, you know, that’s a pretty high bar for them to reach, but we think they can do it. They come out with the earliest earnings next week.

Brandon Colwell:   Well, looking forward to seeing that, seeing if they are able to make that number there. When it comes to the United States, now, obviously a lot of heads have turned their focus over there. Are there certain things for yourself that really stand out for you, or are there certain companies that you think may be a diamond in the rough, or just in general, not enough people are looking at them?

Jason Zandberg:    Yeah, no, the US is a very interesting market in that it’s, you know, every state has kind of its own licensing rules and product, you know, what products can be sold or can’t be sold. So you know, it takes a lot of, again, due diligence to try to identify what are some of the great states to be invested in.

Right now we’re very fond of the Florida market, not only just the sheer size of its population, but the fact that, you know, recently they have overturned the smoking ban on cannabis. So initially they had said that it would only be, you know, concentrates and, you know, oils that would be sold, and essentially banned any smoke-able cannabis. Most states are about 50 percent of the (inaudible) [0:04:26] if they provide both category types, what happens is it’s smoke-able cannabis. So we think this is actually going to be a nice boost for Florida.

You know, furthermore, in Florida, I really believe that we can see that medical market go to a rec market, you know, possibly in 2020, but more likely in 2022. But that’s a pretty flip turn going from medical to rec, and we just think that the upside is huge for that state.

So some of the names we like in Florida, Trulieve. This is the leader in terms of sales; they’ve got 24 locations right now. And we also like iAnthus, which is just starting to open up their dispensaries, right.

Brandon Colwell:   Yeah, and with Trulieve, that’s actually one that caught myself off guard personally, because you know, they came onto the scene and they had some really, really great revenues, and like you said, specifically in the medical side of cannabis, was not recently, it could have even been this week or last week that they won, they overturned something, because there was a limit for how many dispensaries you can have, and I believe they won that and they’re allowed opening more. Do you know more about that?

Jason Zandberg:    Yeah, so Florida, when they initially launched their medical program, they didn’t have a limit to how many locations you could open. They essentially assigned licenses to regions. So Trulieve had opened up 14 locations, and then after that, at that point they set a cap to, at the time, it was 25 locations, and then they increased it to 30 once the patient count increased.

So Trulieve felt this was unfair, the fact that they had an early lead actually hampered them, because if they had known right off the start that they could only have 25 locations, they would have picked, you know, more high-volume locations. But as you mentioned, a judge did rule in their favour this week and essentially said that they should be able to do 14 plus the 30. So the 14 that they had originally opened, and then 30 after the regulations changed.

So there still has to be legislation to push that forward, but, you know, we’re optimistic, and we believe that Trulieve will be able to open up more locations. And regardless, I believe that the repeal on the smoking ban will actually increase the patient count, which in turn will increase the number of available licenses per license holder – or number of locations per license holder.

Brandon Colwell:   Yeah, and you know, that’s something that a lot of people turn to various ways of consuming cannabis, and I was always surprised – somewhere out, I think it’s the UK as well, had Ed come on and they are stating pretty much the same thing that Florida was just before that; that you’re not allowed to smoke it, you had to take it in other means. But certain cannabinoids are only activated when you do heat it past that time, and you are actually smoking it. So it’s a sticky situation there, no pun intended. I didn’t mean for that one there.

But it’s really nice to hear certain players really making a push, because in the States, again, a lot of people are really not paying attention to these MSOs. And they’re really, really not understanding that yes, you can’t export, but you certainly can go in some of the largest states in the largest economy in the world. Are there any other players throughout the United States that you think are either a diamond in the rough or you’re watching for certain milestones to happen with?

Jason Zandberg:    Yeah, no, we like the MSO model in the US, and you know, a lot of these names, you know, like the Curaleaf and the Harvest and GTIs have all got – you know, Acreage, they’ve all got $2 billion to $5 billion market caps. You know, we’re looking at a few that are under that limit that we believe will have some good momentum moving forward. IAnthus, which we talked about, is one of our favourite names. You know, now that they’ve merged with MPX, they’ve got a great footprint across the US: the Eastern Seaboard as well as out west with MPX, assets. And that’s, you know, trading at about 1.5 billion market cap. So we do believe that it should become, you know, one of those top tier MSOs.

Another name that we like, which is very much on the smaller side, is MJardin. They really had their start in Colorado; I know the market doesn’t like Colorado plays, given that you have to set up these odd structures to essentially absorb all the profits. But we do expect that to change at some point. And we believe that they’ve got a great management team, and are really, you know, they’re not getting into bidding wars for dispensaries; they’re really thinking logically about, you know, where they want to place pins on the map and not overpay. So we like that discipline.

Brandon Colwell:   Yeah, that’s an important one.

Ed Milewski:  Jason, Ed Milewski here. Care to comment, any comments on the Namaste legal battles that are, that sort of came to light this week?

Jason Zandberg:    Yeah, no, I mean, we’ve never, I haven’t covered Namaste, so you know, I’ve read the headlines and read some of the stories, but not really close to the situation, so it would be unfair for me to make a comment.

Brandon Colwell:   Okay, no problem. Going back to that original point, though, it is important to start looking for companies that aren’t overpaying for things, because there are some companies that are coming out with some great deals for a fraction of the price.

Ed Milewski:  Damn right.

Jason Zandberg:    You know, if you look at the difference between, you know, buying a license and actually applying and earning a license, I mean, there’s a huge difference. And, you know, we prefer those obviously that can earn their licenses, but if they can’t, you know, try not to overpay, because some of the valuations on licenses have been extremely high, which, you know, we really don’t think that they’ll be a – it’ll be difficult to get a strong ROI on some of those investments.

Ed Milewski:  All right.

Brandon Colwell:   Really, I appreciate very much for your time, taking the time to come on and speak about these, because it’s, again, as a lot of these stocks are starting to cool off from those, some great runs in January; now’s the time to start looking into who are going to be the players, who are the people who are going to really push forward. So I appreciate very much for you coming on the show and giving us your time to talk about a few that you believe in.

Jason Zandberg:    No, thanks for having me on.

Ed Milewski:  Thank you.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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