As another cannabis reporting season comes to a close, Green Market ReportEditor-in-Chief Debra Borchardt spoke with CNBC market strategist Tim Seymour, who is also founder and chief investment officer of Seymour Asset Management, about the overall tone of corporate reports and what the results might suggest for the future.
This interview has been edited for length and clarity.
Some of the largest MSOs reported earnings last week and I’m curious to hear your thoughts. Many large companies reported increasing revenues, which is great. However, we also continue to see significant losses. What was your overall impression of last week?
Tim Seymour: I think I’m going to take a glass half full approach. I think Green Thumb Industries’ (OTC:GTIBF) EBITDA momentum and free cash flow and ultimately margin levels continue to be best in class, and I think they’re largely focused on their retail expansion and their efforts in Florida. Ohio is obviously a big deal, so I’ve been reasonably pleased there.
When you look at some of the others, like Cresco Labs (OTC:CRLBF), I think the numbers are ultimately in line with the guidance. In the case of Cresco, they’re actually trading at a significant discount to a GTI, but for the most part, the operating free cash flow has been impressive. The ability to maintain margin has been impressive.
It’s not about growth at any cost, and that hasn’t been the case for probably six to eight quarters. I think those numbers are OK.
So I’m choosing to take some positivity from the fact that companies are getting better at their core businesses. When you look at the macro picture of the sector, there’s obviously a lot of speculation about what’s going to happen, not just at the federal level but also in the individual states.
Where will the next catalyst be now that Ohio is on the rise? This state certainly seems to be a place that many of the Big Five are focusing on and talking a lot about how important it will be to their sales profile.
We have seen a decline in a few stocks, such as Jushi (OTC: JUSHF) and Canopy Growth (NASDAQ: CGC).
Seymour: I think there’s a disconnect between the people who actually have some flexibility and the people who really don’t have a lot of flexibility – or maybe they’re positioned in markets that are less exposed to exciting growth.
For investors, there are some dynamics of relative value and performance comparison that I find very interesting. Every company has communicated at various points that a market is struggling a little bit, and where they may have admitted that they are not going to invest as much of their resources in that area.
New Jersey’s strength is obviously very important to a handful of these companies as well, and this data showed that New Jersey is definitely seeing a new surge in bringing more facilities and sales online. This and Maryland are evidence that the East Coast is pretty solid overall.
We haven’t seen any new capital coming into this space. I think the fundamentals continue to improve. I always argue that we are making more progress state by state each year. And who knows what will happen in November? But we know for sure that there will be more representatives in Washington from Republican states whose constituencies are interested in cannabis.
Are there concerns about the debt restructuring that we’re seeing as companies extend their maturities? What I’m concerned about is: OK, you’ve bought yourself some time, but does one or two years really make that much of a difference?
Seymour: In most cases, lenders are not trying to exert undue pressure. I don’t think many lenders have a loan-to-own mentality. I think for the most part it’s a dynamic where the operating environment is certainly one of more rationalization, and I think everyone is really partners here.
I think you hit the nail on the head. I think the people who wanted to borrow with the goal of buying have already done so, and the others really don’t want to take over your company.
Seymour: There’s no doubt that was a strategy in the early cannabis days. But no, I think there’s more access to capital. I think there’s certainly an opportunity for non-traditional lenders that don’t necessarily have to specialize in cannabis.
But then I get to my CNBC thought, which is that if rates really do go down, we could have big problems in other ways as far as the economy and cannabis sales and cannabis consumers are concerned. And the reality is that this is still a discretionary item in many circles. So if there were to be a significant drop in rates, it would likely be due to an economic pullback. And that would not be good for the cannabis sector.
There are still a few big cannabis companies coming up this week. For example, we have Glass House (OTC: GLASF), 4Front Ventures (OTC: FFNTF) and Gold Flora (OTC: GRAM). Are you watching any?
Seymour: I just want to talk about Glass House for a minute. I still think their thesis of being a low-cost producer of high-quality products and flower will win out in the end. I think they have navigated the world of capital markets well and have gotten a head start.
I think the assumption is that they will survive and succeed in California. I think they are reasonably well positioned to at least get through this period, with an operating leverage to their business that I think will prove to be very strong over the long term.
