How retail investors should evaluate cannabis stocks
Feb 15, 2024
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Investment expert Jerry Derevyanny discusses evaluating cannabis stocks, highlighting the importance of transparency, debt management, and sustainable value creation in the industry. He explores the challenges investors face, the evolving metrics used for analysis, and examples of companies handling debt well or poorly. Overall, a candid look at the complexities of investing in the cannabis market.
Investors struggle due to lack of metrics and transparency in the cannabis industry.
Flexibility and continuous adaptation are crucial for success in the evolving cannabis market.
Caution needed when using traditional metrics to evaluate cannabis companies; deeper analysis is required for accurate assessment.
Deep dives
Lack of Metrics and Disclosures in Cannabis Industry
There is a lack of good metrics and disclosures in the cannabis industry, making it difficult for investors to accurately assess the value of companies. This is due to the threadbare disclosures provided by companies and the absence of reliable metrics. Investors should be wary of relying solely on metrics and should not underestimate the challenges and uncertainties facing the industry.
The Importance of Rethinking Previously Held Opinions
Rethinking previously held opinions and adapting investment strategies is crucial in the ever-evolving cannabis industry. The challenging and complex nature of the industry requires investors to be open to new information, adjust their thinking, and continuously reassess their investment approaches. There is space for grace and room for mistakes as everyone navigates through the constant changes in regulations, definitions, and legal factors affecting the industry.
Evaluating Companies and Industry Metrics
Investors should be cautious when considering metrics used to evaluate cannabis companies. Metrics like funded capacity, EV/EBITDA, and tangible book value do not necessarily provide a complete or accurate picture of a company's future cash flows or long-term value. Investors should avoid relying solely on metrics and should take a more in-depth approach in analyzing companies by considering factors like state-by-state breakdowns, capital allocation, debt management, and the ability to generate sustainable growth.
Transparency and Future Outlook for Companies
Transparency and disclosure practices vary among cannabis companies, and many continue to lack transparency in reporting state-by-state breakdowns. While some companies may become more transparent in the future, driven by institutional scrutiny, pressure, and aspirations for credibility, the current retail-dominated sector does not exert significant pressure for comprehensive disclosure. Retail investors should keep this in mind while evaluating companies and consider their long-term value creation potential.
Risk and Reward in the Cannabis Industry
Investing in the cannabis industry carries both risk and reward. There are opportunities for sustainable growth, especially for more nimble players and companies focused on efficient operations and capital allocation. However, there are also companies burdened by debt and poor decision-making, whose long-term value creation prospects may be limited. Investors should carefully assess individual companies and their track records, and consider whether they have the stomach and ability to handle the volatility and uncertainties in the industry.
Bengal Capital's Jerry Derevyanny shares his evolving thoughts on 280E and the process of rescheduling cannabis (2:20). Some uncomfortable truths about how investors should be evaluating cannabis stocks (8:30). When will companies become more transparent? (21:40) Who is handling debt well and who isn't (27:15). Examples of sustainable value creation in the industry (34:00).