Locked & Lit: The Grizzle Cannabis Portfolio

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The US cannabis industry is one of the most attractive growth sectors in the stock market for investors.

The industry offers big top-line growth and companies who are cracking open a completely new legal market.

However, investing in emerging growth industries is inherently risky.

Most stocks will fail to live up to their hyped growth expectations and many will go to zero.

Grizzle has been covering the cannabis sector since its infancy, in fact we launched the company in 2018 with a short report on the overvalued Canadian cannabis sector – the first in-depth analysis of the ills that would soon impact the frothy stocks.

We believe we’re at a very attractive juncture for the US cannabis market, sector-level valuations are reasonable relative to the significant growth runway ahead for the sector.

However, company-specific risks are still significant and we believe investors should take a laser-focused approach (fundamental stock selection) rather than a generic scattergun approach (ie. market weight cannabis ETF).

Enter the Grizzle cannabis portfolio.

To help investor’s we’ve created a fundamentally driven cannabis portfolio with a focus on avoiding companies headed to zero while at the same time maximizing upside through valuation and fundamental analysis.

Below is our full portfolio asset allocation as well as explanations of how we assigned all of our individual company weights.

*Check back regularly as we will be posting all portfolio changes here when our industry and stock-specific outlook changes.

U.S. Multi-State Operators

For the best in class US Multi-State operator group our weightings were driven by the level of net debt and the enterprise value to EBITDA multiple plus some qualitative factors.

Curaleaf and Cresco labs have the highest weighting in the subgroup due to recent capital raises leaving them cashed up.

Cresco is significantly cheaper than peers so is ripe for a catchup while Curaleaf has the best access to capital in the group and will likely continue to put up industry-leading growth.

Trulieve and Green Thumb are slightly less attractive on our methodology but also are priced reasonably with manageable debt levels and good growth potential.

Small-Mid Cap US Stocks

Our weightings in this group were led by net debt, the price to sales ratio, and also the potential of a buyout.

Small-cap cannabis stocks provide a potentially attractive way for the bigger guys to enter new states quickly without the permitting hassles that can push off licenses for years.

Our weighting is heavy on Vireo as it ticks all the boxes for a takeover candidate.

Cheap valuation, licenses in attractive states and very little debt.

Jushi, Harvest and Acreage are catchup plays with some significant debts that now can be paid off with the thawing of the capital markets.

They also have licenses in attractive growth states.

With cheap valuations, they could get bought out by a bigger company or simply reaccelerate growth which should push the stock prices higher in 2021.

Ayr and Consortium are in the right states plus trade for relative bargains to the larger MSO’s so deserve nominal weightings.

Canadian Licensed Producers

The only thing Canadian investors want to hear from management teams is how they plan to enter the U.S. market and how soon it’ll happen.

For our Canadian weightings, cash was king, with valuation as a secondary factor.

If you want to enter the U.S. you need cash to buy your way in.

Aphria has cash and a plan to enter the U.S. once the law allows them to, plus trades at a dirt-cheap multiple compared to all other legitimate competitors.

We are heavy on Aphria as we expect the valuation gap will continue to close.

Canopy Growth, Cronos and Village Farms also have solid cash buffers and have indicated they would enter the U.S. in size as soon as it’s legal to do so.

Canopy has the second-highest weighting for us because of the deal to buy Acreage which already gives it a solid multi-state footprint.

Cannabis Equipment

GrowGeneration was the best performing cannabis stock in 2021 and drove much of our returns in 2020, but the stock is now looking mucho expensive.

Given the expensive stock price, we have overweighted Scot’s Miracle Gro, which also has a fast-growing cannabis segment plus a heavily discounted stock price compared to GrowGeneration.

GrowGeneration remains in the portfolio as its acquisition strategy has produced solid growth, but we can’t justify a high weighting with the stock having run so hot in the last 12 months.

Full Disclosure: Employees of Grizzle own securities mentioned in this article.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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