Replies to post #2262 on Green Thumb Industries Inc (GTBIF)

[FUNMAN]

Green Thumb: The $100 Million Vote Of Confidence

Feb. 19, 2021 7:02 AM ET
Green Thumb Industries Inc.

Read at this link to see charts:

https://seekingalpha.com/article/4407359-green-thumb-vote-of-confidence

Summary

GTI announced a $100M direct share sale to a single U.S. institutional investor one day after its S-1 registration form was approved by the SEC.

The transaction marks GTI's first direct stock sale in the U.S. and indicates massive untapped institutional capital unavailable to U.S. cannabis companies due to direct listing restrictions.

We believe GTI has exemplified operational excellence, capital discipline, and foresight in building an institutional shareholders base; we remain bullish on the stock as one of our favorite U.S. names.

Green Thumb (OTCQX:GTBIF) has been a top performer among U.S. cannabis stocks in the last year. We have remained bullish on GTI due to its solid execution track record and disciplined capital allocation.

The company recently took a $100M equity injection from a single U.S. institutional investor. We believe this is just another example of increasing institutional acceptance and interest from large investors and GTI has been a leader in this movement. We remain bullish on GTI and see it as a core holding for cannabis investors and one of our two favorite U.S. cannabis names besides Trulieve (OTCQX:TCNNF).

(All amounts in USD)

U.S. IPO

GTI announced on February 9 that it has completed an initial public offering of $100M in shares after the SEC accepted its S-1 form. The sale was placed to a single U.S. institutional investor at a price of $32.03 per share. Proceeds will be used for general purposes and will help boost its Q3 balance sheet cash balance of $78M. We think this event is a major milestone for the company as it continues to lead the industry in attracting institutional capital.

When we initiated coverage on GTI in November 2018, we pointed out the investment by the billionaire hedge-fund manager Leon Cooperman as a differentiating factor for the young cannabis upstart. Since then, the company has demonstrated its savvy capital allocation strategy by prudently raising capital only when the market is supportive to minimize dilution. GTI has also avoided large all-stock transactions that often lead to bloated cost structure and big dilution for existing shareholders.

Because of GTI's successful operational and financial management, the stock has been a top performer in the sector rising ~280% since the beginning of 2020. GTI performed slightly behind another favorite of ours, Trulieve, but it outperformed Curaleaf (OTCPK:CURLF) whose past acquisitions hurt its profitability, and Cresco Labs (OTCQX:CRLBF) which suffered from capital allocation issues and had to cancel acquisitions. Trulieve also submitted its S-1 to the SEC and we would expect similar capital raises in the future. Trulieve and GTI remain two of the most well-managed cannabis companies and their shares have been rewarded.



(Source: Author)

Future Catalyst
The significance of this equity offering is symbolic but also practical in the sense that U.S. cannabis stocks remain prohibited from access major U.S. exchanges. We have seen recent spikes in Tilray (NASDAQ:TLRY) and Sundial (NASDAQ:SNDL) shares as retail investors piled into cannabis stocks. However, these price actions reflect a misinformed notion that a U.S. legalization will benefit these Canadian names more than the U.S. MSOs. On the contrary, we think the most likely form of federal legalization involves ending the federal prohibition on cannabis (de-scheduling, interstate commerce, 280E tax code, banking access, etc.) while giving each state the ability to implement programs. Therefore, existing medical and recreational cannabis programs will be kept in place for most states and it is unlikely that Canadian firms will be able to enter the U.S. markets freely such as through exports. It is important for investors to realize that despite the progress on federal legalization, cannabis remains a closely watched substance and states will surely apply oversight on cultivation, retail, and use of proceeds from tax revenue. Therefore, we think existing MSOs will become the biggest beneficiary upon federal legalization. Canadian players could only become meaningful competitors through acquisitions; Canopy Growth (OTC:CGC) is rare in that it already has stakes in Acreage (OTCQX:ACRGF) and TerrAscend (OTCQX:TRSSF).

Green Thumb currently operates 52 retail locations across 10 states which represent one of the largest footprints among MSOs. However, GTI has differentiated itself by its early-mover advantage in most of the largest cannabis markets today. In particular, the company started off in Illinois and now operates 8 stores; the 4th most populous state legalized recreational cannabis sales in January 2020 and has surpassed $1.2B in combined annualized medical and recreational cannabis sales in November 2020. Pennsylvania is another state that is growing very fast and GTI has 13 locations open (with licenses that allow up to 15 locations). We have seen the clear benefit of scale and impact on margins, and that's why it is important to discern MSOs with in-depth presence vs. superficial footprint.



(Source: IR Deck)

Market Volatility

Another recent development worth discussing is the surging volatility in cannabis stocks. A select few cannabis stocks have exhibited bubble-like price movement in recent weeks. Tilray and Sundial both rose 500-600% since 2021 began by mid-last week, only to see major corrections on Thursday and Friday. Both stocks remain well above prices just a few weeks ago and we think the correction has further room to go. However, it is encouraging to see that GTI and other MSOs have remained relatively stable amid the extreme volatilities which is a testament to their shareholder base and investor confidence. We think there is no evidence to support the recent outperformance of Canadian stocks because federal legalization will most likely benefit MSOs the most. Canadian companies without an existing U.S. footprint will have a hard time getting into the market other than through expensive acquisitions.

Moreover, betting on Canadian stocks is risky because it is a bet on federal legalization which is hardly a certainty at this point. However, the U.S. stocks are supported strong fundamentals (double-digit organic sales growth, 20%+ EBITDA margin, highly scalable business with multiple potential markets that could legalize in the near-term) and valuations (MSOs trade at 10-15x EV/Sales vs. Canadian peers trading at 20x-50x).

We believe the recent events further vindicated the long-term bull thesis for U.S. cannabis stocks and we are now more confident than ever that the secular trend remains intact. The stocks have proved to be resilient in the face of uncertainties in the market and that is a positive sign. Moreover, the fact that an institutional investor is willing to bet $100M on GTI's stock at today's prices is certainly encouraging.



(Source: Bloomberg)

Conclusion

GTI remains one of our two favorite U.S. cannabis stocks due to its well-positioned asset footprint and execution track record. Its business was built primarily on license wins and greenfield projects so it didn't have to borrow heavily or issue many stocks. The management team is sophisticated and disciplined enough to avoid large all-stock transactions that led to huge dilution and bloated share count. The recent $100M private placement of stock to a single U.S. institutional investor at ~$32/share is a strong vote of confidence despite volatility in the sector. The S-1 was accepted by the SEC on February 8 and the share sale was announced the following day, implying that the investor was already waiting on the sidelines and willing to acquire a large chunk of shares at any price (the shares had already run up ~280% since 2020 began). We remain bullish on GTI and believe that any weakness in its share price in the near-term would represent attractive entry points.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

[FUNMAN]

Green Thumb Industries (GTI) - now the quality of your cannabis: https://bddy.me/37vqUtd via @risecannabis

Know the quality of your cannabis: https://t.co/jlveVGRxYj
via @risecannabis

— Green Thumb Industries (GTI) (@GTIGrows) February 19, 2021