With the states of New York, New Jersey, Virginia and New Mexico legalizing recreational marijuana this year, the U.S. cannabis industry has attracted immense investor attention. However, selling recreational marijuana products legally is possibly months away given that implementing the changed regulations and distributing licenses to dispensaries will be time consuming. While Democrats’ control of Congress and the White House has so far been a blessing for most multi-state pot producers, some could still struggle to generate substantial revenues and profit.
In fact, the Senate’s stance on the Secure and Fair Enforcement (SAFE) Banking Act, a bill aimed at supporting cannabis companies by authorizing banks to do business with them, is still not clear. While the U.S. House of Representatives has passed the bill with bipartisan support, it is unlikely that the Senate will take it up for a vote soon. Amid this uncertainty, we think it is safer to invest in cannabis companies that are already generating high revenue growth.
Multi-state cannabis operators that are trading at lofty valuations compared to their peers absent adequate financial and fundamental strength could witness significant retreats in the near term. We think Jushi Holdings Inc. (JUSHF) and Charlotte's Web Holdings, Inc. (CWBHF) have limited growth opportunities against an uncertain industry backdrop and they currently look highly overvalued.
Click here to check out our new Cannabis Industry Report for 2021
Jushi Holdings Inc. (JUSHF)
JUSHF is a multi-state cannabis and hemp operator involved in the cultivation, retail and distribution of adult-use and medical cannabis products. It operates 11 retail locations under the BEYOND/HELLO retail brand and offers hemp-based CBD products under the Nira brand name.
This month, the company completed the acquisition of a 93,000 sq. ft. facility for approximately $22 million. The facility is operated by Dalitso LLC, its wholly owned subsidiary, and a Virginia-based pharmaceutical processor. Although the acquisition will allow the company to improve its profitability by offering a consistent supply of medical cannabis products across the Virginia cannabis market, its liquidity position may not improve.
JUSHF appears to be extremely overvalued currently. In terms of its trailing-12-month EV/Sales, JUSHF is currently trading at 20.06x, which is 147.3% higher than the 8.11x industry average. Also, the company’s trailing-12-month Price-to-Book currently stands at 10.78x, which is 159.5% higher than the 4.16x industry average.
In the fourth quarter, ended December 31, JUSHF’s total revenue increased 30% sequentially to $32.3 million. However, its trailing-12-month operating loss came in at $18.49 million, while its trailing-12-month net loss was $70.96 million. The company generated a negative $44.28 million trailing-12-month EBITDA and net interest income of negative $14.79 million. Moreover, the stock has declined 19.8% over the past three months.
JUSHF’s POWR Ratings are consistent with its underperformance. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The company has an overall D rating, which translates to Sell in our proprietary ratings system. JUSHF has a D grade for Value and Stability, and an F grade for Quality. In the 230-stock F-rated Medical – Pharmaceuticals industry, it is ranked #175.
To see additional POWR Ratings for Growth, Sentiment and Momentum for JUSHF, Click here.
Charlotte's Web Holdings, Inc. (CWBHF)
Formerly known as Stanley Brothers Holdings Inc., CWBHF is a multi-state producer and distributor of hemp-based cannabidiol wellness products in the United States. It sells products that include tinctures, capsules, gummies, topicals, and pet products under the Charlotte's Web brand name through its e-commerce website, as well as distributors, and various brick and mortar retailers.
Last month, CWBHF secured approval for three of its proprietary hemp cultivars to be registered on Health Canada's List of Approved Cultivars for outdoor cultivation in Canada. Currently, the company’s products are not easily available in Canada since laws do not allow for bulk importing of U.S. grown cannabinoid or related products into Canada.
CWBHF’s stock looks overvalued now. The company’s forward EV/EBITDA currently stands at 677.26x, which is 3,945.5% higher than the16.74x industry average.
The company’s results for the first quarter, ended March 31,are far from impressive. Its sales and marketing expenses have increased 18.2% year-over-year to $7.72 million in the first quarter ended March 31, while its gross profit declined 9.3% from the year-ago value to $13.68 million. It reported a $10.32 million operating loss and a $13.93 million net loss for this period. Also, the company’s cash and cash equivalents declined 33.9% year-over-year to $35.05 million.
CWBHF missed consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has declined 5.7%.
CWBHF’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary ratings system. It has a D grade for Value, Sentiment and Quality also.
In the 230-stock F-rated Medical – Pharmaceuticals industry, it is ranked #135. In total, we rate CWBHF on eight different components. Beyond what we’ve stated above, we have also given CWBHF grades for Momentum, Growth and Stability. Get all the CWBHF ratings here.
Click here to check out our new Cannabis Industry Report for 2021
JUSHF shares were trading at $6.18 per share on Wednesday morning, down $0.23 (-3.66%). Year-to-date, JUSHF has gained 5.46%, versus a 10.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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