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- 👀 Did The Game Just Change? 👀
👀 Did The Game Just Change? 👀
Anthony Varrell
July 15, 2024
GM Everyone,
We are coming off quite a tumultuous week of events with many unknown repercussions for the cannabis industry. The consensus is that in light of Saturday's events, Donald Trump should now be able to waltz into the White House. I don’t see it that way, as we have a long way to go before the election, but you can always look to history repeating itself, as it did with President Reagan. We will be watching the tape closely today for any signs of a sentiment shift, as well as overall headlines around the sector.
Today’s letter can be read in 8 minutes and 26 seconds.
What's Driving the Market Today?
Stock futures are up this morning:
Trump shooting increases election chances, steepens Treasury yield curve.
China’s Q2 GDP growth misses targets; property sector struggles.
Bitcoin surges above $60,000 post-Trump incident.
Goldman Sachs, BlackRock earnings awaited; Alphabet eyes Wiz acquisition.
Fed Chair Powell and ECB President Lagarde to speak; markets eye potential rate changes.
💸 High Impact
The Golden Ratio
The What - As the cannabis industry matures, additional financial metrics become important. One such metric is Days Inventory Outstanding (DIO), which provides insight into how efficiently companies manage their inventory. In this post, we’ll explore what DIO is, why it’s important, and how cannabis multi-state operators (MSOs) stack up against each other. Later this week, we will look at accounts payables and receivables.
What is Days Inventory Outstanding?
DIO measures the average days it takes a company to sell its entire inventory. It is calculated by comparing the average inventory to the cost of goods sold. A lower DIO indicates that a company is selling its inventory more quickly, signifying better operational efficiency and cash flow management. Remember when Canadian cannabis companies/LPs had too much inventory and had to destroy some? This metric would have warned investors that this was likely to happen.
Why is DIO Important?
Understanding DIO is essential for several reasons:
Operational Efficiency: A low DIO indicates effective stock management, reducing carrying costs and potential obsolescence.
Cash Flow Management: Efficient inventory turnover improves cash flow, allowing companies to reinvest in operations or pay down debt more quickly.
Market Positioning: Companies with better inventory management may have a competitive edge, attracting investors and improving market perception.
Performance Benchmarking: DIO allows shareholders to compare performance among peers, providing insights into industry best practices.
Ranking of MSOs by DIO
Below is the number of days each company takes to sell its inventory. A lower number is preferred, as it shows that the MSO is using its capital and inventory more efficiently.
How to Track This Ratio During Upcoming Earnings Season
If you hope to review this after each MSO's earnings report, you will likely be disappointed. You will have to wait for a few days until systems like Capital IQ, Yahoo Finance, etc., update their earnings data. You will then have to calculate this ratio yourself. However, we will be doing this for our readers in the future after earnings and will share how companies are improving or falling back with their inventories.
Big Takeaway
Do you remember last week we shared an article about the current ratio? We shared how inventories are part of the current ratio. We also warned that one can’t pay their bills with inventories, so be careful not to put too much faith in a high current ratio. This is especially true of a company with low inventory turnover; in this case, the MSO likely has an overstated current ratio. For example, Canadian companies/LPs would have overstated current ratios before they destroyed their high inventories. Investors would have been warned if they saw high and increasing DIO ratios.
📈 Dog Walkers
New York, New York
New York State has announced a recall of certain THC-infused food products made under the brand “Sky High Eat By Sky High”. The recall was initiated due to health and safety concerns after discovering potential contamination. These products were made by an unlicensed processor in New York, go figure. We will be looking for an update as this is a new low that products stemming from and unlicensed processor found there way into the regulated market.
Unlicensed dispensaries have littered New York neighborhoods, blatantly circumventing our laws and selling potentially dangerous products,” thundered Gov. Hochul in April as the new law passed. In just over two months, the city has padlocked 535 illegal shops, seized $17.5 million in cannabis products, and issued over $43 million in civil penalties according to the NY Post.
Illinois Social Equity Licenses Are At The Finish Line
According to Crains Chicago, winners of Illinois' cannabis license lottery have managed to retain their licenses amid regulatory scrutiny. The decision ensures that the state's cannabis market remains competitive and diverse. These licenses stem back to the cohort of 185 that were given out in the summer of 2022.
Ron DeSantis Hates Cannabis But Loves Hemp
Newly revealed texts show that top hemp industry executives have pledged millions of dollars in donations to the Republican Party of Florida. This decision aims to influence state policies in favor of the hemp and cannabis sectors. Governor DeSantis will continue to campaign against Amendment 3 with allegiance from the hemp industry, but is this just a ploy to bolster his resources to fight against his real passion project, women's rights?
🗞️ The News
📭 Research
Initiating Coverage: Green Thumb Industries - Download Here
Reconfirming Buy Rating: MariMed - Download Here
Initiating Coverage Of Verano Holdings Corp. - Download Here
Initiating Coverage: TerrAscend - Download Here
📺 YouTube
Which Five Small Cap Stocks Would We Buy?
What we covered:
✅ On our latest Trade to Black Small Cap Sunday Podcast, we provide research for five small-cap stocks and two Biotech companies that we analyze to see how we analyze Biotech stocks and share which of the two stocks we would buy!
First, we will look at a profitable and unique mining company in Mexico called Andean Precious Metals (TSXV:APM).
Next, we will share a process for analyzing biotech stocks. After this educational discussion, we will compare two biotech companies. We will examine Aadi Bioscience (NASDAQ:AADI) and Aprea Therapeutics (NASDAQ:APRE).
Afterward, we will consider a high-tech printing company Arc Document Solutions (NYSE:ARC) and our Cannabis Company of the Week - Curaleaf (OTC:CURLF)