💸 We Have A Pulse 💸

Author

Anthony Varrell
July 12, 2024

GM Everyone,

We got a nice pop in the market yesterday, much to everyone's surprise. Many believe this was due to cooling inflation numbers, a potential rate cut coming in September, and capital rotation into $IWM. I’m not going to lie, it felt nice. Several cannabis names were up double digits intraday and actually showed strength into the close, with TSND leading the way, up over 16% on the session (thanks, Dougie). We will be watching closely for some much-needed follow-through today.

Today’s letter can be read in 8 minutes and 10 seconds.

What's Driving the Market Today?

Stock futures are flat, and earnings season has started with JPM beating expectations; here is what else is moving the market:

  • Big Tech sell-off as investors move into smaller names.

  • June U.S. inflation drop boosts disinflation outlook.

  • German inflation was confirmed at 2.5% for June.

  • The dollar weakens, and the yen surges amid suspected intervention.

💸 High Impact

The Golden Ratio

The What - The current ratio measures a company's ability to pay off its short-term debts with its short-term assets. However, the current ratio has limitations and is one piece of information with two main nuances that make it unreliable. Frankly, I am surprised by how much it is used by the community of US Cannabis MSOs (MSOs) investors. For example, I often see individuals post an image of four or five MSOs comparing and ranking them by the Current Ratio without any deeper thought. Why does this surprise me? Let's look more closely at the Current Ratio and its limitations. 

The current ratio measures a company's ability to cover its short-term debts with its short-term assets. In accounting, we consider short-term debt to be one year or less. It is calculated by dividing current assets, like cash and inventory, by current liabilities, such as accounts payable and short-term loans. A ratio of 1 or higher suggests that the company can meet its short-term obligations, while a ratio below 1 indicates potential liquidity issues.

Investors and analysts use the current ratio to compare companies' liquidity within the same industry. A higher ratio is generally seen as a sign of better financial health. Out of curiosity, let's rank the MSOs by their current ratio as reported at the end of the last financial reporting period. In the traditional sense, without considering limitations, the higher the ratio, the better.

The Why - Here are three main limitations and why they cause issues. One example understates the number, and the other two overstate the number.

Limitation #1: If a company has debt coming due this year and plans to renew it, when the debt has less than 12 months left until renewal, it is considered a current liability. In this case, the current ratio will decrease, making it appear the company is at risk of insolvency. Most MSOs have significantly improved their cash flows, and debt is widely available. Hence, the risk of debt renewal for many MSOs is negligible. Imagine if a company has five-year debt and renews most of it every five years. Then, for four years, the company would look liquid and sound, but every five years, warnings would arise that the company is potentially insolvent. For companies with positive cash flows, this situation causes many prints of the numbers to be irrelevant.

Limitation #2: The opposite can also happen; the number can be overstated. Remember when the Canadian Cannabis LPs overproduced cannabis, and they had to destroy their inventories? In the previous quarters, this inventory would have been counted as a current asset, just like cash. Cash is always worth something, but inventories are tricky and can be written down. The same is true with account receivables; if MSOs aggressively sell wholesale products on credit, this ratio indicates that IOU is as good as cash. This is part of why I look at ratios like Levered Free Cash Flow; cash is cash and comforts me as an investor.

Limitation #3—You can’t pay your bills with current assets. When it is time to pay your supplier, they don't want your inventory or account receivables. That is why I like to look at cash holdings in addition to current assets. Another comparison is the ratio of cash to current assets used to calculate the current ratio. 

📈 Dog Walkers 

Trulieve Opens New Dispensary in Wilkes-Barre

Trulieve (CSE: TRUL, OTC: TCNNF) has opened a new affiliated medical marijuana dispensary in Wilkes-Barre, Pennsylvania. This expansion enhances Trulieve's footprint and provides more patients with access to high-quality medical cannabis products.

Nebraska Advocates Push for Medical Marijuana Legalization

Nebraska advocates, led by Crista Eggers, are pushing for medical marijuana legalization, collecting 2,500 signatures in Omaha and Lincoln. The campaign faces challenges in the verification process, needing 5% voter support in 38 of 93 counties. The future of the initiative hinges on upcoming verification and petition language review steps.

Thai Cannabis Policy Reversal Concerns Investors

Thailand's potential reversal of cannabis legalization is causing investor concern. Key political parties argue that the shift could undermine investor confidence and disrupt the burgeoning cannabis market in the region.

🗞️ 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

DC Expert Analyzes GOP Concerns on Marijuana Rescheduling

What we covered:

✅ Join us for an episode of Washington D.C. Wednesday, where we discuss the matters of Cannabis regulation and how it will affect Marijuana stock prices and the MSOS ETF.

John Sullivan, the Executive Vice President of Government Relations from Cresco Labs will join us and address the latest stories involving the GOP congressional committees efforts to try and block marijuana rescheduling.

John has a lot of credibility; he has been instrumental in influencing legislative and regulatory changes in the cannabis industry. He helped draft the SAFE Banking Act language in the U.S. Senate and an Illinois proposal allowing cannabis businesses to deduct ordinary business expenses from state taxes. Additionally, he introduced the first bipartisan adult-use legislation in Pennsylvania. Sullivan is an executive board member and chair of the Illinois Cannabis Association.