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Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: Follow Mark on twitter: @stonefoxcapital

3 Promising Cannabis Stocks Set to Expand Into the Colorado Market

One of the more interesting stories in the U.S. cannabis market is the opening up of the developed cannabis market in Colorado. Prior to the passing of Colorado’s House Bill 19-1090, publicly traded companies weren’t allowed to own or invest in Colorado cannabis businesses.

The bill went into effect on November 1, 2019 opening up the $1.6 billion market opportunity to public companies previously focused on new states opening up recreational use such as Illinois. The state has long been used as an example for the regulatory environment such as the high level of dispensaries compared to the relatively low levels in Canada. The main drawback has been the lack of public investments.

According to estimates, Colorado has one retail store per every 10,000 residents. The state first legalized cannabis back in 2014 and has over 560 outlets serving a population of 5.7 million residents.

The state serves as an example of the ramp up period needed to reach normalized cannabis sales. Back in 2014, Colorado started with slightly above $40 million in monthly sales and recently topped $160 million to reach $1.6 billion in annual sales. Sales growth has nearly plateaued since the fourth year of legalization with sales topping $1.5 billion in 2017. Also worth noting, medical marijuana sales have only declined since the original sales levels of $30 million monthly.

With this in mind, we’ve delved into three U.S. companies set to expand into the well-established Colorado cannabis market in an attempt to consolidate the market. Using TipRanks’ Stock Comparison tool, we lined up the trio alongside each other to get the lowdown on what the near-term holds for these cannabis players.

Columbia Care (CCHWF)

Columbia Care made the most direct move into the Colorado cannabis market with the purchase of The Green Solution (TGS) for $140 million. TGS is listed as the largest vertically integrated cannabis operation in the state with trailing proforma revenues of $73 million.

TGS operates 23 dispensaries in Colorado now with 48,000 pounds of cultivation capacity with combined indoor greenhouse and outdoor flower. The company has plans to expand cultivation to 150,000 pounds by 2023 providing for over 200% growth in the next few years.

Columbia Care suggests the deal priced at 1.6x 2020E sales or the equivalent of $87.5 million in revenue from TGS. The deal price is relatively low due to the limited growth expected from Colorado in general and the acquisition target specifically.

In total, Columbia Care forecasts a total US footprint of 93 facilities covering 15 jurisdictions in the U.S. with an addressable market of 155 million people. The deal nearly doubles the size of the MSO making Columbia care a suddenly large player in the cannabis business while increasing the path to profits when the deal closes in the 1H of the year.

Columbia Care only has a market value of $740 million with quarterly revenues of $22 million. The company is definitely a less risky way to participate in the consolidation of the Colorado cannabis market.

Wall Street analysts are on the same page. 3 Buys compared to no Holds or Sells add up to a Strong Buy consensus rating. Additionally, the $10.82 average price target implies 252% upside potential. (See Columbia Care’s price targets and analyst ratings on TipRanks)

Medicine Man Technologies (MDCL)

The one stock now most tied to the new rules in Colorado is Medicine Man Technologies. The company has announced 12 deals to consolidate a whole list of cannabis operators when the deals are finalized in the next few months.

Once closing all of the deals, the company predicts having 12 cultivation operations, seven product manufacturing operations, 34 dispensaries along with research, development and innovation assets. Medicine Man forecasts the combined*- businesses generating 20% EBITDA margins with a goal of reaching 30% margins via collaborative growth and economies of scale in the future.

Prior to the deals closing, Medicine Man generated Q3 revenues of only $5.3 million with a net loss of $1.8 million. The company had a cash balance of $15.2 million. Most of these numbers are irrelevant due to the pending acquisitions.

Medicine Man will need a strong management team to carry off the integration of a dozen separate business units working on a range of products from dispensaries to edibles to cultivation and production facilities. The stock is the best way to obtain a pure play in the Colorado market, but the financials of the company are still largely unknown. Due to the potential here, the stock trades above the levels from last year.

Curaleaf (CURLF)

The last stock set to benefit from the new laws allowing public companies to invest in Colorado is more of a speculation. Curaleaf is in the process of becoming the largest cannabis company in the world and the company recently obtained one of the 14 medical marijuana licenses in Utah.

The logical conclusion to the large ambitions of Curaleaf is that the Utah business provides for the easy step across the state line to Colorado.  The company recently closed the Select deal and has another major pending deal with Grassroots to enter the Illinois market. Once these deals are done, the company will likely return back to looking for more deals.

While these other states offer growth opportunities, Curaleaf has national ambitions and the establishment of operations in Colorado is only logical. With over 500 dispensaries in a competitive market, one can easily foresee the company making a similar deal as Columbia Care to acquire an established chain in need of capital or better management to grow operations and consolidate market share.

Curaleaf is forecasted to top $1 billion in annual sales this year so a similar move to Columbia Care won’t move the needle drastically, but rather Colorado provides a more certain growth opportunity and likely positive EBITDA to help build the business. The stock is trading close to the lows below $7 despite the substantial opportunities still ahead in the U.S. cannabis sector due to opportunities in Colorado.

What does the rest of the Street think? As it turns out, 7 out of 8 analysts that have published a recent review see the stock as a Buy, making the consensus rating a Strong Buy. Adding to the good news, the $9.13 average price target indicates 44% upside potential. (See Curaleaf’s stock-price forecast and analyst ratings on TipRanks)


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