Cannabis stocks have cooled off in recent months, and while investors looking to get into the space may be swayed to take one of the bigger names like US industry leader Curaleaf (Curaleaf Stock Quote, Charts, News, Analysts, Financials CSE:CURA), here’s a better option: portfolio manager Jordan Zinberg says go for Massachusetts-based Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR.A).
“We don’t do a tonne of cannabis investing. We were active in the early days, both long and short on several names,” says Zinberg, President and CEO of Bedford Park Capital, who spoke on BNN Bloomberg on Monday.
“Curaleaf is obviously a leading US MSO [multi-state operator],” he said. “I think that the industry itself is still very early days. Once we have financial reform and once we see potentially more interstate commerce allowed amongst the businesses I think you’re going to see the US MSOs firm quite a bit within this space,” he said.
With a market cap of $10 billion, Curaleaf was certainly a good cannabis stock to own in recent years, following the ups and downs of the nascent sector but without some of the wild swings characteristic of some other names. CURA’s 2020, for example, saw the stock go from $8.18 at the year’s outset to a low of $3.82 in the worst of the COVID-related pullback before finishing the year at $15.24. That made for a monster return of 86 per cent.
This year saw the stock go from $15 to almost $23 before starting a long slide back to $14 where it currently sits. Volatile? Yes, but in keeping with the sector which hit a high point in February before tailing off.
The Horizons Marijuana Life Sciences ETF (Horizons Marijuana Life Sciences Stock Quote, Chart, News, Analysts, Financials TSX:HMMJ), for example, which attempts to track the sector as a whole, went from $7.88 per share at the start of the year to as high as $18.94 before falling back to $8.86.
Now, compare CURA’s chart to Ayr Wellness, a $2 billion market cap company. In 2020, AYR went from $11.85 to a huge $30.25 by the year’s end — that’s a return of 155 per cent! What’s more, 2021 hasn’t seen a big pullback like much of the rest of the sector, with AYR reaching a high of $46.40 in February before dropping into the $35 range where the stock has stayed for the past four months. That puts AYR in the black for 2021 compared to CURA, which is now down a bit year-to-date.
What’s good about Ayr Wellness? For starters, the company just reported second quarter earnings that saw revenue jump 222 per cent year-over-year to $91.3 million. And the company is well into positive EBITDA, hitting $27.4 million for the quarter, a 225-per-cent increase over a year earlier.
Overall, the company projects next year’s revenue to reach a whopping $800 million based on growth targets.
“We are seizing a massive opportunity to position ourselves to be the best cannabis CPG company in the US,” said Jonathan Sandelman, CEO of Ayr Wellness, in an August 16 press release.
“Today our brands are in over 280 stores, up three times year-over-year, and they aren’t slowing down. We’re seeing increased demand for our products and accelerating growth in our wholesale business. We plan to continue to invest in the growth of Ayr brands nationally – Kynd premium flower, Origyn Extracts, and our most recently announced acquisition of Levia – and the strategic marketing and operational talent behind them,” he said.
Ayr is expanding across the US, announcing recently the proposed acquisition of Herbal Remedies in Illinois and a hydroponics business in Nevada while adding stores in the hot Florida medicinal market and developing its powerhouse in the US Northeast through, for instance, adding Garden State Dispensary in New Jersey as well as new dispensaries in Pennsylvania.
It’s Ayr’s deep bench that makes it more attractive than other names, says Zinberg.
“Ayr Wellness is my favourite name [in US cannabis]. We have a small position,” Zinberg said. “They would be more diversified in my view in terms of operations in the US and it trades on a more reasonable valuation than you would see with Curaleaf and some of the other names.”
“Not to say that I don’t like Curaleaf but if I were only going to buy one US MSO at this point it would be Ayr,” he said.
From the sell side, analyst Andrew Semple from Echelon Capital Markets would tend to agree on Ayr Wellness. Semple chose Ayr as one of his Top Picks for the third quarter 2021, saying the stock is still heavily discounted compared to its peers despite the share price gains over the past year and a half.
“Ayr continues to have one of the most compelling valuations in the cannabis sector,” said Semple in a June 30 report to clients. “It trades at 7.3x EV/2022E EBITDA based on our estimates compared to an average 11.5x EV/2022E EBITDA multiple for the large cap US cannabis peer group (ex. Ayr).”
“We see dwindling reasons for the company to trade at such a steep discount,” Semple said. “Ayr has closed most of its announced M&A transactions, delivered solid financial results, and secured the debt/equity capital needed to execute on its organic and acquisitive growth plans.”