Curaleaf pullback is attractive, this portfolio manager says

With well over $1 billion in the company’s annual sales, Canada’s own pot co’s are likely looking south of the border with awe and envy at the cannabis empire that is Curaleaf Holdings (Curaleaf Holdings Stock Quote, Charts, News, Analysts, Financials CSE:CURA). And as the sector-wide pullback over 2021 continues to hit almost all names, including CURA, Brian Madden of Goodreid Investment Counsel thinks investors should be considering adding the stock to their portfolios.

“We continue to hold Curaleaf,” said Madden, senior vice president at Goodreid, who spoke on BNN Bloomberg on Thursday. “We bought it in July last year on the $10 mark and it kind of roared higher as we headed into the US election and then peaked in January when it became clear that the Democrats were going to have control of the Senate after that runoff in Georgia. And it’s been checking back ever since then.”

Headquartered in Wakefield, Massachusetts, Curaleaf has cultivation, processing and retail facilities across the US. At last count, the company has 113 dispensaries nationwide with a concentration in Florida where it has 38 outlets and a growing presence in jurisdictions such as Arizona, New Jersey and New York. Curaleaf’s operations cover 23 states in the union including 22 cultivation sites and over 30 processing sites along with business in the European market. 

The company generated revenue of $317 million in its third quarter 2021 with cash from operations at $52 million or 16 per cent of revenue. Curaleaf spoke of transient headwinds over the Q3 which slowed its growth trajectory — revenue grew by just two per cent sequentially although still up 74 per cent year-over-year, while the net loss for the quarter was $0.08 per share compared to a loss of just $0.01 per share for the second quarter.

“We continued to successfully execute our plan for long-term growth in the third quarter with a focus on our four pillars of competitive advantage – research & development, commercialization, national distribution, and marketing and brand building,” said Joe Bayern, CEO, in the third quarter press release on November 8. “We expanded our scale and reach by strategically growing our retail and wholesale presence and significantly increasing our cultivation capacity both organically and, more recently, through M&A.”

With all that growth and as more and more US states legalize either medical pot or both that and rec cannabis, you’d expect CURA’s share price to be doing better than it has been. The stock rose from about $10 last October to as high as $22 by mid-February but it’s been all downhill since then and CURA is currently hanging around $12.

But the sector as a whole has been down over 2021, with Canadian as well as American companies feeling the heat perhaps for different reasons. 

In Canada, the maturing market has perhaps brought a dose of reality to the business, both in terms of the eventual size of the market and how hard it might be for companies to claim their stake in terms of market share. In fact, throwing money at the problem doesn’t seem to have worked, as the larger companies, many of whom come with well-heeled backers in the tobacco and alcohol industries, are in tough against smaller operations who are gaining traction in niche verticals such as craft and premium flower.

In the US, the story is more of a wait-and-see game, as so-called multi-state operators like Curaleaf continue to expand their footprint but where there’s only some hope persisting of movement at the federal level on legalization.

But Madden remains optimistic, saying investors that go with a name like Curaleaf are likely to be rewarded.

“This is an emerging growth industry and we think it’s going to be a very big industry in time,” Madden said. “And we think that Curaleaf is going to be one of the dominant players in this industry over time, so we continue to buy it, we like the pull back, the valuation has come back to a less demanding level and, really, if we peel back the layers and try to understand why is it a check back, the whole sector has [pulled back].”

“It’s a function of a few things. One is sentiment — sentiment can move the needle wildly on high expectation, high valuation growth stocks like Curaleaf — and then [there are] legislative delays. There have been expectations that the Democrats would get a cannabis reform bill through the legislature this year. It looks like that’s going to be pushed,” Madden said.

“We think the question here is not yes, but rather when and when it happens, it will be meaningful for all the players in the sector and Curaleaf as the biggest and in our view the best among them for quite a number of reasons,” he said.

Madden said part of Curaleaf’s more recent slip has had to do with heightened competition in Florida but that shouldn’t concern investors too much as the company continues to gain market share in the state. 

Overall, Madden sees right now as a clear buying opportunity on CURA.

“When a company is executing well, the fundamentals are improving and stock price is going the other way, you buy and that’s what we’re doing,” he said.