Two US cannabis picks from Paradigm Capital

A new acquisition in the US cannabis space has Paradigm Capital analyst Corey Hammill feeling good about two stocks in Paradigm’s coverage universe. In a Tuesday update to clients, Hammill said Verano’s just-announced $413-million buy of Goodness Growth Holdings shines a light on how much upside there is from current levels for both Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW) and Trulieve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL).

Chicago-based Verano Holdings, which has operations across 12 states involving cannabis production facilities, cultivation, dispensaries and a portfolio of consumer brands, announced on Tuesday that it has entered into a definitive agreement to buy Minnesota-based Goodness Growth Holdings, which has a multi-state cannabis subsidiary Vireo Health as well as an intellectual property developer in Resurgent Biosciences.

The transaction includes Goodness’ 18 active dispensaries (four in New York, four in New Mexico, eight in Minnesota and two in Maryland), five cultivation and processing facilities, the Resurgent R&S facility and brands including Vireo, 1937, LiteBud and Kings & Queens. The deal will see Verano get one of only ten vertically-integrated licenses in New York state as well as one of only two vertically-integrated licenses in Minnesota.

“We have always viewed New York as a strategic market to solidify our existing East Coast presence, particularly ahead of the state’s adult-use rollout, as we further expand the Verano platform and exceed a milestone of operating more than 100 dispensaries across the country,” said George Archos, Verano Founder and CEO, in a press release.

“Adding the New York, Minnesota and New Mexico markets to our portfolio, with full vertical integration, provides Verano with a solid foundation for future growth. We’re excited to welcome new colleagues to the Verano family and look forward to serving patients and consumers in communities across these great states,” he said.

Commenting on Verano’s announcement, Hammill said it “highlights the attractive valuation of both Columbia Care and Trulieve.”

“Part of the rationale for the deal looks to be for Verano to get a coveted vertically integrated medical license in New York state.  There are only ten issued, another of which is owned by Columbia Care,” Hammill wrote.

“As New York moves to recreational cannabis (already approved), it is expected these legacy licenses will have significant benefits over newly issued licenses, including vertical integration (new licenses expected to be only for either wholesale or retail) and likely to option to option up to eight locations, whereas new licenses are expected to be limited to three locations,” he said.

On a comparative basis, Hammill said the acquisition — which will see each holder of Goodness subordinate voting share receive 0.22652 of a Verano share and each holder of Goodness multiple voting shares and Goodness super voting shares receive 22.652 Verano shares — pegs Goodness’ shares at $2.39, which would be a 15 per cent premium to Monday’s close.

“The acquisition price implies ~3.8x 2022 revenue (based on FactSet consensus). By comparison, Columbia Care is trading at ~1.8x 2022 and Trulieve at ~2.6x,” Hammill said.

Hammill added that by the Goodness acquisition multiple, CCHW’s implied share price would be C$9.00, representing 160 per cent in upside from current levels, while TRUL’s implied price would be C$37.50, implying a 50 per cent upside from current levels.

Both Columbia Care and Trulieve are taking part in the year-long selloff in the cannabis space, with the two stocks down about 58 per cent and 49 per cent, respectively, since February 1, 2021.

But Hammill sees pluses to owning the two stocks. Starting with New York-based Columbia Care, the analyst likes the company’s growing footprint across diverse jurisdictions in the US, with CCHW working in mature regions like California and Colorado as well as states transitioning to legal recreational use such as New Jersey and Arizona. 

“For investors looking for exposure to U.S. cannabis, we think Columbia Care is a high-quality name at an attractive price and believe it has considerable upside potential in the coming year,” said Hammill in a November 15, 2021, research note.

On Trulieve, which is the dominant cannabis company in the state of Florida along with having operations across 11 states, Hammill said in comparison with many of its MSO competitors which struggled early on with operations spread thinly across the US, TRUL’s first focus on Florida allowed it to develop a strong record of profitability.

“TRUL has grown organically in Florida and made acquisitions to expand its footprint into additional regions, including a hub in the Northeast. Legislative changes being discussed at both the State and Federal level put TRUL in a position to be a beneficiary as cannabis markets across the U.S. continue to progress through different stages of the maturation lifecycle,” Hammill wrote in a November 19 report.

Hammill reiterated a “Buy” rating and target price of C$11.50 on CCHW for an implied one-year return at press time of 226 per cent and a “Buy” rating and C$70.00 target on Trulieve for an implied return of 177 per cent.