Green Thumb Industries Is Not A Safe Cannabis Investment (OTCMKTS:GTBIF)

I follow Green Thumb Industries (OTCQX:GTBIF) closely and have done so since it went public in 2018. I think that the company has a decent business and the best balance sheet of the large MSOs. The company, which will report its Q4 on Tuesday afternoon, seems overvalued to me relative to peers. I currently have no exposure to it in my model portfolios.

I last wrote about it in late December, saying it was not the best way to invest in cannabis. While the stock is higher, it has not been the best way to invest in cannabis. Ahead of that recent article, I wrote about it in late July, suggesting that it wasn’t a good time to buy GTI. This was not right, as four weeks after the article, the potential rescheduling news hit the market. While the stock is up a lot since then, there have been some better returns from peers. My first article was near the beginning of 2023, when I described it as cheap but not the cheapest.

The stock is up a lot from early 2023, and I am worried about the prospects. I am downgrading it from Neutral to Sell. I don’t see GTBIF as the worst MSO investment, but I do see it as a bad investment at this time.

GTI’s Q4

I shared a preview today of the Q4 report ahead this week with my investing group members. The analysts expect GTI to generate revenue of $270 million, up 4% from a year ago. Adjusted EBITDA is expected to decline 4% to $78 million. In Q3, revenue of $275 million was up 5% from a year ago, and adjusted EBITDA of $83 million fell 2%. So, the outlook is slower revenue growth and profitability growth from a year ago and down sequentially.

The balance sheet of GTI remains stronger than its peer balance sheets. At the end of Q3, it reported debt at $299 million and cash of $137 million. It has a lot less income tax payable than peers, and its current ratio (current assets divided by current liabilities) at 2.1X is much better than peers.

The Outlook for GTI

In that last article from late December, the analysts, according to Sentieo, were projecting for 2024 that revenue would increase 7% to $1.116 billion and generate adjusted EBITDA of $331 million, up 6%. They now project slightly lower revenue at $1.115 million and adjusted EBITDA of $329 million, up 6%.

The outlook for 2025, which is from 7 of the 17 analysts, was for revenue of $1.231 billion and adjusted EBITDA of $379 million. Now, they forecast slightly higher revenue at $1.237 billion, up 11%, and slightly higher adjusted EBITDA at $381 million, up 16%.

If cannabis is rescheduled, the revenue for GTI shouldn’t materially increase. Neither would the adjusted EBITDA rise. Cash flows, though, would improve due to the lower taxation. Cannabis should be rescheduled, but there is no way to know if it will or when it might happen.

The GTI Chart

GTI is having a good year at +26.5%, but this is the worst of the Tier 1 MSOs. Since my third GTBIF article was published in late December, this is true as well:

I currently have no exposure to any of the Big 5 MSOs in my model portfolios. I really liked Trulieve (OTCQX:TCNNF), writing about it in mid-November, saying that I still liked it despite the rally. I no longer do, as I downgraded it to Neutral in January.

Looking back to July, when I published the second GTI article, the potential rescheduling has more than doubled the price of GTI. It has gone up more than the 89.3% average:

Now, assessing the action since my first article at Seeking Alpha in early January a year ago, GTI has been in the middle of the pack and above the average return of 46.6%:

Looking at the chart of GTI, the stock closed Friday at the highest price since a spike in late 2022:

The volume has declined from where it reached in September. I see resistance at $15 in this chart, and support between $9 and $10.

The stock had posted a new post-peak low in August, but it was still well above its 2020 low that was below $4:

GTI is the only Tier 1 MSO that did not make a new all-time low in 2023.

A Big Owner That Scares Me

While GTI has lagged its peers, it has benefitted greatly from the share expansion of AdvisorShares Pure US Cannabis ETF (MSOS) over the past several months. I warned several weeks ago that investors should exit the ETF, and it is lower now than it was then. In that article, which was written a few days into February, I discussed how the shares outstanding had soared 14.1% year-to-date and 52.2% since 8/25. Now, the share-count, three weeks later, has increased 23.5% year-to-date.

The inflows into MSOS have resulted in purchases of GTBIF. The fund currently owns 18.58 million shares through a swap. This is up 23% since year-end, in line with the inflows. The price, though, is lagging the peers despite all this buying.

My concern is that if rescheduling doesn’t take place, then a lot of the buyers will be looking to sell. Near the end of 2022 and the beginning of 2023, share redemptions kicked in, and the ETF ended up selling the MSOs. If this happens again, who will be buyers be? MSOS has 26% of its fund in GTBIF.

The Valuation Suggests Big Potential Downside

Comparing GTI to its peers, the stock doesn’t look extremely out-of-line, but it does look expensive. I think the better balance sheet than peers encourages many investors. Compared to the other 4 Tier 1 MSOs, the stock, at an enterprise value to projected adjusted EBITDA for 2024 ratio of 11.0X is the second highest and above the average of 9.2X. Curaleaf (OTCPK:CURLF) stands out negatively, and I shared a strong sell after the first week of 2024.

Looking at the Tier 1 and Tier 2 MSOs, the stock does look more expensive:

I wrote about TerrAscend (OTCQX:TSNDF) a week ago, saying it looks much better to me after its recent underperformance, but it’s the most expensive Tier 2 name. I prefer Planet 13 (OTCQX:PLNH), which has a superior balance sheet and a lower valuation relative to its tangible book value than GTI. I wrote about it two weeks ago, saying why I liked it when it was $0.65, and it has rallied. I still include it in my model portfolios.

I shared some targets for GTBIF with subscribers of my investing group ahead of the Q3 report. In the optimistic scenario, with 280E going away, I was projecting the stock would trade at an enterprise value to projected adjusted EBITDA for 2025 at 10X. In the pessimistic scenario, with 280E remaining, I was expecting the ratio to be 5X. This worked out to $14.85 in the optimistic scenario and $7.14 in the pessimistic. Today, I revised the targets to 12X and 6X, which works out to prices of $18.76, up 31%, and $9.70, down 32%. Perhaps it could trade better than 12X, but it could also trade cheaper than 6X.

Conclusion

In my previous articles, I have discussed the lack of appeal of GTI stock relative to some peers. Today, I am downgrading the stock to sell. The MSOs seem very ahead of themselves. While GTBIF is lagging a bit, the potential upside seems low relative to the downside. I certainly think that some of the MSOs could have much more downside than GTBIF. One that I prefer is Planet 13, which could rally but has less downside in my view.

I think that the MSOs could go up on the termination of 280E taxation, but they could go down a lot on the failure of it to go away. Investors can buy NASDAQ-listed ancillary companies currently that seem to have better balance sheets and the potential to benefit from the elimination of 280E through having healthier customers.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.