2023-04-11 13:22:16 ET
Summary
- Investors saw new lows for CURLF shares. Curaleaf delayed its Q4 earnings release and conference call.
- There are two big issues facing cannabis companies.
- For CURLF shares, the trend is not your friend.
- Tobacco and cigarettes remain a far better bet.
On August 8, 2023, I wrote about Curaleaf (CURLF) on Seeking Alpha . At that time, CURLF shares were at the $5.67 level, with the company's market cap leading the sector at just over $4 billion. I pointed out that at $4 billion, " CURLF's inexpensive market cap and leadership position make the company an attractive takeover candidate that could provide accretive returns for an acquirer. " I also wrote, " Pot investors have been patient and have persevered since the stocks had made lower highs and lower lows since early 2021 when the hopes for prompt legalization went up in smoke. The waiting has been the hardest part, but it could be worthwhile if Washington, D.C., decides the tax receipts are too hard to ignore. "
Washington has made no moves toward federal legalization, and the waiting for those holding CURLF and other pot sector investors has been downright painful. Since August 2022, CURLF shares have more than halved in value as the shares and sector have decayed in a bearish abyss.
New lows on CURLF shares
CURLF shares reached a $2.54 low in March 2020 before rallying to a high of $18.38 in February 2021, where the stock ran out of upside steam.
The chart highlights the pattern of lower highs and lower lows that took CURLF shares to a new $2.32 low on April 10, 2023. The shares put in a bearish key reversal pattern on the monthly chart in December 2022 when it traded at a higher high than November and closed the month below November's low.
While CURLF recently announced the completion of its Deseret Wellness acquisition in a stock and cash transaction for approximately $20 million, the stock fell as CURLF delayed its 2022 Q4 and full-year results and conference call . The company stated it needs more time " due to the complexities of converting three years of financials from IFRS to U.S. GAAP coinciding with year and quarter-end reporting, and the review of the treatment of various accounting matters." While CURLF said it would release financial statements " sometime in April ," there has been no word on any date.
Delaying earnings likely weighed on the stock over the past week, but CURL has been in a bearish spiral since the February 2021 high.
Curaleaf's market cap slips
In August 2022, CURLF was the market cap leader of 29 publicly-traded cannabis companies. The combined value of 29 companies was $23.44 billion, with CURLF leading with $4.06 billion.
Chart of the Leading Publicly Traded Cannabis Companies (companiesmarketcap.com)
The chart shows CURL was close to Green Thumb Industries and Tilray with a $1.71 billion market cap, an over 57.9% decline from the August level. Meanwhile, the market cap of 40 companies in the asset class was $12.85 billion, 45.2% below the August level of 29 companies.
Cannabis stocks have underperformed the overall stock market over the period, and pot has been a losing investment since early 2021. On Monday, April 10, Tilray ( TLRY ) reported weaker-than-expected earnings. TLRY reached $76 per share in February 2021 and was at the $2.52 level on April 11, just slightly above the March 15, $2.28 low.
The two main issues of cannabis sector
The two factors weighing on the cannabis sector are:
- No action on the federal front: The last 2022 U.S. election handed a slim majority to Republicans in the House of Representatives. After two years of a majority by Democrats, the odds of federal marijuana legalization declined under the current Washington, D.C., government. Without federal legalization, cannabis companies face financial challenges and cannot accept credit cards for payment. No action by the U.S. Congress is bearish for the recreational and medical marijuana business.
- The illegal market continues to thrive - legal companies cannot compete: While a growing number of U.S. states have legalized pot, illicit sales continue. States tax cannabis, while illegal dealers do not, providing illegal dealers with a significant advantage. Moreover, the Mexican cartels have become more powerful from drug exports to the U.S., and domestic illicit marijuana production continues to compete with legal weed. Meanwhile, foreign drug cartels have funded U.S.-based marijuana farms.
The trend is not your friend
At around $2.40 per share on April 11, CURLF shares continue to make lower highs and lower lows as they decline into a bearish abyss. The bearish trend since February 2021 has not been any investors' friend. In August 2022, Seeking Alpha's factor grades had improved:
As of April 11, 2023, they mostly worsened:
Factor Grades for CURLF on April 11, 2023 (Seeking Alpha)
Valuation and revisions improved, but the delay of Q4 earnings reports and the conference call could cause a failing grade when the company finally releases its numbers. Meanwhile, valuation improved because of the significant share price decline, but time will tell if the cash burn from the latest Deseret Wellness acquisitions takes a toll on the company.
Moreover, in a highly shaky stock market, investors steer clear of companies that cannot make money. CURLF is unlikely to profit in Q4 and 2022 after posting losses in Q1 through Q3.
The two unlikely factors that can cause a rebound
The two factors that could foster a sudden recovery in CURLF and other cannabis stocks is an epiphany in Washington, D.C., that creates federal legalization and a sudden stop of the flow of illegal marijuana into the U.S., making the only avenue for purchases the legal dispensaries. Meanwhile, the Republican majority in the House of Representatives and law enforcement's concerns about DUI and DWI factors and other marijuana-related issues make widespread federal legalization highly unlikely. In Las Vegas, Nevada, where recreational and medical pot is legal, smoking pot in hotels, on casino properties, or on the street is illegal. With over 40 million tourists annually, the current laws do not encourage legal consumption. Las Vegas is introducing legal consumption lounges, but the environment remains challenging for legal dispensaries.
Cash burn, no pun intended, is a leading factor facing publicly-traded pot companies. While the market cap of the 40 leading companies fell 45.1%, even though the sector added eleven companies, tobacco has done far better.
In August 2022, the market cap of the top 16 tobacco and cigarette companies was as follows:
Leading Tobacco and Cigarette Companies by Market Cap in August 2022 (companiesmarketcap.com)
On April 11, 2023, the market expanded by three to 19 companies:
Leading Tobacco and Cigarette Companies by Market Cap in April 2023 (comapniesmarketcap.com)
The chart shows the total market cap was slightly higher, with gains in the leader, Philip Morris ( PM ), and third place Altria ( MO ).
As I wrote in August 2022:
The chart highlights two of the leading three tobacco companies, Philip Morris and Altria, with a combined market cap of $231.26 billion or just over 50% of the top 16 publicly-traded tobacco and cigarette companies. Meanwhile, six of the top 16 are US companies, but the other four have market caps below $1.3 billion, lower than CURLF. PM and MO are candidates to make aggressive acquisitions in the cannabis sector upon Federal legalization, and CURLF is a leading target.
In April 2023, PM and MO had a combined value of $234.18 billion, slightly higher than in August 2022. The market cap of the 40 leading publicly-traded cannabis companies at $12.85 is 5.5% of the two top tobacco companies. The bottom line is the bearish trend in cannabis companies makes the potential for acquisitions high. However, since the bearish trend continues, there's no reason for the top tobacco companies to be aggressive as the targets become cheaper daily.
The outlook for CURLF and the other leading pot companies remains cloudy in a haze of federal political inaction and competition from the illegal but very profitable sector. The pot stocks flamed to highs in early 2021 and continue to burn out in April 2023. The only potential hope may be a takeover by cash-rich tobacco companies.
For further details see:
Curaleaf Stock: New Lows And A Cloudy Outlook