Trulieve Stock in 2022: Soaring or crashing?
ohOne of the most frustrating transactions of 2021 involved cannabis stocks in the United States. After riding a wave of enthusiasm at the start of the year based on a Democratic electoral victory and hopes for federal legalization, Congress bogged down on other priorities. While there is bipartisan support for cannabis reform, some lawmakers want to go further than others who only want incremental action. So of course nothing was done.
Cannabis stocks sank in response. But in the midst of falling stock prices, is it time to jump on the American cannabis train? One of the best and most profitable US multi-state operators is Trulieve Cannabis (OTC: TCNNF)which was up over 60% in January and February 2021, before falling with the sector to end the year down 17.7%.
After the fall, stocks practically returned to where they were shortly after the 2020 election. So, does that mark a bottom? And where will Trulieve go in 2022?
Image source: Getty Images.
Close a big deal in October
The big event for Trulieve was the closing of its massive $ 2.1 billion acquisition of Harvest Health and Recreation on October 1. Prior to the deal, Trulieve had pursued a somewhat unusual strategy of focusing its efforts on dominating one state: Florida. Trulieve thus ended up with more than 50% of the market share in this immense state, the limited licenses and the vertically integrated structure of Florida giving it the best margins in the sector.
Some may think that the huge Harvest acquisition is a departure from this strategy, but it really is an expansion. While the acquisition gives Trulieve a combined footprint in 11 states, the bulk of Trulieve’s ânewâ footprint is now located in three regional centers in Florida, Pennsylvania and Arizona.
During his recent third-quarter conference call, CEO Kim Rivers said the company would focus its investments in these three limited license states, converting Harvest stores to Trulieve stores and becoming a retail giant, instead of follow a low margin wholesale strategy. .
Trulieve therefore continues to employ its strategy of concentrating on high margin opportunities, without spreading over too many states like other large MSOs have done.
Reasons Trulieve Might Soar
Cannabis stocks have tended to trade almost entirely against the outlook for federal legislation, so any move on that front could cause Trulieve and all cannabis stocks to soar. However, even in the absence of federal legislation, more movement at the state level could also be a catalyst. A bill to legalize adult use has been proposed in Pennsylvania, which is currently only medical. If this passes, investors would likely take a positive view, as adult use is expected to lead to increased volumes. Florida is now only medical, but will likely be used by adults around 2024. That would be a big deal for Trulieve, but it’s probably beyond.
Then there are always catalysts for gains. Trulieve actually completed the Harvest acquisition earlier than expected and its integration is going well. Management noted that when Truleive modernized the Harvest stores in Florida, volumes increased by approximately 35%. There are concerns about competitive pressures and pricing issues, so better-than-expected revenues and profits could also be catalysts. Trulieve will release its full first quarter after the acquisition in March, which could lead to positive or negative surprises.
As the industry is under pressure, Trulieve may also be able to acquire smaller cannabis companies or individual stores at good prices in 2022, given its scale, high relative margins and a strong balance sheet that has more cash than debt.
Why Trulieve Could Sink
Of course, these competitive pressures and aggressive price discounts from competitors could weigh on Trulieve, although Trulieve may be the MSO best equipped to handle it. Additionally, if there is some sort of permanent removal of federal law on any front, even banking reform, it could hurt sentiment for cannabis stocks in general. If Republicans took over the House of Representatives and the Senate, it would likely be bad for cannabis stocks. While many Republicans are open to legalization, many are not, and a Republican-controlled Congress would make federal legislation less likely.
Additionally, if the Federal Reserve raises interest rates more than expected, it could hurt Cannabis stocks and Trulieve as well. While many U.S. cannabis companies achieve healthy EBITDA margins, they don’t do much in terms of GAAP net income. And when you factor in the capital expense to increase, a lot is negative for cash flow. Higher interest rates tend to hurt companies with profits further afield, so interest rate risk is also present in 2022.
What could be more likely?
Considering that Trulieve’s shares went back down until they were at the time of the 2020 election, I don’t think there are too many downsides here. This is especially true given that Trulieve is among the most profitable and cash-rich US cannabis stocks.
But if cannabis stocks are having a bad year, Trulieve could be in a good position to buy other low-cost cannabis assets. This lower risk profile in a somewhat risky industry is why Trulieve remains my biggest position in cannabis. And of course, if Trulieve performs well and has any regulatory luck, so much the better.
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Billy Duberstein is the owner of Trulieve Cannabis Corp. Its clients may own shares of the companies mentioned. The Motley Fool owns and recommends Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.