The Cheapest American Cannabis Operator Stock Is Still Cheap

Last week began with some very disappointing news for a stock that I have liked: Ascend Wellness (AAWH) fired its CEO and its CFO suddenly and surprisingly. The stock fell for the week by 17.4% and is now down 4.2% in 2024.

In mid-July, I wrote about Ascend here, calling out how cheap it was then. The company had just announced a major financial improvement, as it had extended the maturity of its debt as management had suggested it would do. The stock closed on 8/30 at about $0.96. While this is down a lot from its very recent peak, it is above the level when I wrote that article almost seven weeks ago, which was about $0.82. It's up even from an article I shared at Seeking Alpha a week later describing the fantastic opportunity.

I haven't discussed the stock on this blog since that mid-July post, but a lot has happened. Again, to stay on top of my thinking of cannabis stocks, this is not the best place. What is? 420 Investor, which I have been running for over 11 years now. In that last piece, I did share some other ways to get in touch with my thinking too.

Sequentially, here is the timeline for what happened:

• 8/5: Ascend reports its Q2 and misses expectations

• 8/26: DEA schedules a hearing in early December regarding rescheduling

• 8/27: Ascend shocks investors with CEO and CFO firings

The company had been expected to generate revenue in its Q2 of about $148 million. A quarter earlier, the expectations for Q2 had been $143 million. Adjusted EBITDA had been expected to be about $30 million. The company actually reported revenue of $141.5 million, lower than what had been expected but up 15% from a year earlier. Adjusted EBITDA was also below what had been expected, rising 33% to $28.3 million. This growth, while below what had been expected, was solid relative to what peers reported over the next few days.

Three weeks later, the DEA announced late in the afternoon that it was holding a hearing on December 2nd for the pending rescheduling. I didn't take this as bad news, but the stocks started selling off that afternoon after trading had closed for the day, with the large and popular (and bad) fund, AdvisorShares Pure US Cannabis ETF (MSOS), tanking in after-hours trading. In fact, it broke below $6.00 that afternoon after closing on the 26th at $7.04:

I am not a fan of MSOS at all, but I did share on X my positive near-term view when it was offered at $6.20. It did close Friday at $6.32, up 2%. I believed and still believe that traders and investors can do a lot better with other cannabis stocks.

Rescheduling, which will wipe out the onerous tax, 280E, remains a major catalyst for cannabis stocks. I continue to believe that it will happen, and this hearing which was scheduled will solidify it, if it happens. It is not a done deal, but it appears very likely.

The final point is the most important, in my view. When I was in NYC, I went out to Ascend to meet the CEO and CFO as well as the Head of Investor Relations. I left from Brooklyn in the morning to take a subway to Penn Station, where I got on a train to Morristown, New Jersey. I have had a criticism of the publicly traded cannabis stocks: Unimpressive CEOs. Too many of them come from the investment world or the legal world, and too few of them have ever run companies.

I had spoken to the founder of Ascend, Abner Kurtin, just once. I had nothing against him except that he was an investor and not an operator. Shortly after our phone call, he was arrested in Florida for allegedly beating his girlfriend. The company immediately moved Kurtin from CEO to Executive Chairman and named two execs as co-CEOs. The charges were dropped by the state.

I am not a fan of co-CEOs, and I wasn't really a fan of these two, both of whom ended up leaving the company after it named a new CEO in May 2023. I had never heard of Hartmann, but I liked his background. I also had never heard of the CFO he brought six months later, but I did like that Cassebaum had worked with Hartmann at buybuy BABY (part of Bed Bath & Beyond). I commend these two for getting that debt refinanced and for posting stronger growth than peers.

The press release announcing the firings was very poorly written in my view, as it didn't really explain why they were fired. In my discussions afterwards, I got the sense that the Board of Directors was mad about the Q2 report. How short-sighted! The company named a new CEO, a director since May 2023. A co-founder and director was named President, and the former Chief Accounting Officer was named CFO.

While I don't fully understand what is going on and don't like the moves, I am not sure that this is going to be bad for the company. The stock remains very cheap in my view (just 4.0X enterprise value to projected adjusted EBITDA for 2024) and extremely beaten up in price, down over 90% over the past three years. My Beat the Global Cannabis Stock Index model portfolio at 420 Investor, which is up 25.6% year-to-date compared to the index being up just 4.1%, has a 17.1% position currently in AAWH. On Tuesday morning, I did reduce the position at $1.00 by 22% to about 13% of the model portfolio, and I added to it by 36% at lower prices over the balance of the week.

I followed up today because the stock seems very cheap to me, but there are some things going on that investors need to understand better. The drama at Ascend reminds me that investors in stocks need to always be prepared for things to happen. Sometimes, these can be good things, but sometimes they are not good. I remain very bullish on cannabis stocks, which have been in a bear market for more than three years now. The 90%+ decline is similar to the passage of time and the amount of loss to stocks in general during the Great Depression almost 100 years ago.