Andrew Thut, Chief Investment Officer (CIO) of 4Front Ventures Corp. (CSE:FFNT), gives investors advice on how to pick the best cannabis stocks by analyzing the cannabis company’s operating performance
SmallCapPower | September 27, 2019: On Day Two of the 2019 Money Show Conference in Toronto, we got a chance to listen to Andrew Thut, who provided tips on what investors should be looking for when analyzing the operating performance of a cannabis company to help them choose the best cannabis stocks. Andrew Thut is the CIO of 4Front Ventures Corp. (CSE:FFNT) (OTCQX:FFNTF), and has spent over 20 years as a Managing Director of the BlackRock Small Cap Growth Fund at BlackRock Advisors LL.
Every cannabis company is saying that they are ‘best in class’ and will the market leader. Andrew Thut says now is the time for cannabis companies to prove it via operating performance. Investors should be asking themselves: how does the company’s operations look? Are they vertically integrated; cultivation, processing, and retail. Investors should also pay attention to grams/square foot (sq. ft) when looking at a company’s operations. Cannabis grown in greenhouses can typically yield between 80 and 100 grams per sq. ft, while cannabis grown indoors is typically a lot higher: 200 to 500+ grams per sq. ft. Yield per sq. ft is determined by a number of factors, including: cannabis strain, nutrients, temperature, PH balance, type of lights used, light intensity and spectrum, amount of carbon dioxide, and amount of air circulation in the room. How is the company using automation to reduce costs? Process such as trimming, labeling, and packaging could be automated to reduce operating expenses.
Don’t forget about processing and retail. Which method is the company using to extract the cannabis: CO2, ethanol, or hydrocarbon. Each method has its advantages and vertically-integrated cannabis companies should be utilizing all three. Cannabis companies should be aiming to provide customers with a unique retail experience to differentiate themselves from their competitors. Thut thinks that brands are overplayed. If you can give the customer a good quality product at a low cost this creates price inelasticity. Thut says that this is 4Front’s strategy and by using this strategy they are outperforming established black-market brands in terms of market share. 4Front currently has 7 out of 10 of the top-selling edibles products in Washington State. Another important consideration is the budtenders. This is because marketing in cannabis, especially in Canada, is heavily regulation. As a result, budtenders will typically be the consumers’ first point of contact and education. 4Front provides a week-long training program for all its budtenders. Essentially, retailers should be looking to normalize the cannabis retail experience as much as possible.
Be weary about excessive Mergers & Acquisitions (M&A). Thut also mentioned that a lot of cannabis companies went on M&A sprees and some did 10+ acquisitions in one year. This could be a challenge for companies to integrate the operations of 10+ different business units to realize synergies. A study conducted by Harvard Business Review found that 60% of Mergers & Acquisitions do not end up creating synergies in the long term. It is likely that many cannabis companies are going to end up having to divest some of their acquired assets at a loss.
Finally, is management executing on their business plan. Are they doing what they said they are going to do? Investors need to hold management accountable. For example, if management said that they will have 10 dispensaries in a state within the next six months, did they do it? The real winners in the industry will be the companies with a real platform and management that can execute.
About 4Front Ventures Corp. (CSE:FFNT)
4Front Ventures is a MSO that owns, operates or manages six cultivation and production facilities and 11 retail facilities across eight states. FFNT has developed two >50,000 square-foot indoor cultivation facilities in Washington with yields of more than 300 g/sq. ft. In Washington, 4Front operates one of the largest cannabis product manufacturing facilities in the world, where it produces some of its top-selling brands of flower, edibles, and oil-based products. The Company is focused on premium indoor cultivation, extraction, manufacturing, and branding of flower, edible, and derivative products. 4Front has cultivation and processing licenses in Washington, Illinois, Michigan, California, Massachusetts, and Arizona, and now also has retail licenses in Illinois, Michigan, Massachusetts, Maryland, Pennsylvania, and Arizona.
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