Weekly Sector Valuation Report – Cultivation & Retail Sector

• The ninety-four companies in the cultivation and retail sector continue to trade at market-to-book ratios that suggest future writedowns of assets. The median market-to-book ratio for the group is .43x, and the third quartile value is only 1.41x. Finance theory tells us that the market-to-book ratio is related to the ratio of Return on Equity divided by the Required Return on Equity. Companies that are making better returns than their cost of equity should trade at multiples over 1. Moreover, to the extent that companies have an “advantage period” during which they are expected to continue to make excess returns, the premium to book can increase. Cannabis ratios tell us that not only are the companies not earning their cost of equity, but the market doesn’t believe this will be a short-lived problem.
• Happily, some of the valuation ratios tell a much more positive story. The median EV/ 2025 multiple of 6.36x is still extremely low relative to past periods when legislative gains seemed imminent. Comparisons to other industries like beer, tobacco, and CPG suggest that these multiples are being restrained by the added tax burden of 280e and could easily double without the added taxes. Still, the market is skeptical of all things Washington D.C. related, and for good reason.
• Still, we view the cannabis stock market as a rare opportunity for retail investors to outperform institutional investors in what appears to be one of the best catalyst-driven investment themes of the decade.