Imagine you could invest $6 million into an investment in a tough, competitive market. This investment normally earns $5-$6 million a year in EBITDA, which would be an incredible 100% annual return on your initial investment. Even when times are tough, the business environment is stressed and prices are down, this investment still earns $3-$4 million in EBITDA, or 50%+ annual returns.
Now imagine because of what you have learned from this investment, you can now make this same investment in other markets but earn even higher returns in good times because the competition in that market is inefficient and has not had to face hard times like your business has.
This in a nutshell is Grown Rogue (OTC: GRUSF) and their experience in Oregon and Michigan. Grown Rogue is the #1 flower brand in Oregon and is free cash flow positive in the state despite these conditions. Knowing how to operate hyper efficiently and earn great returns in an ultra-competitive environment is a superpower in my humble opinion and is the secret sauce of what Grown Rogue is now bringing to new states such as New Jersey and Illinois.
And it’s what most investors misunderstand about the business. Pricing pressures may come and go, but Grown Rogue was made to withstand and thrive in brutal conditions.
I bring this up because since Grown Rogue reported their Q4 earnings, it became clear that some investors who owned the stock did not understand the core of what makes Grown Rogue such a wonderful long-term investment.
Grown Rogue’s stock, which had been holding up well in the face of another brutal decimation of other cannabis stocks, fell over 30% since reporting their numbers.
In light of this, it felt like a good time to check in with CEO Obie Strickler to get an update on the state of the business.
Here is what we discussed, and I learned from our conversation:
1. The company realizes that it has to do a better job of investor relations and going forward will disclose more detailed information around earnings.
2. The company will host its first ever conference call on May 13th.
3. We discussed how New Jersey is ramping and that investors should start to see the growth take off in Q1 and Q2
4. How Obie thinks about pricing cycles in mature markets such as Oregon and Michigan
5. The opportunity to step into some of the empty cultivation facilities that others are abandoning as less efficient cannabis companies go out of business
I continue to believe in Grown Rogue’s unit level economics and its business model. And I believe this model can be replicated in many new states for phenomenal returns for investors to enjoy.
Part of growing up is realizing that not all investors may understand your story. Sometimes quarters are noisy and there are a lot of moving parts that create confusion. And it’s important to tell your story clearly.
Luckily for investors, Grown Rogue is starting to flex its growth muscles and there should be tangible evidence of this when they report Q1 in about a month. This year, Grown Rogue should double its annual cash flow. Despite that growth, the stock after its recent decline trades at about 4 times my estimate of EBITDA. When the company hosts its first conference call, I believe it is akin to an awkward teenager getting his braces off. The company’s growth and potential should shine for all to see.
Here is my interview with Obie Strickler:
And here is the Spotify link: