Trulieve: Short Attack Doesn't Alter Attractive Valuation

Summary

• Trulieve faced a short-seller attack on Tuesday after Grizzly Reports published a 26-page report on the company.
• The report alleged fraud and insider transactions at Trulieve, in addition to criticizing its IFRS accounting and competition in Florida.
• Despite the initial negative reaction, we think Trulieve's thesis as a cheap but high-quality cannabis stock remains intact after the report.

December seems to be a popular month for short sellers to launch campaigns on cannabis stocks. Trulieve (otcpk:TCNNF) became the latest target for short-seller Grizzly Reports in its report published on Tuesday morning. After reviewing the report, we think there are few merits to the short argument and we continue to believe that Trulieve represents one of the best-run cannabis companies in the sector with first-class financial performance.

(All amounts in USD)

The Short Argument

Grizzly published a 26-page long research report that mainly contained the following arguments against Trulieve:

• The majority of its cultivation assets are low-quality hoop houses
• Trulieve could be implicated in the ongoing investigation
• Potential conflicts of interests and insider transactions
• Misleading profitability as a result of IFRS accounting
• Increasing competition in Florida

Our takeaway after reading the report is that there should be very limited, if any, impact to the fundamental thesis for Trulieve. We would not comment on the fraud allegation due to a lack of hard evidence provided by Grizzly and we also believe that the board and auditors will take care of them in due course. Similar to Aphria's past short attacks, we think most of these allegations refer to common, although sometimes less than ideal optically, practices within the cannabis industry (insider transactions, related-party financings). However, these do not necessarily represent illegal dealings or violations of securities law. The short report merely asked a lot of questions and left them open inconclusive. Turning to the last two points from Grizzly, we think there are strong counter-arguments that should dissipate any investor concern.

Short Thesis: Inflating Profitability

Cannabis companies listed on the Canadian stock exchanges use IFRS to report financials which requires them to measure biological assets at fair market values. Each quarter, the changes in fair value are recorded as an adjustment

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.