It has not been a kind year for U.S. cannabis stocks. After starting 2021 on a tear, most leading cannabis names have sold off hard, as legislative action on legalization has dragged on and the prospects for reform have been thrown into question.

As a result, U.S. cannabis companies continue to bear high costs, and investors have lost enthusiasm for stocks without near-term profits. The Advisorshares Pure US Cannabis ETF (MSOS -2.49%) is down a whopping 75% from its all-time highs as investors have fled for safer pastures.

However, the biggest U.S. cannabis multi-state operator (MSO) appears to think its shares have fallen too far, and its entire management team just put their money behind that conviction.

Trulieve executives open their wallets

On May 25, nine different Trulieve (TCNNF -3.51%) executives bought shares on the open markets. CEO Kim Rivers purchased 14,000 shares at an average price of $14.45, good for over $200,000. President Steve White, who was previously CEO of Harvest Health & Recreation, which Trulieve acquired last year, bought 7,000 shares on the same day.

Four other high-level officers bought in smaller amounts, including Chief Financial Officer Alex D’Amico, Chief Product Officer Kyle Landrum, Chief Sales Officer Timothy Morey, and Chief Legal Officer Eric Powers. Not only that, but three lower-level members of management also bought shares, bringing the total insider buys to nine.

While one insider purchase is notable, open-market purchases by an entire executive team is very interesting — especially since this is a cannabis stock, which still has many risks. Have Trulieve shares fallen too far too fast?

Image source: Getty Images.

Trulieve’s recent results were solid

The cannabis market is very dynamic, thanks to the different market dynamics within different U.S. states, including recreational vs. medical, limited license vs. unlimited license, vertically integrated vs. wholesale. Not only that, but state-level regulations are constantly evolving, forgetting the uncertainty at the federal level.

Trulieve’s results are also very noisy, as the company recently completed the large acquisition of Harvest Health & Recreation as of October 1, 2021. The move expanded Trulieve’s footprint to 11 states, greatly increasing its revenue. On the other hand, there’s still lots of noise with the company’s margins, as it’s integrating the transaction and incurring several one-time costs.

It’s probably best to look to the company’s guidance for this year. On the May earnings release, management guided to revenue of $1.3 billion to $1.4 billion for 2022, with adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) between $450 million and $500 million.

Based on the company’s current market cap of $2.84 billion and net debt of $286 million ($553 million in debt vs. cash of $267 million), Trulieve is trading at an enterprise value-to-EBITDA ratio of just 6.6, based on the midpoint of 2022 guidance.

That is certainly cheap for a company in a growth industry such as cannabis. However, cannabis is unique. Due to high interest rates and exorbitant tax costs that disallow normal operating-expense deductions, it’s almost impossible for that EBITDA to translate into net earnings. Although Trulieve’s adjusted EBITDA totaled $105.5 million last quarter, its adjusted net income was only $1.7 million.

Trulieve could be a bargain long term

Given the current headwinds, an investment in Trulieve requires a belief that cannabis will be legalized at some point down the road, giving these companies relief on both interest rates and taxes. Currently, there are bills to this effect making their way through Congress, but the outcome is uncertain.

Yet should that happen, Trulieve has a number of positives going for it. First, although current profits are low, it’s one of the most profitable cannabis companies in the country. In addition, it appears to be operating at a high level.

Sales grew sequentially from the fourth quarter, while sales declined sequentially for several of its rivals during a period of high supply. Amid this tough market, Trulieve’s relative strength could allow it to capitalize on opportunities that arise if smaller companies or independent dispensaries look to sell.

Meanwhile, Trulieve’s two largest markets, Florida and Pennsylvania, are still medical-only. However, should adult-use recreational amendments get passed, Trulieve’s leading position in those states could lead to lots of profitable growth. Of note, Trulieve’s western “hub” state of Arizona just converted to recreational sales in early 2021.

In any case, it appears Trulieve’s management team consists of true believers on legalization and the company’s own capabilities. While one should never buy a stock merely because insiders are buying, the united purchases do grab one’s attention.

Trulieve will give a more detailed analyst day presentation on Tuesday, June 7, which could perhaps act as a catalyst.