SHF Holdings Is An Interesting Cannabis Stock (Rating Upgrade)

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SHF Holdings has seen a significant price decline in 2024 since going public but shows potential for recovery with strong technical support levels and improving profitability and cash flow.Despite ...

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In Q2, it more than tripled from a year earlier to $1.84 million, 45% of revenue. This was up 12% sequentially. Offsetting this gain has been a decline in deposit activity and in investment income. Looking beyond revenue, the operating exp","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate"],"viewcount":null,"language":"en","relate_stocks":{"SHFS":"SHF Holdings, Inc."},"translate_title":"SHF Holdings是一只有趣的大麻股票（评级升级）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SHFS":0.9},"content_text":"SHF Holdings has seen a significant price decline in 2024 since going public but shows potential for recovery with strong technical support levels and improving profitability and cash flow.Despite falling revenue, SHFS has increased loan interest income and reduced operating expenses, leading to improved net income and adjusted EBITDA.The stock is undervalued, trading at less than 9x the current annual rate of adjusted EBITDA and near tangible book value, suggesting limited downside risk.The Company could benefit from cannabis rescheduling and is a potential acquisition target, making it an interesting investment with likely limited downside risk.strelov SHF Holdings (NASDAQ:SHFS) has been on my Focus List of 23 cannabis stocks since early April 2023, when they fixed a big problem with their ownership and debt. I wrote about it negatively in late 2023 after it had rallied, explaining how it had gone up too much. It went up even more at the beginning of this year, but it is now down 64% year-to-date. I like the stock and explain why here. SHF Holdings Has Seen A Big Price Decline When I wrote negatively about SHFS in December, the stock was $1.00. It is now about half that level. The stock traded near $0.33 twice in 2023, so it is up a lot from the double-bottom. I called out the stock to my subscribers when the $10 SPAC fell to $4.00 in late 2022, warning them that it could fall further, which it did. Here is the chart of the return for the past two years: YCharts So, the stock is down almost 95%. The New Cannabis Ventures Global Cannabis Stock Index has dropped by 23.1% over the past two years. Some stocks that are down a lot are done, but I don't think that is the case here at all, as I explain below. Looking at the chart over the past year and a half, it looks promising: YCharts The stock is 51.4% above where it was trading on 8/29/23, which was the day before the news of a potential rescheduling hit. Since April 30th, though, the stock has declined 42.2%. This was the day that the DEA confirmed that it was recommending a move for cannabis from Schedule 1 to Schedule 3. I think that $0.50 could provide support and see $.40 and $0.35 as levels beneath it that could also provide support. I see technical resistance at $0.60 to $0.75. Volumes have been very low, typically under 200K shares per day over the past six months. The average over the past month has been just 51K shares per day. SHF Holdings Is Growing SHFS, which operates Safe Harbor Financial, reported its Q2 on 8/14. The company generated revenue of $4.04 million, which was down 12% from Q2 in 2023. The year-to-date revenue of $8.09 million was down 8%. Growing? Yes! SHFS has been working on boosting its interest income, and this has been paying off. In Q2, it more than tripled from a year earlier to $1.84 million, 45% of revenue. This was up 12% sequentially. Offsetting this gain has been a decline in deposit activity and in investment income. Looking beyond revenue, the operating expenses have declined substantially. In 2023, there was a very large goodwill impairment and a smaller impairment of intangibles. Excluding the write-downs, operating expenses have declined 33%, leaving operating income at $300K in Q2, which is an improvement from 2023. The company reported net income of $941K in Q2 and $2.99 million in H1. Cash flow from operations was $2.7 million in H1 compared to a use of $964K in the first half of 2023. Adjusted EBITDA in Q2 rose 14% to $973K. In H1, adjusted EBITDA rose 63% to $2.06 million. So, while revenue is falling, profitability and cash flow are improving. For those who aren't following the purposeful transition in the business, they are missing the strong growth in loan interest income that SHFS has enjoyed. SHF Holdings Is Inexpensive With the price down a lot to $0.5146, the market cap is $28 million. Adding net debt of $6.4 million gives it an enterprise value of about $35 million. There is one analyst who covers the company, but I don't have access to the estimates. If one doubles the year-to-date adjusted EBITDA roughly to $4 million, the enterprise value of the stock is less than 9X the current annual rate of adjusted EBITDA. This seems reasonable for a NASDAQ-listed company that is growing with free cash flow being generated and that doesn't have a tremendous amount of debt. For downside protection, I evaluate a company's price to tangible book value. SHFS trades at 0.98X, which suggests to me that the downside risk should be quite limited. Conclusion While it is not in the index that I am trying to beat, SHFS is 4% of my Beat the Global Cannabis Stock Index model portfolio that I share with subscribers to 420 Investor. I last added to the position on Friday the 27th, and my average cost is $0.55. The model portfolio currently has 9 positions and 0.2% cash. The largest exposure is to Canadian LPs at 37.7% (two stocks). MSOs are close at 34.7%. I am currently underweight Ancillaries like SHFS at 27.5%, which is way below their index exposure of 45.5%. I find the stock interesting due to its market position and its valuation. The stock trades on the NASDAQ, but it doesn't trade that much. There are no analysts pushing the stock. I believe that being a small stock turns off many, and the company's transition that I discussed above has depressed the growth. Some may fear SAFER Banking, but I don't think that this will pass Congress. If it does, I don't believe that it is a threat to Safe Harbor. In fact, it may boost interest from other financial institutions to make entry into the space and leave SHFS as a possible acquisition target. While the stock seems cheap, it has traded at a lower price in the past and could fall again. It trades near tangible book value, but it could trade below it. At the same time, it is a potential M&A target. Compared to when I wrote about it in December, the price is much lower now. Additionally, rescheduling of cannabis by the DEA is now officially in process. This would eliminate 280E taxation and likely boost not only investor sentiment but also business levels. SHFS is a tiny stock, but it could do very well with likely limited downside risk.  Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2471382530"}