Given that today’s date is 4/20, I feel compelled to acknowledge that that’s the code for “time to smoke pot.” But I don’t have any jokes. This is serious business. And it’s doubly serious because we’ve been dealing with a weak sector for over a year!
The only bright spot in that trend is that valuations have become more attractive; if this goes on long enough, I expect Cabot’s value analyst Bruce Kaser will recommend one of these stocks!
But at heart these are still growth stocks, because the growth rate of our companies is still good. Of the 9 companies in our portfolio, the average growth rate of revenues in the fourth quarter of 2021 was 55%. And I expect growth to continue, as legalization spreads.
New Jersey is opening up for recreational cannabis sales tomorrow, and all the U.S. companies in our portfolio will have stores in the state, with the exception of Trulieve—though I wouldn’t be surprised to see the company do an acquisition in the state soon.
And New York will no doubt follow, in part to avoid “losing” tax revenue. Here in Massachusetts, where recreational cannabis has been legal since 2018, revenues from taxes in the second half of 2021 were more than double the revenue from alcohol taxes. Those are numbers that get politicians’ attention.
In the meantime, identifying the leaders of this industry is becoming easier. Four years ago, when the sector was red-hot, I was tracking 167 stocks, both “pure” marijuana companies and peripherals, like those selling fertilizer or hemp or providing consulting services. But there’s been a big reduction in the number of stocks, thanks to attrition (companies simply failed to thrive and were delisted) and acquisitions (the biggest companies in the industry are still doing numerous acquisitions every year).
As a result, today I am following just 98 companies (that’s a drop of 41%), many of which are thinly traded or very low-priced. In fact, of those 98, only 18 are trading above a dollar today—and our portfolio owns half of them, so we’re well-positioned.
Cresco Labs (CRLBF) continues to push ahead with the planned acquisition of Columbia Care (CCHWF), but it’s not a sure thing. The deal is big and could create the biggest multistate operator in the country, but state laws would require divestment of some properties in Florida, Illinois, Massachusetts, New York and Ohio (and possibly more). CRLBF continues to trade above the 5 level, where it has found support since January. As for the stock, it’s trading flat, right at support, but fundamentally, it’s notable for selling for just 1.7 times revenues, the lowest multiple of all the major multistate operators. CRLBF remains the portfolio’s largest position.
Curaleaf (CURLF) announced last week that its Select CBD and Curaleaf Hemp products will become available for the first time in the Caribbean market thanks to a new distribution agreement with WB Canna Co. & Wellness, which is a wholly owned subsidiary of Miami-based WEBB Banks, the leading premium wine and spirits distributor in the Caribbean. This agreement will bring Curaleaf’s lineup of products to customers in, and traveling throughout, the U.S. Virgin Islands, Puerto Rico, Aruba, Bermuda, Barbados, Cayman, Costa Rica, Guatemala, Jamaica, and Saint Maarten, as well as additional markets in Latin America, travel retail, and the cruise and diplomatic channel. CURLF is trading above its March lows.
Green Thumb (GTBIF) has a chart that looks very similar, trading above its March lows. Last week the company opened its 77th retail location in the U.S., in Minnesota.
Innovative Industrial Properties (IIPR), our marijuana REIT, was hit by a short attack last week, that alleged, in brief, that the company is not only acting as a REIT but also as a lending institution, in that it overpays for properties so tenants can get cash, and then expects to get high rents in return for many years; and that its two largest tenants (private companies) have shaky finances, while its many public company tenants (including Cresco, Curaleaf, Green Thumb, and Trulieve) have seen the value of their stocks diminish so much that they might have trouble getting new financing (though the ones running a profit don’t need it). IIP’s management immediately rebutted the accusation, explaining that the short-sellers were ignorant of the improvements it made to properties before tenants moved in—but it failed to elaborate. My view is this: It’s interesting that this short report came out not when the stock was peaking, but when it was already down 36% from its high and the average cannabis stock is more than 50% off its high. In other words, they’re not just trying to scalp the top; they truly believe there’s further downside for this stock. And for IIPR there might be; the stock outperformed all expectations from our initial 2017 investment to its 2021 top, and could easily give more of that gain back. Fundamentally, the company is still growing at a good pace, with revenues up 59% in the latest quarter compared to the prior year. But as cannabis grows more legal, and new competitors arrive to offer the same services, that growth is almost certain to slow. Finally, IIPR is still expensive, trading at a price-sales ratio (PSR) of 22, while the average REIT trades at a PSR of 9.4. Much as I like holding onto long-term winners with growth prospects, I think it’s time to further reduce our position in IIPR. I’ll sell half. SELL HALF
Organigram (OGI) last week released its fiscal second-quarter report. Revenues were $31.8 million, up 117% from previous year, and while the net loss was a penny a share, EBITDA turned positive, two quarters ahead of the company’s initial estimate. And Organigram achieved an 8.2% market share in the quarter, #3 among Canadian producers, and received $6.3 million from British American Tobacco (BTI), which increased its equity position to 19.4%. As for the chart, it’s trending slightly upward, sitting on its 50-day moving average, and I would rank it as the best-looking in this weak group.
TerrAscend (TRSSF), the smallest of the vertically integrated multistate operators in our portfolio, last week announced an agreement to acquire Pinnacle, a dispensary operator in Michigan that includes six retail dispensary licenses, five of which are currently operational and located in the cities of Addison, Buchanan, Camden, Edmore, and Morenci. The stock has a long base, dating back to November.
Tilray (TLRY) announced first-quarter results two weeks ago. Revenue was $152 million, up 23% from the prior year, and earnings were $0.09 per share. The company maintained its #1 position in Canada with 10.2% of the market and achieved #1 market share in Germany as well, and boasted about increasing synergies from the Aphria acquisition. As for the stock, it looks much like the rest, still holding above support just below 5. But our buy was high, so our loss is unpleasantly large. Selling is an option here because cutting losses short is important, but I’m going to stick with it as long as it holds above its March low (technically 4.78).
Trulieve (TCNNF) The stock chart looks much like those of its peers, but a little heavier, which is probably the result of excessive popularity previously. Still, it’s holding above its March low.
Verano Holdings (VRNOF) is our weakest stock; it’s hitting new lows. And part of the reason might be the delay in releasing first-quarter results. Verano is the fifth-largest U.S. multistate operator, and it’s been profitable for its past three quarters, but there’s been no explanation for the delay in reporting results. That, combined with the new lows and our big loss, adds up to a sell signal. SELL
Summing up. By selling VRNOF and half of IIPR, our cash level will rise to about 37%, but as soon as the sector strengthens, I’ll plow it back into the leaders.