The Picture Continues to Improve
The good news today is that the bottom seems to have passed, for both the broad market and stocks in the cannabis sector. The S&P 500 was down 25% at the bottom, while the cannabis index was down 84% at the bottom—and for both, that seems enough.
The factors behind the broad market’s health (or lack of it) are numerous, of course, but for the cannabis sector, the main factors are simpler. There are the fundamentals of the companies, which continue to improve, as revealed by recent quarterly reports, and there’s the level of investor sentiment, which has shifted from euphoric back at the February 2021 top to massive disappointment at the recent bottom and now is beginning to trend back up.
The portfolio did some new buying two weeks ago, figuring the odds were very good that the bottom has passed. That took our cash position from near 56% down to 35%. And I’m going to leave it there for now, watching these stocks carefully to see which become the strongest in the developing uptrend. Details below.
Ayr Wellness (AYRWF), our newest addition, is a vertically integrated multistate operator based in Miami, Florida with 73 dispensaries in eight states (Arizona, Florida, Illinois, Massachusetts, Nevada, New Jersey, Ohio and Pennsylvania). It makes the #2 carbonated THC beverage in the U.S (Levia), it has its products in 475 third-party stores, and it has three adult-use stores coming to the very dense New Jersey market. It’s the cheapest of our stocks on a price/sales basis, and it was the fastest-growing of the multistate operators, based on first-quarter results. (Second-quarter results will be released on August 18, before the market open.) As for the stock, it’s got a great base dating back to May, and while the stock is technically just below its 25- and 50-day moving averages, I think it’s a good buy here. BUY
Cresco Labs (CRLBF)
Chicago-based Cresco was the cheapest stock in the portfolio (on a price/sales basis) based on first-quarter results, but new addition Ayr Wellness knocked it out of that spot. Still, the stock is relatively cheap, and with the company’s acquisition of Columbia Care (CCHWF), which is expected to close by the end of the year, Cresco is likely to become the industry leader, even considering the required divestitures. Cresco has long prioritized the wholesale market, and thus is currently the #1 seller of branded cannabis products in the U.S. But retail revenue has been growing faster, and the addition of Columbia should create a real powerhouse. Second-quarter results will be released before the market open on August 17. The stock bottomed at the end of June, climbed above its 25- and 50-day moving averages in the middle of the month, and remains above them both today. BUY
Massachusetts-based Curaleaf reported second-quarter results on Monday and the news was very good. Revenues grew 8% from the year before to $338 million (the biggest quarter ever by any cannabis company) and adjusted EBITDA was $86 million, a record for the company and a sign that its focus on growing the European market and improving operating efficiencies is paying off. During the quarter, the company opened seven new dispensaries in the U.S., bringing its total to 135—and it now has 2,200 wholesale partners as well, though Cresco still appears to be the leader on that front. Seventy-five percent of Curaleaf’s revenue came from retail sales in the quarter. Curaleaf is now both the biggest cannabis company in the world (by revenue) and the most valuable (by market capitalization)—though Cresco may take the lead in revenue when its Columbia Care acquisition is complete. Still, this is an attractive stock. Two weeks ago, I wrote that CURLF was the strongest of our group, having climbed well above its 50-day moving average—and while it’s still above that reference point, it’s cooled off a little, so I’m giving OGI the label of strongest today (see below). BUY
Green Thumb (GTBIF)
Chicago-based Green Thumb reported second-quarter earnings last week, and the results were great. Revenues in the quarter were up 15% from the previous year to $154 million, while earnings per share were $0.10, unchanged from a year ago and marking the company’s seventh consecutive quarter of positive earnings. Revenue growth was driven mainly by increased retail sales in New Jersey as the legal market opened, increased retail sales in Illinois, 19 new locations since last year and increased traffic in the majority of the company’s 77 stores. As for the stock, it’s above both its 25- and 50-day moving averages, though below its peak of three weeks ago. BUY
Organigram is the number three producer of cannabis in Canada, and number one in dried flower, with its flagship brand Edison. And it was the first of our stocks to announce second-quarter results—technically the company’s third fiscal quarter. Net revenue was $38.1 million, up 88% from the year before, making this the second-fastest-growing company in the portfolio (close behind Ayr—though those are still first-quarter numbers), while the net loss was a penny per share, reminding us that profits are easily achievable when investing activity slows. As for the stock, it looks great, having hit an eight-week high on Monday. BUY
As the smallest of the vertically integrated multistate operators in our portfolio, TerrAscend is a potential acquisition target—perhaps by Canopy (CGC), a major player in Canada that holds 20% of the stock now. TerrAscend has a strong presence in the Michigan market and is pushing hard in New Jersey, Pennsylvania and Maryland. But it’s the slowest-growing of our multistate operators, and its chart is the weakest of the bunch, still below its 25- and 50-day moving averages. I’ve mentioned before that TRSSF is close to the chopping block, and if second-quarter results, which are expected after the market close tomorrow, August 11, don’t reverse this trend, I’ll likely sell. HOLD
Florida-based Trulieve reported second-quarter results this morning. Revenues were up 49% from the year before to $320 million (making Trulieve the fastest-growing of the big three; the Harvest acquisition was key), but the net loss was $0.12, and the main reason was a competitive wholesale market. While retail revenue was up 3% from the immediately prior quarter, revenue from wholesale and licensing was down 22%. My view is that this is a short-term problem, and as the leading companies secure their territories, and slowly eliminate smaller competitors, the wholesale market will stabilize, just as it did for the tobacco industry long ago. In the meantime, management has reduced their projections for the remainder of the year by 5%. Trulieve finished the quarter with operations in 11 states, with market-leading positions in Arizona, Florida and Pennsylvania, and with 32% of its 175 retail dispensaries located outside Florida. As for the stock, it was sitting above both its 25- and 50-day moving averages yesterday, but this morning’s news has knocked it down a little, so this is the only stock in the portfolio down as I write this morning. Still, I think it’s a good buy here. Trulieve is and will continue to be one of the industry’s leaders. BUY