The Uptrend Continues
Thanks to the huge 17-month downtrend that ended in late June, cannabis stocks are all very good values today. The best ones to buy are the ones that have been trending up since early July. Those are rated buy below.
Fundamentally, the industry’s biggest problem today is falling wholesale prices, the result of oversupply. But that’s good for consumers (which means the market grows), and it weeds out the least efficient operators, which is good in the long run.
Eventually, of course, national legalization will come, but I strongly urge you to own these stocks before then, because the odds are that the stocks will top when national legalization kicks in, just as they have on previous big legalization events.
Second-quarter results are mostly in, and the stocks have reacted, so now we will make a couple of adjustments, selling one stock and downgrading another to hold. 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 3 adult-use stores coming to the very dense New Jersey market. Plus, it’s the cheapest of our stocks on a price/sales basis. However, its stock is also weak, having once again fallen below its 25- and 50-day moving averages, and for that reason, I’m downgrading it to Hold. Second-quarter results will be released tomorrow, August 18, before the market open, and the stock’s reaction may help us decide whether to stick with this stock or not. HOLD
Cresco Labs (CRLBF)
Chicago-based Cresco reported second-quarter results this morning. Revenues were $218 million, up 4% from the year before, while EBITDA was $51 million, or 23% of revenue, up 11% from the previous year. Wholesale revenue was $95 million, which means the company remains the #1 wholesaler in the U.S. The company was the #1 retailer in Massachusetts, Illinois and Pennsylvania. And retail revenue was up 22% from the year before. But the challenge—not only for Cresco but every operator—was in product pricing, as prices fell between 10% and 30% depending on the state. Eventually, prices will stabilize and be less of a factor, just as they have in the tobacco industry. In the meantime, Cresco is still a contender to become the largest company in the industry, as its acquisition of Columbia Care (CCHWF), is on track to close by the end of the year. And management expects continued growth as seven more high-population states—New Jersey, New York, Pennsylvania, Ohio, Virginia, Florida and Maryland—transition to legal adult use. 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
Curaleaf (CURLF)
Massachusetts-based Curaleaf was the industry leader in the second quarter, with revenues of $338 million from 22 states and 136 dispensaries and its European operations as well but will likely be surpassed by Cresco once the Columbia Care acquisition is complete. Still, this is an attractive stock, and the company’s focus on the European market adds an element of diversification. In fact, last week the company announced the acquisition of a majority stake in Germany’s Four Pharma, a licensed producer and distributor of medical cannabis that has more than 10% market share in Germany. The stock is above both its moving averages, on a small pullback, and looks attractive here. BUY
Green Thumb (GTBIF)
The best indication of a healthy stock is its ability to hit new highs, and that’s just what Chicago-based Green Thumb has been doing, as it hit a new high (for this uptrend) on Monday and has pulled back minimally since and is still well above both its 25- and 50-day moving averages. What do investors like here? Positive earnings (seven consecutive quarters), size (it’s number three in the U.S.) and growth (second-quarter revenues were up 15% from the prior year). GTBIF is our largest position. BUY
OrganiGram (OGI)
OrganiGram is the number three producer of cannabis in Canada, and number one in dried flower, with its flagship brand Edison. And it’s still growing fast; second-quarter revenue was $38.1 million, up 88% from the year before, which was in stark contrast to many Canadian producers, who are still shrinking (again, falling wholesale prices are the culprit). Like many of the stocks here, OGI is still well above both its 25- and 50-day moving averages. BUY
TerrAscend (TRSSF)
TerrAscend is the smallest of the vertically integrated multistate operators in our portfolio and its stock is also the weakest. Last week I mentioned that the stock was close to the chopping block, and if second-quarter results didn’t reverse the downtrend, I’d likely sell. Well, the results (released August 11) saw revenues of $64.8 million, up 10% from the prior year, and a profit of six cents per share. But the market was disappointed, and the stock has been down since. Time to switch to a faster horse. SELL
Trulieve (TCNNF)
Florida-based Trulieve has operations in eleven states, with market-leading positions in Arizona, Florida and Pennsylvania. It was the fastest growing of the big three multistate operators in the second quarter and will continue to be one of the industry’s leaders. With its stock right on its uptrending 25- and 50-day moving average, it’s a good buy here. BUY