Over the Christmas holidays, my wife was having lunch with a bunch of her girlfriends when one related the following story.
She and her husband had gone to an Open House at their neighbors’ house. They didn’t know the neighbors well, and it was a quiet affair, but as they were leaving the host gave them a gift, a jar of “organic, home-grown marijuana.”
They were taken aback, surprised, thrown off guard. My wife’s friend hadn’t indulged (perhaps the word is “experimented”) since college, and her husband had never partaken. Ever. But they are kind and polite people, so they accepted the gift, albeit awkwardly—wishing just a minute later while walking home that they had politely rejected it—and once home proceeded to hide it where it wouldn’t be found by their two kids, one in high school and one in college.
Back at my wife’s lunch one of the ladies said, “I’d have flushed it down the toilet!” But another said, “I’d be happy to take that off your hands.”
The point is, we are in the midst of a cultural shift, but still far from through it. Marijuana is still far from universally accepted, and until it is, the sector will continue to have great growth potential. That’s how investing works.
Cabot Marijuana Investor on a Tear
Speaking of holidays, on Martin Luther King Day, I was working, but the office was very quiet and the market was closed, so I took time to review all the sales, full and partial, of the Cabot Marijuana Investor Portfolio since inception. Here’s the table.
Early on, when I limited the portfolio to 10 stocks, I had to sell one to buy another, so I sold full positions. But as I grew loath to part completely with good stocks I began selling partial positions, either when I wanted to lighten exposure or to raise cash for new purchases. And I removed the cap, so now I can own as many stocks as I want—provided I keep track of them!
So what sparkling insights do I glean from reviewing these transactions? What were the biggest mistakes? What were the biggest successes? And how can I do better in the future?
On the mistake side (from today’s perspective) there are a few.
CannaRoyalty (now Origin House), sold for a profit of 15% in May 2018, and is up 50% more since the sale—but it was replaced by iAnthus, which has great prospects for growth in the U.S., so I don’t feel too bad about that.
Kush Bottles (KSHB) and Innovative Industrial Properties (IIPR), both of which I sold a third of for great profits, are a bit higher now. But I lightened up to put the money in faster-growing companies, and I think that’s worked out quite well. KSHB is now 5% of the portfolio while IIPR is 7%, which seems like plenty at this point for these low-risk diversification components.
The Cronos Group (CRON) story is more complicated. I lightened up on it first in October when the sector as a whole was high, but bought some back at 9.20 (24% cheaper) a month later and then sold a partial position again earlier this month when the position had grown overweight. CRON is still the largest component of the portfolio, at 13%, and if I’d held on our profit would be bigger, but so would our portfolio risk. As it is, I’m thinking of selling some more.
On the success side, the very first sell, AXIM, was great, as that stock has performed terribly since, down 82%.
The sell of Emerald Health (EMHTF) was prescient too; the stock is down 37% since then.
But the biggest success was selling the six Canadian producers on the day before Canadian legalization—as the whole sector subsequently rolled over—and then buying four of them back in early November at lower prices.
What can I do better?
It doesn’t show in the table, but my three regrets today are these:
1. MedMen (MMNFF) remains a substantial loser in our portfolio, partly because I bought wrong and partly because the entire group of U.S. multi-state operators is currently in the doldrums. If I had cut the stock loose when our profit turned into a loss, I would have lost less—but I’m holding because I continue to believe that these U.S. operators will thrive as cannabis commerce grows increasingly legal in the U.S.
2. Tilray (TLRY) is also a substantial loser. I now believe it was too “famous” when I bought, even though it was down 58% from its high at the time, and I should have waited longer for that celebrity premium to fade.
I’m usually pretty good at avoiding groupthink, but in this case I was swayed by the near-universal admiration of Tilray’s management and plans. Never again.
In fact, a few readers have recently asked me about Charlotte’s Web (CWBHF), a stock that is not in the portfolio, and I’ve told them that as the most famous CBD company, it’s probably the most overvalued and thus the one where there’s the least opportunity, at least short term.
3. The portfolio has too much cash today, 18%. Sure, the portfolio has gained 18.2% this year, which is great, but with the market strengthening, I’ve got to get that money back in the market, ideally on a timely pullback—maybe next week!
Next week’s issue of Cabot Marijuana Investor will be published on Thursday, January 31 and will include updates on all 15 portfolio stocks, and hopefully opportunities for some new buying or averaging up.
Note: Starting today, HEXO (HYYDF) will begin trading on the NYSE American exchange under the symbol HEXO, which will make life just a little bit easier, and also provide the stock more liquidity.