One of the things you should occasionally think about as an investor is the topic of what makes stocks move, either up or down.
The simplest reason is an imbalance of supply and demand; if supply is insufficient to meet demand, as it often is in a brand new industry, prices rise. That’s one reason marijuana stocks have been rising, overall, for the past few years.
And why is demand rising? It’s not because earnings are rising. Most of these companies have no earnings; they’re happy to keep investing the money that investors are throwing their way.
No, demand is rising because perceptions are changing. Perceptions about the harm that marijuana does are shrinking; perceptions about the good that marijuana (and CBD) can do are growing; and perceptions about the money that can be made by investing in the industry are growing as well.
Which brings me to institutional investors.
The fact that the marijuana industry will be big in the years ahead is a given. If you’re an institutional investor focused on growth, therefore, this is an industry you’ve got to get into. But with no earnings in sight for most companies, and volatility frequently high and trading volumes often thin, where do you invest?
Well, the lowest-risk decision on Wall Street has always been to follow the crowd. If you’re wrong, at least you’re in good company. And that’s why the buying in marijuana stocks in recent months has been concentrated in the biggest, most liquid stocks, so much so that their valuations are now seriously out of whack with the rest of the sector.
Tilray (TLRY), Canopy Growth (CGC) and Cronos (CRON) are the poster boys here. They all have great long-term growth prospects, but their valuations are multiples higher than the rest of the pack.
And that condition might continue—but it might not, which is why diversification remains one of my key themes and why I’ve been putting more weight on valuation recently.
Meanwhile, the broad market remains very healthy with the post-Christmas blastoff auguring well for the months ahead.
And marijuana stocks are clearly the leading sector, so we’re in the right place!
Below are updates on all the portfolio stocks.
Aphria (APHA 9.2) — APHA stock is up 66% since the December 24 bottom, and looks healthy. But the matter of the hostile takeover offer from Green Growth Brands (GGBXF) remains. I received the offering package last week and read it (though not thoroughly—it’s an 87-page document) and these are the main facts as I see them.
Green Growth would pay 1.5714 shares of their stock for each share of Aphria, provided that two-thirds of Aphria shareholders accept the offer.
Green Growth would immediately replace the entire Aphria board of directors.
Aphria stock, which currently trades on the prestigious and liquid NYSE, would disappear, leaving the combined company trading on the OTC Venture Market and the Canadian Securities Exchange.
Aphria shareholders would own 60% of the new combined company
From my perspective, there are two interesting aspects to the offer.
First, the offer was formulated very quickly around Christmas when all stocks were down—APHA in particular thanks to the recent short-seller attack. Those days are gone.
Second, the offer (which runs until May 9) assumes that the stock of the combined larger company would automatically be rewarded with a higher market premium, like those of TLRY, CGC and CRON. But there’s no guarantee that will happen, particularly with the loss of the NYSE listing.
Furthermore, I don’t see any real synergy.
Aphria management has advised that shareholders reject the offer (by simply ignoring it), and they have signaled their intention to address the points of the short-sellers by moving out the company’s CEO and a co-founder over the coming months and installing a “globally-minded executive leadership team.” To me that sounds like a sensible move.
As for Green Growth Brands, I think they’ve bitten off more than they can chew, and Aphria doesn’t need them. However, I do note that since the company came public in November at 2.5, its stock has advanced nicely and the stock is currently building a base between 4 and 5. I’ll be keeping an eye on it, while watching how this story unfolds.
Aurora Cannabis (ACB 7.3) — Aurora released its fiscal second-quarter results on Monday and the results were fine, causing no major movement in the stock.
Net revenue was $54.2 million, up 83% sequentially, and up 363% from the same period in 2018. The Canadian consumer market brought sales of $21.6 million, while Canadian and international medical markets brought sales of $26.0 million, up 8% in revenue and 23% in volume sold. Based on available data released by Health Canada for the Q2 2019 period, Aurora accounted for approximately 20% of all consumer sales across the country. Management believes that Aurora can achieve sustained positive EBITDA beginning in fiscal Q4 2019 (calendar Q2 2019). Also, the company believes it has a leadership position in Germany, and it also exported to Poland, the Czech Republic, Luxembourg, Mexico and the United Kingdom.
As for the chart, ACB is up 46% from its December 24 close and looking like a decent buy on the current pullback.
Canopy Growth (CGC 46) — With a market valuation of nearly $16 billion, Canopy remains the undisputed king of the marijuana industry, not least because of last year’s $4 billion contribution by Constellation Brands (STZ). Thus, its price-to-sales ratio is roughly 55. But if Constellation does what investors hope for, all will be well.
Financial results for the quarter ended December 31 will be released after the markets close on February 14 (today), so take a look at the report and see how the market reacts.
The stock is well off its December bottom but still below its October high of 60.
Cresco Labs (CRLBF 7.6) — Cresco is a U.S. multi-state retail operator, with operations in seven states (Illinois, Pennsylvania, Ohio, Nevada, Arizona, California and Massachusetts) and approvals pending in two more (New York and Maryland).
And its stock looks cheap to me, which is one reason I bought more for the portfolio two weeks ago. Why it’s so cheap I have no idea, beyond the fact that it’s so lightly traded that institutions are afraid to get near it.
But the stock looks healthy, stair-stepping higher since it came public in early December, so if you don’t own it, or you’d like to own some more, I recommend buying some here between 7 and 8—ideally in the lower half of that range. The portfolio averaged up on February 1 at 7.2.
Cronos Group (CRON 20) — Cronos will soon be 45% owned by Altria, the global king of the cigarette business, and this one fact alone is the biggest reason that the stock trades at more than 200 times sales. That’s high.
Someday, that valuation is likely to be justified, but it will take years!
The stock more than doubled through January, as institutional money poured in. The portfolio sold a third of its position two weeks ago at 21 (partly because it was overweight), and the stock peaked the very next day at 25, before beginning the correction that is now unfolding.
Long term, I remain optimistic about the stock’s prospects, but short term, anything can happen; the bull market could drive it even higher—or a market correction could slap the hands of some recent buyers. The stock’s 25-day moving average is down at 17, while the 50-day moving average is at 14 and the 200-day moving average is at 10.
Curaleaf Holdings (CURLF 7.9) — Massachusetts-based Curaleaf is another U.S. multi-state retail operator, with a focus on highly populated, limited license states including Florida, Massachusetts, New Jersey and New York.
The company is the most highly valued of the U.S. multi-state operators, at $3.6 billion, so it’s not undiscovered, but its valuation is not as lofty as the stocks that have Big Alcohol or Big Tobacco behind them.
The stock has been climbing higher since the December bottom and just hit a new high for the year on Monday, a good sign.
CV Sciences (CVSI 4.9) — What shall we do with CVSI, whose stock has moved basically sideways since September, sitting out both the December selloff and the subsequent rebound? My answer is to wait. After all, the company saw revenues grow 330% in the latest quarter, so it’s not as though business is slow.
Management apparently thinks part of the problem is lack of visibility; they engaged a new communications and advisory firm just this month “to enhance the Company’s investor relations, media relations and corporate communications program.”
Another part of the problem might simply be that CV Sciences is focused on cannabidiol (CBD), which is sold across the U.S. in health food stores, marijuana dispensaries and online under the brand Plus +CBD, while the market today prefers companies in the marijuana space.
I can afford to be patient longer, and see what the next earnings report, expected any day, brings, but traditional technical analysis says that if the stock’s not going up, you shouldn’t buy it. HOLD.
Elixinol (ELLXF 2.3) — Elixinol is a U.S. CBD vendor whose stock has been trending up (unlike CVSI) since October. I added it to the portfolio two weeks ago and it’s pulled back a bit since then which provides a better entry point.
HEXO Corp. (HEXO 5.5) —HEXO is a one of the smaller Canadian marijuana growers, but it grew revenues at a 414% rate last quarter and it’s partnered with Molson Coors to put cannabis drinks on shelves in Canada as soon as they’re legal—so it’s definitely got great prospects.
Looking back, HEXO was one of the six Canadian stocks we took profits on at the top in October; I sold at 6.7 and put most of it back in a month later at 5.2, which is roughly where we are now.
It looks like a decent buy here, though you might be able to get in on a dip to 4.5, where we see the 50- and 200-day moving averages.
iAnthus Capital (ITHUF 5.5) — Thanks to its recent acquisition of MPX Bioceutical, iAnthus now has operations in 11 states that will permit it to operate 63 retail locations and 15 cultivation/processing facilities, “forming super-regional footprints in both the eastern and western United States reaching over 121 million potential customers.”
The stock has been climbing well since the December bottom, aided in part by perceptions that the climate for marijuana is fast improving in New York, and if you’re looking to buy, a pullback toward 5 would be attractive.
Innovative Industrial Properties (IIPR 65) — This REIT (real estate investment trust) has exceeded all expectations, but I suppose part of its success comes from the fact that it’s the “safe” (and legal) way to invest in the marijuana industry.
Last week the company closed on its first property in California, so now it owns 12 properties located in Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York and Pennsylvania, totaling approximately 1,070,000 rentable square feet.
Short term, the stock looks high, but if you’re looking to buy, a pullback to 59 would be attractive. HOLD.
KushCo Holdings (KSHB 5.8) — KSHB is another stock that’s been going sideways a long time—more than a year. But the growth is there, up 186% in the latest quarter. And the stock is here for diversification away from growers as much as anything. I averaged up for the portfolio two weeks ago at 5.5 and if you like the idea of owning a major supplier for the industry, you can buy here or on a dip toward the 200-day moving average at 5.4.
MedMen Enterprises (MMNFF 2.9) — MedMen is a major cannabis retailer in the U.S., with 19 facilities ranging from cultivation to retail in five key states: Arizona, California, Florida, Nevada and New York. All retail outlets operate under the MedMen name.
But management has made mistakes—above all a botched fund-raising deal in November that led to greater dilution and the exit of the CFO, who has since been replaced. And this week the company was expelled from the New York Medical Cannabis Industry Association following allegations of financial impropriety and accusations of sexism and bigotry among top executives (which the company of course denies).
And the stock is a definite laggard, barely off its December low.
Still, the long-term prospects are good, and I’m sticking with the stock in this advisory (though I did just recommend selling in Cabot Stock of the Week, which generally has a shorter-term focus and much more turnover). Earnings will be released February 27, after the market close.
Organigram (OGRMF 5.6) — Based in the province of New Brunswick, OrganiGram is the smallest of the Canadian growers in the portfolio by market capitalization, and possibly the lowest-cost producer in Canada, thanks to its cheap electricity and attention to automation.
But it’s growing fast (up 419% in the latest quarter) and its stock has been very strong since the December bottom, coming very close to hitting a record high two weeks ago.
Back then I recommended not buying at those heights, but it’s corrected since then, and would be attractive for new buyers or averaging up between 5 and 5.5.
Tilray (TLRY 77) — Tilray and Aphria both have market caps of about $7.2 million, but Aphria’s revenues last quarter were five times Tilray’s—which tells you there’s a lot of expectation in Tilray’s stock.
Tilray should be reporting its quarterly results about now, but there is no official notice of the timing.
And the stock, which was as high as 300 last September, is having a hard time getting an uptrend reestablished; it’s still building a base centered on 80. But the fundamental prospects are still great, so I’ll hold.
And if you do see this stock blast off under big volume for any reason, that would be a great technical sign to buy.
Turning Point Brands (TPB 39) — As the slowest growing company here (14% in the third quarter), this old-school smokeless tobacco company expanding into the cannabis industry is designed to be a stabilizing influence on the portfolio. Yet its stock is up 42% since the start of the year—and still climbing higher!
The company hasn’t yet announced its fourth-quarter earnings, but the action of the stock suggests they’ll be quite good; Turning Point does have actual earnings, plus a dividend.
But the stock’s action also suggests that more and more investors are noticing this company’s entry into the fast-growth cannabis sector and thus according it with a higher multiple.
If you haven’t bought yet, wait for a pullback.
Last but not least, Happy Valentine’s Day to you and all those you love.
