It’s time for another brief update. Remember, these updates are not officially scheduled for Thursdays; technically I can send them anytime I want—or not at all. But Thursdays fit my schedule well, and there’s lots going on, so here you go!
The Bull Market of 2019 Continues
The broad stock market remains healthy, with all indexes at or near highs, with the exception of small-cap stocks, which are lagging. A rising tide lifts all boats.
Cannabis Stocks Continue to Lead the Way
We’ve been enjoying a perfect storm, in a good way.
The industry is growing fast, with most companies in our portfolio reporting triple-digit growth from the year before. Consumer attitudes keep improving. Investor projections keep improving. And money continues to flow into the sector, pushing stocks ever higher.
This won’t last forever, of course, and it might be changing today, but as I’ve said before, trends tend to last longer and go further than people expect. And when the trend finally changes, I’ll change my tune, too, cutting back on the weakest and most vulnerable positions and raising cash in preparation for the next bottom. I have a few tweaks to the portfolio today.
One Correction
In the table that was included in last week’s email, I reversed the performance numbers of the portfolio and the Marijuana Index. The correct numbers were these. Portfolio +54.8%. Index +47.3%.
Symptoms of a Young Fast-Growing Industry
I’ve mentioned before that many of the management teams at these companies are undergoing a baptism by fire; they’re learning fast, but sometimes they make mistakes.
We saw it with Aphria’s imprecise treatment of acquisitions. We saw it with MedMen’s botched fundraising. And now we see it with KushCo’s decision to restate prior financial statements.
None of these mistakes have been fatal, but they have impacted the stocks for a while. More importantly, they’ve incentivized managements to be more diligent, often by upgrading the top brass and hiring new financial experts—and this is good.
A Note to Newer Readers
All the previous issues and updates of Cabot Marijuana Investor are available on the website, and you can find a lot of good advice on our general strategy there. A few of the main points are these:
Diversify, by stocks, by country, by sector and by time; don’t buy everything on the same day.
Learn how to read charts. Again, there’s a lot on our website.
This is a marathon, not a sprint; my goal is to own the companies that will be leaders in the industry five and ten years from now.
Lastly, a big reason for the outperformance of our portfolio this year has not been stock selection but stock concentration, owning less of the stocks vulnerable to decline and more of the stocks likely to rise. I see no need for any reader to follow my advice exactly; not everyone is going to own 14 cannabis stocks (as I do today). But I do try to guide you in the right direction.
Changes Today
The portfolio will now sell a third of its Canopy Growth (CGC) position, sell a third of its Cronos (CRON) position, sell a half of its iAnthus (ITHUF) position and increase its Green Growth Brands (GTBIF) position by 50%.
Updates
Aphria (APHA) APHA continues to build a base between 9 and 10. Ideally, this will be resolved by a resumption of the uptrend, but there’s still downside risk. Aphria will announce quarterly results on April 15, before the market opens.
Aurora Cannabis (ACB) Aurora yesterday announced an update on the status of Aurora Sun, the company’s newest and largest growing facility, which is under construction in Medicine Hat, Alberta. Because of growing demand, the facility will be expanded to 1.62 million square feet, representing a 33% increase from its originally planned 1.2 million square feet. Installation of the glass is expected to be completed in May, and when complete, the facility’s production systems will be the most automated and efficient of the company’s growing centers. At full operation, the company says there will be more than a million plants in various stages of growth in the facility at any given time, enabling production capacity in excess of 230,000 kg of cannabis per year.
Thanks to extensive merger and acquisition work over the past few years, Aurora has 15 wholly owned subsidiary companies – MedReleaf, CanvasRX, Peloton Pharmaceutical, Aurora Deutschland, H2 Biopharma, Urban Cultivator, BC Northern Lights, Larssen Greenhouses, CanniMed Therapeutics, Anandia Labs, HotHouse Consulting, MED Colombia, Agropro, Borela, and ICC Labs—and sales and operations in 24 countries.
ACB pulled back normally after its mid-March high and is now basing at 9. I don’t think it’s attractive on valuation grounds, but it’s a strong hold.
Canopy Growth (CGC) The most famous company in the industry remains one of the most overvalued, by my measurements, but it’s a solid long-term hold, as long as your position size is reasonable. The CEO of Constellation Brands told CNBC on Sunday that Canopy could generate as much as $1 billion in revenue by the end of this fiscal year, as it rolls out different types of edibles as well as infused cannabis beverages—in particular targeting millennials looking for a calorie-free tasty beverage that gets them high.
As I’ve suggested, the stock is following CRON’s trend lower, slowly falling off its base at 42 and heading toward its 200-day moving average at 39. In the worst-case scenario, 26 is possible, and though I’m not predicting that, I will lighten up by selling a third.
Cresco Labs (CRLBF) Cresco announced today that it received approval for its previously announced acquisitions of licensed medical cannabis dispensaries MedMar Rockford, MedMar Lakeview and PDI Medical in Buffalo Grove, Illinois, bringing the company’s footprint to five dispensaries in its home state—the maximum level of dispensaries any single company can own in Illinois. The company also has the highest market share of any operator in Illinois
CRLF has pulled back normally over the past week, and I still think it’s reasonably valued, so if you don’t own it, you can nibble here. The portfolio is still overweight.
Cronos Group (CRON) Trading in CRON is drying up as the stock attempts to find a bottom in this area—below both its 25- and 50-day moving averages. But I still think it’s the most overvalued position in the portfolio (thanks to all the investors who followed Altria on board) and I think the odds are that it will go lower. Thus, the portfolio will now sell a third of its position.
Curaleaf Holdings (CURLF) CURLF has pulled back normally over the past few weeks and remains above its 25- and 50-day moving averages, so is quite healthy. We’re still overweight.
Elixinol (ELLXF) ELLXF remains one of the strongest CBD stocks—which constitute the strongest part of the cannabis sector. It’s pulled back minimally for a couple of days, but remains out of trend to the upside so there’s real potential for a pullback.
Green Thumb Industries (GTBIF) Chicago-based multi-state operator GTI reported fourth quarter results on Tuesday. Revenue was $20.8 million, up 237% from the year before. That came from five states, but since then the company has been generating revenue in four more states, and soon expects to be operating in 12 states total. The company’s core brands include Rise, Rythm, Dogwalkers, and The Feel Collection.
In my latest update I recommended buying on a pullback to 14, and here it is! I think this is the best buy in the portfolio today so I will increase our position by 50%.
HEXO Corp. (HEXO) HEXO has pulled back normally since reporting excellent fourth quarter results four weeks ago and now sits right on its 25-day moving average. I averaged up last week, and still like this as a buying point.
iAnthus Capital (ITHUF) iAnthus, a multi-state-operator with a focus on the heavily populated coasts, is already generating revenue in 9 of 11 states, but fourth quarter results last week did not impress investors and today the stock has fallen through support at 5 and through all its moving averages. Of course, the group as a whole is weak today, but ITHUF has one of the weakest charts, so I’m cutting back, selling half of our position.
Innovative Industrial Properties (IIPR) IIPR has not only bounced very well off last week’s slightly concerning low, it’s also resisted today’s sector weakness, in part, I believe, because it’s the most conservative holding in the portfolio by some measures. I like having this REIT in this portfolio for diversification.
KushCo Holdings (KSHB) KushCo announced yesterday that it will release its fiscal second quarter 2019 results today after the market close. Additionally, the company announced that it will restate financial statements for fiscal 2018 and 2017 due to “inadvertent errors in the accounting for certain shared-settled contingent consideration relating to its acquisition of CMP Wellness in May 2017, Summit Innovations in May 2018, and Hybrid Creative in July 2018.” As a result, the 2018 net loss will increase from $10.2 million to $24.3 million and the 2017 net income will increase from $0.1 million to $1.7 million.
Bottom line, the market didn’t like the news, sending the stock back down to the center of its trading range where it’s met up with its 200-day line. Thus, the main trend for KSHB is still sideways. Aggressive investors could lighten up here; this stock is not trending up (though tonight’s report could change that), but I’m holding for now, because I still think the stock is cheap and it provides relatively low-risk diversification.
Organigram (OGRMF) OGRMF hit a record high last week, and is still decently valued vs. the more famous names in Canada. But the stock may be rolling over slightly, so if you’re looking to buy, I recommend waiting for the current correction to bottom.
Turning Point Brands (TPB) TPB is another “low-risk” component of the portfolio that looked good today, but I don’t recommend buying here; it’s still at risk of going lower.