With the broad market still trending up and cannabis stocks continuing to lead the way—and lots of news, to boot—I can’t let another week go by without an update, so let’s go!
Today’s Big News
Today Canopy Growth (CGC) announced that it had nearly completed an agreement that would give it the right to buy Acreage Holdings (ACRGF) once marijuana is legal in the U.S. Acreage, which has John Boehner and Bill Weld on its board, is a multi-state operator that had revenues of $10.5 million in the latest quarter, and would give Canopy a good platform in the U.S. However, it’s possible that such a big announcement could be a sign of a short-term top in the sector.
The Rapid Fundamental Growth of the Industry is Mind-Boggling
Looking at the revenues of the 14 companies in our Marijuana Portfolio, the average growth rate in the latest quarter, relative to the previous year, was 409%. The median, for you statistical fans, was 255%. This is one fast-growing sector!
Legal Banking is Coming
While federal legalization of marijuana still looks unlikely until 2021 or later, legalization of banking by marijuana businesses in states where the drug is legal looks increasingly likely in the coming months, thanks to a push by bipartisan politicians in Washington of the Secure And Fair Enforcement (SAFE) Banking Act. It’s nice when they agree on something.
The Old Leaders Continue to Fade
As mentioned before, Cronos (CRON), which has Altria as a major investor, was the first of the big Canadian cannabis stocks to crack, and Canopy (CGC) and Aphria (APHA) have rolled over as well, though today’s announcement jolted Canopy back to life, at least for a day. The other big favorite, Aurora (ACB), is at risk of rolling over, too, but so far, is sitting tight.
U.S. Stocks Have Been Gaining Strength
In our portfolio, Cresco (CRLBF) and Curaleaf (CURLF), both bought near the December bottom, have been runaway successes so far and are now overweight in the portfolio.
Performance
As of today, the Marijuana Index was up 41.6% year-to-date, while our Marijuana Portfolio was up 50.4%, the difference attributable not so much to stock selection as to stock weighting.
Strategy
To put it simply, the strategy is to own more of the stocks that are going up and less of the stocks that are not going up. So far, the year has been good to us, but when the main trend changes, as it will some day, I’ll shift some funds to cash.
Long-term, however, as I’ve said many times, I want to own the companies that will be leading this industry five and ten years from now, so my tendency is to hold onto partial positions of the stocks with that potential. However, I will sell a position completely from time to time, and have done so over the past two years with these stocks: Axim Biotechnologies, Cannabis Sativa, GW Pharmaceuticals (all 2017); Corbus Pharmaceuticals, 22nd Century Group, Emerald Health Therapeutics, CannaRoyalty, CV Sciences (all 2018); and MedMen and Tilray (both 2019).
Changes Today
The portfolio will now sell half of its Aphria (APHA) position, sell half of its Aurora (ACB) position, sell half of its Cronos (CRON) position, and sell half of its Turning Point Brands (TPB) position. This will take the portfolio to about 24% cash. Then we will take a fourth of that cash and split it among new positions in Charlotte’s Web Holdings (CWBHF) and Village Farms (VFF). Details below.
Updates
Aphria (APHA) On Monday APHA announced its results for the fiscal third quarter ended February 28, and while the results were good, they weren’t good enough for investors. Net revenue was $73.6 million, up 240% from the prior quarter and up 617% from the prior year period, but the increase was primarily due to $57.6 million of distribution revenue from CC Pharma (acquired in September) and ABP (acquired in January). Unfortunately, both cannabis revenue and kilograms sold were lower than the prior quarter, as transitions in growing methods led to supply shortages, as well as packaging and distribution challenges. On the bright side, the matter of the LATAM acquisitions was put to bed by recording a non-cash impairment charge of approximately $30 million; the company introduced CannRelief, a CBD-Based nutraceutical and cosmetics product line for the German market to be distributed by CC Pharma; and it was awarded provisional approval in Germany for a cannabis cultivation license, including five lots each with a minimum annual capacity of 200 kilograms. Current annualized production capacity at Aphria is now 115,000 kilograms.
Management says they’ve turned the corner, and that results will be better from here (and my valuation studies say the stock is no longer one of the expensive stocks in the sector) but investors clearly disagree, as the stock fell out of bed on Monday and is now trending down, with no likely support until it hits 7, 6.5, 4.5?
The portfolio has already sold some (last October at 15.20), but I still feel like we own too much, so I’ll sell half of our holding now.
Aurora Cannabis (ACB) Aurora announced on Wednesday an agreement to buy Hempco, a Canadian provider of quality, hemp-based foods, hemp fiber and hemp nutraceuticals, for $63.4 million, thus obtaining not only a strong global hemp business but also access to the raw material of CBD, which is seeing demand boom in both Canada and the U.S. Aurora first invested in Hempco in 2017, and this will complete the acquisition of the company.
But the stock didn’t move on the news, and I fear that it will roll over like the other big Canadians, so we’ll lighten up now. (We previously sold some last October at 11.56.)
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 stock had been trending lower since January, but the agreement to purchase Acreage may have broken that downtrend, while increasing its profile even more.
Charlotte’s Web Holdings (CWBHF) Colorado-based Charlotte’s Web claims it’s the world’s leading brand of hemp-based CBD products by market share. Fourth quarter results saw revenues grow 71% from the year before to $21.5 million. The stock has been strong (with other CBD stocks), but pulled back to its 25-day moving average on Monday and I think that presents a decent entry point, so the portfolio will buy an initial position, aiming to average up if this works out.
Cresco Labs (CRLBF) Cresco is one of the leading multi-state operators, and the stock’s uptrend is intact—with a spike today on the Canopy news. The portfolio is overweight in the stock.
Cronos Group (CRON) CRON remains the most overvalued position in the portfolio (thanks to all the investors who followed Altria on board) and the stock has been trending down since early March. We previously took profits earlier this month at 17.32 and will now sell half of the remaining position.
Curaleaf Holdings (CURLF) BlackRock, the world’s largest asset manager (and one of the stock recommendations in Crista Huff’s Cabot Undervalued Stocks Advisor), disclosed this week that five of its funds have a stake in Curaleaf. And this is a big deal because many institutional investors have been reluctant to do business with cannabis businesses that touch the plant.
CURLF broke out to a new high on the Canopy news, and remains in a strong uptrend. The portfolio is overweight the stock.
Elixinol (ELLXF) ELLXF remains one of the strongest CBD stocks, though it did offer a brief buying opportunity when it dropped to its 25-day moving average on Monday.
Yesterday the company announced a partnership with Ken Brown, MD of KBMD Health, to create KBMD CBD Extract in various flavors to help alleviate abdominal discomfort—a treatment Dr. Brown has been prescribing for over two years in his own gastroenterology practice. It’s not a big deal, but it’s something.
Note: The corporate structure of Elixinol is complex, as the parent company is Australian, and that means that buying the stock might be more expensive than usual. For example, two readers have told me that their trades at Schwab cost $50, rather than the usual $5. Buyer beware.
Green Thumb Industries (GTBIF) This Chicago-based multi-state operator’s stock also jumped on the Canopy news, and it’s now close to record highs. The trend is up. We averaged up recently.
HEXO Corp. (HEXO) Bank of America initiated coverage of HEXO Wednesday, with a price target of 10, sparking a surge of buying. We averaged up recently, but if you didn’t you could still buy here.
iAnthus Capital (ITHUF) Multi-state-operator iAnthus was looking pretty sick until this week, when the company announced that it had hired as Chief Marketing Executive Neil Calvesbert, who previously served as Vice President of Global Marketing for Monster Energy Beverages. And the Canopy announcement today helped more. We previously sold some, and are now underweight, but I don’t see reason enough to change that. ITHUF us sitting on its 200-day moving average.
Innovative Industrial Properties (IIPR) On Monday, this REIT announced a $27.1 million acquisition of a five-property portfolio in southern California that totals approximately 102,000 square feet of industrial space; the move will bring the firm’s portfolio to 18 properties located in Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Ohio and Pennsylvania, totaling approximately 1.23 million rentable square feet, all of which were 100% leased with a weighted-average remaining lease term of approximately 14.9 years.
The stock looks healthy, consolidating its gains, and I like it the REIT in this portfolio for diversification, but I may not hold it forever. REITs have been strong this year, but if the sector weakens, I could sell.
KushCo Holdings (KSHB) KushCo announced its fiscal second quarter results last Thursday, and the results were decent. Revenue jumped nearly 240% to $35.2 million from $10.4 million. Analysts had expected revenue of $25.5 million. And the company raised its full-year revenue guidance to $140 million to $150 million from previous guidance of $110 million to $120 million. But the market was unimpressed, and the stock remains stuck at its 200-day moving average, going sideways. So why am I still holding it? Because it’s a low-risk diversification play, and the odds are that this base (now 15 months long!) will eventually lead to a resumption of the uptrend.
Organigram (OGRMF) Organigram on Monday reported its second fiscal quarter results. Revenue grew to $26.9 million, more than double the net revenue of the first quarter and up more than 1,000% from the prior year. It’s on track to be one of only three Canadian licensed producers to be in all provinces. It continues to increase capacity while driving down costs, and it’s preparing for the launch of the legal edibles market in Canada (sometime this fall is the best guess), with a chocolate molding line and additional fully automated packaging equipment. The stock looks good, bouncing off its 50-day moving average, and can be bought here.
Turning Point Brands (TPB) TPB is the old smokeless tobacco company diversifying into the cannabis industry (but not plant-touching), and the stock has had a great run as one of the lower-risk diversifying components of the portfolio. But the stock seems to be breaking down—it fell though its 50-day moving average today—so I’m going to sell half now (we sold some last August at 33.79).
Village Farms International (VFF) A major (and profitable) grower of greenhouse tomatoes, peppers and cucumbers, Village Farms is fast transitioning into the cannabis industry. The stock was hit Tuesday by a research report by famed short-sellers Citron Research, which knocked the stock down 10%, but it seems to have bottomed, so I see this as a decent low-risk entry point.