Investing in up markets is easy. From the December low until recently, the strong market provided a huge tailwind that sent marijuana stocks soaring—and had our portfolio, at the peak, up 57.2% year-to-date.
But investing in down markets is more difficult. In fact, our Cabot Tides (our intermediate-term market timing indictor) flashed a sell signal on Monday, telling us that for the time being, an extra dose of caution is advisable, as the market is likely to head lower.
Long term, however, the market’s main trend remains up, and the odds are that the market will be higher later this year.
So what’s the best way to play this?
First, remember that our main goal is to be early investors in the companies that will be leaders of the cannabis industry five and 10 years down the road. As consolidation reduces the field, those leaders will enjoy economies of scale while benefitting from the value of their brands—the way Altria benefits from its Marlboro brand. Of the stocks we own, therefore, any that have that potential should be held—though taking partial profits from time to time, as we have done, is perfectly acceptable.
Second, remember that the short-term goal is to make more money than the index when the market is heading up and to lose less than the index when the market is heading down, and in this way, beat the index in the long run.
So what’s the best way to beat the index when it’s headed down? Hold cash, of course. Additionally, I’d like to point out that a very healthy practice is to analyze all your recent trades. If they’re working, great; do more of the same. But if they’re not working, stop. Step back. Reassess. And consider doing something different.
In our own case, for example, I see this:
Our past four sells—all partial profit-taking—were on April 18, nearly a month ago. Of those four, three stocks are substantially lower today. Only one, TPB, is higher. So overall, selling has been a good move.
But of our past four buys, from March 14 through April 25, only one currently shows a profit, so overall, buying has been a bad move.
So today I’m going to do more of what has worked—selling—and hold the cash. We’ll be selling all of CannTrust (CTST), Charlotte’s Web (CWBHF) and iAnthus (ITHUF). This will take our cash position to approximately 20%. Details below.
Aphria (APHA) Aphria is the cheapest of the Canadian major producers, by my measure, and there’s a good reason: management made some mistakes in acquisitions and raising capital last year. The stock was hit by short-sellers in December and there was a hostile takeover offer, but it rallied back as management worked to address their shortcomings and now, optimistically, I believe they’ve got the ship on an even keel.
Additionally, the chart is now looking more promising. APH bottomed early last week, and when the broad market fell apart later in the weak, APHA actually advanced! We previously took profits at 15.20 and 8.15 and have been underweight for a while so will be looking to add more shares in the future.
Aurora Cannabis (ACB) Until last week, Aurora was the only Canadian major that hadn’t rolled over; but now it has, as it joined the broad market to the downside late last week.
And yesterday, May 14, the company released its report for the fiscal third quarter. Revenues were $65 million, up 305% from the year before. Production volume increased 99% to 15,590 kilograms, up 1,200% year over year. Cash cost to produce a gram of marijuana declined 26% to $1.42 per gram.
Looking forward, management expects to get its cost below $1. It expects to have vapes and certain edibles ready for launch when the Canadian consumer market for these goods opens later this year (perhaps October). And best of all, management expects to achieve positive EBITDA beginning in fiscal Q4 (the current quarter).
This is all good, but the stock remains expensive, and the current correction has the potential to go to the stock’s 200-day moving average down around 7.5. Hold.
CannTrust (CTST) CannTrust also released its quarterly report yesterday.
Revenue was $16.9 million, up 115% from the year before. Cash cost per gram of marijuana was $2.77, down from $2.94 the year before. (Note: There is no universal process for measuring this cost.) And looking forward, the company expects to have edibles—including vape pens, beverages, confectionaries and healthcare products—ready for the market later this year.
However, we have a loss in the stock, thanks mainly to the company’s issuance of more shares early this month. Additionally, it’s now clear that CannTrust has not only the lowest market capitalization of our Canadian marijuana producers but also the slowest revenue growth—which means it’s falling further behind. In short, CannTrust won’t be among the leaders in Canada.
The low for the stock may well have passed—in fact, this could be a good short-term entry point—but I’m going to sell here, hold the cash, and look for better opportunities.
Canopy Growth (CGC) With a valuation of more than $15 billion, backing from Constellation Brands, and an agreement to acquire U.S.-based Acreage Holdings whenever it becomes legal, Canopy remains the hands-down leader in the industry, at least until a U.S. company surpasses it, which is almost inevitable.
Because of its high profile, it’s one of the most overvalued stocks as well, selling at roughly 47 times sales—but that’s life at the top.
Last week the company announced the launch of its global brand of medical cannabis, Spectrum Therapeutics, which combines (1) the company’s established Spectrum Cannabis, with its color-coded spectrum to categorize medical cannabis according to THC and CBD levels, (2) Canopy Health Innovations, which has 38 provisional patents filed in the U.S. designed to address a range of medical issues, from addiction to pain management, and (3) C3 Cannabinoid Compound Company, Europe’s largest cannabinoid-based pharmaceuticals company.
As for the stock, overall it looks healthy, in the 20th month of a consolidation phase. It could come down to its 200-day moving average, now at 41.5, but eventually, it will break out above its old high of 59. If you don’t own it, you could look to get in around the 200-day moving average, now at 41.5.
Charlotte’s Web Holdings (CWBHF) Charlotte’s Web released a preliminary first-quarter report last week. Revenue was $21 to $22 million, up roughly 70% from the prior year (50% was from e-commerce), while adjusted EBITDA was $4.0 to $4.5 million. Looking forward, management expects full-year revenues of $120 to $170 million for 2019 (that’s a big range!). As of May 8, Charlotte’s Web CBD was available in more than 6,000 retail locations across the U.S.
But the market didn’t like the report, sending the stock down on heavy volume. And I don’t like that “slow” growth—the slowest of any in the portfolio save the old tobacco and tomato companies. And most of all I don’t like our loss. Sure, the stock may bottom here and eventually climb back to where we bought it, but the goal is not to get out even (a common beginner’s mistake). The goal is to lose less in down markets (like this one) and make more in up markets, by investing in the best stocks—and CWNHF isn’t one of them today. Sell.
Cresco Labs (CRLBF) Chicago-based Cresco is now operational in seven U.S. states (with particular strength in the Midwest) and has the potential to be one of the U.S. industry leaders in years to come. The stock hit new highs on big volume in early April after the company announced an agreement to acquire Origin House, a Canadian company. It hit a new closing high near the end of the month. And now it’s pulled back normally, touching its 50-day moving average at Monday’s low and then bouncing off it.
The portfolio remains overweight in CRLBF, which remains moderately valued. If you don’t own it, you could buy some here.
Cronos Group (CRON) CRON remains the most overvalued stock in the portfolio (thanks to all the investors who followed Altria on board) and the stock remains under pressure, getting close to its 200-day moving average at 13.5. We’ve taken plenty of profits out and are currently sitting with an underweight position, but if Cronos does as well as so many investors expect, we could easily be buying back in when the stock resumes its uptrend—though there’s no telling when that might be.
Curaleaf Holdings (CURLF) Massachusetts-based Curaleaf is now the most highly valued of the U.S. multistate operators, thanks in part to an agreement to acquire the cannabis business of Cura Partners, owners of Select, the biggest brand on the West Coast.
The stock hit a new high when that news was announced in early May and has pulled back minimally since—a great technical sign given the weak market. If you don’t own it, you could nibble here—but more risk-averse investors might get lucky by waiting for a dip to the stock’s 50-day moving average, now at 9.3. The portfolio is overweight the stock.
Elixinol (ELLXF) Elixinol is the largest public competitor of Charlotte’s Web in the CBD market and its chart looks better. It dipped to its 50-day moving average two weeks ago (after I suggested it might do so) and is now riding that trend line back up toward its old high of 4.2. Note: If you choose to invest in low-priced stocks like this, be prepared for big percentage swings. And also remember that Elixinol is part of a global company based in Australia—which has the same name. If you invest, don’t buy the wrong one.
Green Thumb Industries (GTBIF) This Chicago-based multi-state operator is the second-most valuable of the U.S. players, and the stock has been good all year—until recently. In my latest update, when GTBIF was trading at 15, I wrote, “The stock could easily drop below 15 again, and in a weak market—not that I’m predicting it—all the way to 12.” Well, it hit 12.5 last week and remains near there, riding its 200-day moving average. If you don’t own it, you could buy here; in fact, I’m tempted to buy more. But the portfolio has an average weighting, and that seems like enough for now.
HEXO Corp. (HEXO) Second-tier Canadian producer HEXO has a joint venture with Molson Coors, which is expected to result in the distribution of cannabis beverages (non-alcoholic) when they become legal in Canada later this year. And HEXO plans to duplicate that model by finding Fortune 500 partners in other sectors, including vapes, edibles, health & wellness and cosmetics, all of whom, ideally, will boast “Powered by HEXO.”
As for the stock, it looks great, trending generally higher since the start of the year. It peaked at the end of April and has pulled back normally since, and is now riding its 50-day moving average. If you don’t own it, you could buy some here.
iAnthus Capital (ITHUF) New York-based multi-state-operator iAnthus has an East Coast concentration and good growth prospects, but it’s been slow getting revenue flowing, the stock is expensive relative to its peers, and now the news is getting worse. In short, first New Jersey’s legislature said no to marijuana legalization and now it appears almost certain that New York’s will do the same. Yes, the company is in other states, including Florida, Massachusetts, Arizona and New Mexico, but the delay in New York is big and the stock’s behavior reflects that. ITHUF is now below all its moving averages and heading lower. Sell.
Innovative Industrial Properties (IIPR) Innovative Industrial Properties has been a fabulous holding for the portfolio, exceeding all expectations since it was added to the portfolio in late 2017. But it’s not a pure marijuana stock; it’s a REIT. And someday this great performance is likely to end. In my last update I discussed the possibility of selling the stock, but in the end decided to hold. And holding this stock felt pretty good when the broad market fell apart last week!
The company reported solid first-quarter results last week, with no surprises. Rental revenue was $6.6 million, up 146% from the year before. The company paid its eighth consecutive quarterly dividend of $0.45 per share on April 15, representing a 29% increase from the company’s fourth quarter 2018 dividend and an 80% increase over the first quarter 2018 dividend. Acquisitions in the quarter included a 43,000 square foot industrial property in California for cannabis cultivation; a property in Ohio to be used by a subsidiary of PharmaCann for two industrial and greenhouse facilities; five industrial properties in southern California totaling approximately 102,000 square feet; and in April, the company acquired a 51,000 square foot industrial property in Pennsylvania to be used for medical-use cannabis cultivation and processing.
As for the stock, it hit a high of 92 in late March and has been consolidating that gain since, trading very sensibly in a range between 75 and 88 and riding its 25- and 50-day moving averages. If this stock would fit your portfolio, I recommend trying to buy anywhere under 80.
KushCo Holdings (KSHB) KushCo has fallen below its 200-day moving average, but remains in the long consolidation pattern that began a long 16 months ago, bounded by 4 on the downside and 8 on the upside. From time to time I’m tempted to sell it, take the profit, and focus on stocks that are more plant-touching, but the fact is, KushCo is still growing fast and its stock looks cheap and I like the diversification—so I’m holding.
Organigram (OGRMF) Organigram looks cheap too, relative to its Canadian cannabis peers, and the stock is holding up extremely well, ripe for a breakout to new highs. If you don’t own it, you can buy a little. I might average up if the stock can break out.
Turning Point Brands (TPB) TPB is the old smokeless tobacco company diversifying very successfully into the cannabis industry—but not plant-touching. An excellent first-quarter earnings report sent the stock soaring to new highs (up 27% in three days) two weeks ago, and the stock has pulled back normally since. If you don’t own it, and it would fit your portfolio, you can nibble here.
Village Farms International (VFF) Village Farms is a major (and profitable) grower of greenhouse tomatoes, peppers and cucumbers that is fast transitioning into the cannabis industry—both marijuana (in Canada) and hemp (in the U.S.). First-quarter results, released last week, showed revenues of $37.3 million, up 26% from the year before.
We were lucky to buy VFF near the bottom of the recent correction, so we already have a profit, and will try to average up if that profit grows.
Note: The portfolio is now up 48.2% year-to-date, while the Marijuana Index is up 32.2%.