Bad New Creates Bottoms
A few weeks ago, on a webinar I did on marijuana investing, I mentioned that the next great buying opportunity for the sector might come after some bad news about marijuana got national attention. A bad batch of pot brownies might do it, I suggested, or a mass murderer under the influence of marijuana.
Well, neither of those has come to pass, but we do have two substantial pieces of bad news that might qualify.
First, the CEO of Canopy Growth, arguably the most visible executive in the entire industry, was fired last week by his company’s board, presumably because the board didn’t like the company’s continued losses. Remember, Canopy is 38% owned by Constellation Brands, and those guys are used to making money.
Second, CannTrust, one of the second-tier Canadian producers, had some marijuana seized by regulators from Health Canada after it was found that the company had grown product in unlicensed grow rooms for six months between October 2018 and March 2019. Additionally, it’s been found that some of that product was sold to a Danish company, which in turn sold it to patients, and thus, technically, this appears to be an indictable crime that is potentially punishable by a jail sentence—even though it’s hard to identify a real victim.
Is this enough bad news to create a bottom? Maybe. We just need to see the charts to confirm it.
The marijuana sector’s charts have been weak overall since the sector’s March top. And even though the broad market has recovered in recent weeks—many indexes are hitting new highs—the marijuana sector has still been soft, as the chart below shows.
But it may be building a bottom, and thus, emboldened by the “bad news” above, I think it’s time to do some buying.
Remember, the portfolio is now 33% cash.
We’ve suffered less in the downturn of recent months. We’ve kept core positions of stocks that have the potential to lead this industry in the years ahead, while holding positions in lower-risk industry players for diversification. And now that we see the potential for a new uptrend to begin, it’s time to put some money back to work.
What to Do Now
If you’re a new reader or truly underinvested in the sector, you can begin easing in now (don’t hurry) in some of the stocks I mention. For the portfolio, I’m going to buy back into a stock we sold back in March, MedMen (MMNFF). Details below.
Updates
Aphria (APHA) Aphria is building a bottom. Plus the stock is cheap. But it’s not going up yet.
Aurora (ACB) Aurora too is building a bottom, though it’s not as long as Aphria’s. ACB is notably pricier than APHA, but that may be justified by the fact that ACB is ramping up volumes rapidly, that it can sell in 24 countries, and that its costs are under control, with positive EBITDA reportedly right around the corner.
Canopy Growth (CGC) The reigning heavyweight of the industry, currently looking for a new CEO, its stock is weak, under all its moving averages, and it’s expensive.
Cresco Labs (CRLBF) This Chicago-based U.S. multi-state operator (MSO) saw its stock surge three weeks ago when the path to the acquisition of Origin House got smoother, but the stock has been drifting lower since. One rule of thumb says the retracement after a stock’s surge should be no more than 50% of the surge (which was 8.5 to 11.5), so halfway back is 10, which the stock is below now. Not good.
Cronos Group (CRON) Canadian Cronos, which is 45% owned by Altria, is without a doubt the most expensive of the portfolio’s stocks. But you might just conclude, with an optimistic eye, that this chart has bottomed and is advancing. If you’re a new reader, or light in the sector for some other reason, you could buy here.
Curaleaf Holdings (CURLF) Massachusetts-based Curaleaf is still falling, and all smart growth stock investors know that you should never try to catch a falling knife, though the chart says a bottom in the 6s is likely.
Elixinol (ELLXF) Colorado-based Elixinol is the portfolio’s only pure CBD stock. But it’s also the lowest-priced stock in the portfolio and it has the lowest market capitalization, so the institutional support that holds up some of the bigger stocks has been lacking here.
Still, it’s rallied nicely in recent weeks and today it surged higher on no news (and regular volume), possibly because of investors looking to duplicate the gains of investors in fellow CBD-maker CWBHF. If you don’t own it, let it calm down a little before you consider buying.
Green Thumb Industries (GTBIF) Chicago-based Green Thumb surged nicely in the second half of June, but has given most of it back, so likely needs more time to bottom, ideally above 9.5. If it falls below that level, our loss will exceed 30% and that’s a sell signal.
HEXO Corp. (HEXO) Still going down.
Innovative Industrial Properties (IIPR) Yahoo! As the only cannabis REIT in the world, and a well-managed one at that, IIPR attracts investors (including institutions) who want to invest in a facet of the industry that’s totally legal across the U.S. I can’t recommend it as a buy up here, as it’s out of trend and very expensive, but I will say the strength of this chart has been impressive.
KushCo Holdings (KSHB) KSHB remains stuck in an 18-month trading range bounded by 4 and 7, and is currently heading back toward the upper limit of that range. Like Innovative Industrial Properties, this packaging and industrial gasses business is totally legal nationwide—and one big reason I continue to hold it, despite the chart, is that the stock is way cheaper than IIPR.
Yesterday the company reported financial results for its third fiscal quarter ended May 31. Net revenue increased 221% year-over-year to $41.5 million, while the loss per share improved from negative $0.14 last year to negative $0.12. The stock’s reaction was negative but minor.
MedMen (MMNFF) MedMen is one of the larger U.S. multistate operators, with 37 retail locations and operations in 12 states, including Los Angeles, Las Vegas and New York. We previously sold the stock in March at 3.0, watched it bottom in early June at 1.9, and then saw it climb through the rest of June right up through both its 25- and 50-day moving averages. Since then the stock has pulled back normally on low volume and I will now commit 5% of the portfolio to the stock. Valuation appears quite reasonable. BUY.
Organigram (OGI) OrganiGram is one of the four public Canadian producers that have supply deals with every Canadian province, plus it’s one of the lowest-cost producers, thanks to its three-tiered growing technology. In my last update I noted that I was worried the company wasn’t working enough on upstream activities like branding and other intellectual properties, but this week the company allayed those fears to some extent by announcing its plans for the launch of cannabis beverage products in Canada in early 2020.
Typically, the active ingredients in cannabis are lipophilic, and don’t naturally dissolve in water, so the process by which the body processes these ingredients can take a long time and onset and duration are variable. Consumers, of course, value repeatable onset and duration, as with alcohol.
So OrganiGram has developed a nano-emulsification process that converts the fatty substances into very small water-soluble droplets and enables them to be dispersed uniformly in water. The company says, “This process effectively bypasses a large part of the metabolic process, accelerating absorption of active forms of the cannabinoids into the bloodstream.”
Additionally, the company has developed a way to transform this emulsification system into a solid form, turning it into a dissolvable powder, which consumers can add to their beverage of their choice and “expect a reliably rapid onset and offset of effects.” Finally, the company is seeking a strategic partner with proven experience in beverage product development. (HEXO already has Molson Coors, while CGC has Constellation).
Personally, I don’t see people carrying around powder to dump in their drinks, but having the manufacturer do it—ideally with a liquid—is a no-brainer, and investors loved the announcement, sending the stock up 8% on Monday, though it has since given up more than half the gain.
Organigram will report its quarterly results on Monday, July 15, before the market open. The stock’s pattern is roughly neutral now, though I do think it is cheap.
Turning Point Brands (TPB) TPB is the old-school smokeless tobacco company diversifying quite capably into the faster-growing cannabis industry—though not plant-touching. It owns Zig-Zag rolling papers; it runs the distribution and sales platforms for Vapor Beast and Direct Vapor; and it recently launched Nu-X Ventures to capitalize on emerging alternatives like CBD.
Today the stock received a buy rating from an analyst at Anonymous Analytics who wrote, “As its CBD story gains awareness, we expect substantial market interest. Investors are thirsty for an established, profitable and non-speculative company in the cannabis space. TPB is it.”
If you don’t own it, and you want a lower-risk entry into the cannabis industry, you can consider buying on the next pullback.
Village Farms International (VFF) VFF is the big successful grower of greenhouse tomatoes/peppers/cucumbers that’s diversifying into the high-growth cannabis industry—marijuana in Canada and hemp in the U.S. Fundamentally, prospects are great, but the stock has been building a bottom at 11 since mid-April so it shouldn’t be bought until trends turn up.
WATCH LIST
Akerna (KERN) Akerna, which I wrote about previously, sells MJ Freeway, the industry’s original seed-to-sale tracking software, which allows regulators and government agencies to track cannabis products from their cultivation to their final sale, and the company hopes to become the technology backbone of the entire cannabis industry. Everyone can see how big that could be. But the stock is young; it zoomed from 10 to 72 in four days and is now coming back to earth, possibly bottoming here in the 14-15 region. WAIT.
Charlotte’s Web (CWBHF) The most famous CBD company, Colorado-based Charlotte’s Web has seen a real improvement in its chart in recent weeks, with high-volume buying taking the stock from 10 to 18, and aiming for its April high of 25. Given that there’s been no news, my best guess is that this is institutional buying. I’ll be watching closely, and if I see a tempting entry point and/or the sector as a whole gets stronger, I could add some to the portfolio.
Tilray (TLRY) Canadian-American producer/operator TLRY traded as high as 300 in September, bottomed at 35 in June, rallied above both its 25- and 50-day moving averages, and is now trying to build a base at 45. This is encouraging, but the stock is still highly valued, at 64 times revenues, so as with CWBHF, I’ll watch and wait.
