The broad market is in fine shape, with most major indexes at or near their highs and all Cabot’s market-timing indicators bullish.
Marijuana stocks, meanwhile, remain in the toilet, after nearly four months of downward action.
Last week I discussed the possibility that the sector might be bottoming, after a downturn that has erased nearly all the index’s gains of 2019, and today my position hasn’t changed; some stocks have rallied successfully and are weeks beyond their bottoms, while others are still trending down.
The index looks like this.
Generally, though there are exceptions, it’s the previously hottest marijuana stocks (as opposed to supporting players and more diversified companies) that are the weakest today.
The main reason for this weakness is simply the eternal market fact that whatever is hottest eventually becomes coldest. Those folks who bought at the top have to finish selling before the stocks can go back up.
Another reason (and possibly a case of bad news appearing at the bottom) is the firing two weeks ago of the CEO of Canopy Growth, arguably the most visible executive in the entire industry.
Our portfolio has survived this downturn pretty well by being underweight those old leaders, by diversifying into peripheral companies that are less marijuana-centric and by holding cash, and today we’re going to lean a little further that way, by adding two new stocks to the portfolio—Alcanna (LQSIF) and Charlotte’s Web (CWBHF).
Additionally, we will take a loss on Green Thumb Industries (GTBIF). Fundamentally, prospects at the company look good, but the market is the final arbiter here, and the downtrending stock and our 30% loss say it’s time to sell. If you have any stocks with similar losses, you should consider selling them, too.
Cutting losses short is a key strategy of successful growth investors. If you don’t do it, you’ll end up with a portfolio of losers—and no one wants that.
What to Do Now
Buy Alcanna (LQSIF) and Charlotte’s Web (CWBHF).
Sell Green Thumb Industries (GTBIF). Sell.
Updates
Alcanna (LQSIF)
Previously known as Liquor Stores N.A. Ltd. (thus the symbol), Alcanna is expanding from the retail alcohol business into the retail cannabis business, and transitioning from a sleepy cash cow that paid a 6% dividend (eliminated late last year) to a true growth-oriented business. As of March 14, 2019, the company operated 236 stores in Alberta, British Columbia, and Alaska; and 5 cannabis retail stores under the Nova Cannabis brand in Alberta. Revenues in the latest quarter were $150 million, up 16% from the year before. The stock’s trading volume is light, so volatility is to expected, but since the stock plummeted last December (due to both the broad market and the change in corporate strategy) the stock has been trending up. The portfolio will buy a 5% position. Buy.
Aphria (APHA)
Aphria had the second-largest revenues of the Canadian producers in the latest quarter, and the stock looks cheap (relative to its peers). But it’s not going up yet; it’s still building a bottom. The portfolio remains underweight.
Aurora (ACB)
Aurora is working hard to be a major producer of mass-market cannabis for Canada (and the world), and just this week was selected as the only winner of the Italian government’s public tender to supply medical cannabis in Italy. Interestingly, all submissions from the four competing cannabis companies were disqualified because they were unable to meet the stringent requirements of the tender.
As for the stock, Aurora too has been trying to build a bottom, but it fell through its recent floor last week, so technically the trend is still down. My best explanation for that is valuation; ACB is roughly 5 times as expensive as APHA. The portfolio remains underweight.
Canopy Growth (CGC)
It’s been two weeks since CEO Bruce Linton was fired and only three days since the stock bottomed, having given back all its gains since the first week of January. Long-term, Canopy is still the best bet to be the leading marijuana producer/seller in Canada. Plus, its agreement to acquire Acreage Holdings of the U.S.—when it’s legally possible—means it will have a substantial presence in the world’s largest cannabis market. However, the stock remains expensive, and the stock is definitely not in an uptrend. The portfolio remains underweight.
Charlotte’s Web (CWBHF)
The most famous CBD company in the U.S. is Colorado-based Charlotte’s Web, which had $21.7 million in revenues in the latest quarter, up 66% from the year before. The stock saw a real improvement in its chart in recent weeks, zooming from 10 to 18 on high volume and now pulling back normally on falling volume.
Last week I wrote that if I saw a tempting entry point and/or the sector as a whole got stronger, I might add some to the portfolio, and this pullback, combined with the improvement in CBD competitor ELLXF’s chart, tells me now is the time. The portfolio will buy a 5% position. Buy.
Cresco Labs (CRLBF)
This Chicago-based U.S. multi-state operator (MSO) saw its stock surge a month ago when the path to the acquisition of Origin House got smoother, but the stock has now given up all that gain—and if it doesn’t bottom here at 9, it might fall as low as 8. The portfolio remains underweight.
Cronos Group (CRON)
Canadian Cronos, which is 45% owned by Altria, is without a doubt the most expensive of the portfolio’s stocks. But it also has one of the longest bases, telling us that institutions are supporting the stock at this level. If you’re a new reader, or light in the sector for some other reason, you could buy here. The portfolio remains underweight.
Curaleaf Holdings (CURLF)
Massachusetts-based Curaleaf made waves yesterday when the company announced an agreement to acquire Grassroots, the largest private vertically-integrated multi-state operator, in a cash and stock deal valued at approximately $875 million. Chicago-based Grassroots has a portfolio of 61 dispensary licenses, with 20 operating today, and 17 cultivation and processing licenses; it has particular strength in large markets in which Curaleaf currently does not operate, including Illinois and Pennsylvania. The proposed transaction will expand Curaleaf’s presence from 12 to 19 states, and the combined company will have 131 dispensary licenses, 68 operational locations, 20 cultivation sites and 26 processing facilities. With the acquisition, Curaleaf will also add new markets in Arkansas, Michigan, North Dakota, Oklahoma, and Vermont, and build on its existing businesses in Connecticut, Maryland, Nevada and Ohio. Upon completion of the proposed transaction, Curaleaf claims it will be the largest medical and adult-use cannabis company as measured by both revenue and operating presence (however they define that).
The market loved the news, shooting the stock up 21% for the day on big volume, and today the trend continued, with volume easing off. Without the support of the whole sector, it’s unlikely this trend will continue in the short-term, so I don’t recommend chasing the stock. Long-term, however, this news increases the chances that the company will be one of the leaders in the U.S. market. The portfolio has been underweight the stock, but will look to increase its position when we see a decent entry point.
Elixinol (ELLXF)
Colorado-based Elixinol was not only the portfolio’s only pure CBD stock until today’s addition of CWBHF, it’s also been lowest-priced stock in the portfolio, with the lowest market capitalization, so lacking the institutional support that holds up some of the bigger stocks.
Still, it’s been looking better than many of the marijuana stocks, building a bottom in June, surging higher in July, and then pulling partially back over the past week. If you’d like, you could buy now (or CWBHF).
Green Thumb Industries (GTBIF)
Last week I wrote, “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.” Well, it has fallen below the level and shows no signs of bottoming, so it’s time to exit here. There’s no reason to hold a loss greater than 30%—and you might even have less tolerance for loss. Sell.
HEXO Corp. (HEXO)
HEXO is a smaller Canadian marijuana producer, with a deal with MolsonCoors and a moderate valuation—but low institutional support, despite the fact that a brokerage report I recently read identified the stock as the best investment prospect, based on a combination of growth and value. The stock has pulled back with the sector since April and is trying to build a bottom.
Innovative Industrial Properties (IIPR)
As the only cannabis REIT in the world, and a well-managed one at that, IIPR has been a fabulous investment in the 20 months we’ve owned it. But last week I wrote, “I can’t recommend it as a buy up here, as it’s out of trend and very expensive,” and three days later the company announced that it had sold 1,300,000 shares of stock at $126 for gross proceeds of $163.8 million, raising cash which will be used to fund growth, and in the process diluting the value of our current shares. In response, the stock, naturally, came right down to 126, and now it’s building a base in this area.
Note: One reason for the stock’s strength this year has been the REIT sector as a whole, which has attracted a lot of buying and that won’t last forever—but we’ll ride it as long as it lasts. Hold.
KushCo Holdings (KSHB)
KSHB remains stuck in an 18-month trading range bounded by 4 and 7. But the stock is cheap, and like Innovative Industrial Properties, the non-plant-touching business provides great diversification to the portfolio. If you like the story, you could buy some on the current pullback.
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. Valuation appears quite reasonable. We added this to the portfolio last week, thinking the stock would find support at its 25- and 50-day moving averages, but it didn’t, and we are now underwater, with a modest loss. Hold.
Organigram (OGI)
OrganiGram is one of the four public Canadian producers that have supply deals with every Canadian province. It’s one of the lowest-cost producers, thanks to its three-tiered growing technology. And by my measurements, the stock is cheap.
However, in its third fiscal quarter report, released Monday, the company admitted a mistake. It tried a new growing protocol—related to planting—which didn’t work. Yields were lower and costs per gram were higher. So, the company has reverted to proven growing methods and yield has returned to previous levels.
More importantly, revenues were $30.4 million, up 784% from the year before (very good), and the loss per share was $0.07 (a temporary increase tied to the unsuccessful new protocol and investments in production). The Phase 4 expansion remains on schedule, with completion by the end of calendar 2019 expected to increase production capacity to 113,000 kilograms per year. And as reported last week, the company has major initiatives in place to develop cannabis beverages and chocolates.
The stock had sold off prior to the report, and in response to the mostly good news, it blasted higher this week on good volume and remains in a long-term uptrend. If you don’t own it, you could buy some here.
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.
It doesn’t have the pure growth power of the high-profile marijuana stocks, but it’s been a great performer this year, joining in the early-year advance and then standing like a rock as the marijuana stocks corrected. Today, it’s near a record high.
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 fell out of its base at 11 last week, and 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. The stock came to the NASDAQ in June, zoomed from 10 to 72 in four days and is still coming back to earth, possibly bottoming here in the 13 region. Wait.
Supreme Cannabis (SPRWF)
A smaller Canadian producer, with $10 million in revenue in the latest quarter (up 382% from the year before), Supreme looks to be a good value but the stock is still in a downtrend. Wait.