The good news is that many cannabis companies have been releasing their second quarter reports and the results have been excellent. In the companies in our portfolio alone, the average growth rate of revenues from the year before has been 326%! Of course that rate will slow, but I expect it to remain at triple-digit levels for at least the next year.
The bad news is that stocks in the cannabis sector, which has been in a correction since April, have been joined by the broad market, which fell out of bed last week as China relations soured.
Thus, short-term, it’s still time for caution, which means keeping new commitments small, selling (at least partially) stocks that are going the wrong way, and holding some cash, so you’ll have buying power when the trend turns up again.
Following last week’s partial profit-taking in Charlotte’s Web, the portfolio is 35% in cash, and now I will sell half our position in CRON, taking a profit, to take the cash level to 37%.
Also, note that this week is our Cabot Investing Summit here in Salem (where all the analysts congregate), and next week I will be on vacation in a part of Maine where cell service is poor to non-existent, so there may be no more updates until the last week of the month.
Of course, the end of August is the normal “quiet season” on Wall Street anyway. And when it’s over, maybe we’ll have a fresh uptrend!
Alcanna (LQSIF) The portfolio’s most recent addition, a cannabis stock still unknown to most cannabis investors, Alcanna looks good, trending higher with moderate pullbacks. If you haven’t bought yet, you could buy between here and the stock’s 50-day moving average at 4.55. But beware the low liquidity. Know what price you’re paying. Buy.
Aphria (APHA) In last Monday’s update I reviewed Aphria’s excellent second quarter earnings report from August 9, which included a surprise profit that sent the stock gapping up on high volume for a gain of 41%. The stock has drifted a bit lower since then, but the odds are very good that its low has passed. Hold.
Aurora (ACB) Aurora provided a preliminary report on its fiscal fourth quarter ended June 30, and like Aphria, also gapped up in response, though not as impressively. The company anticipates net revenues for the quarter of between $100 million and $107 million compared to $19.1 million the year before, which would be a gain of between 423% and 460%. Aurora now boasts funded capacity in excess of 625,000 kilograms per years and sales and operations in 25 countries across five continents, in part because it has acquired 17 companies: MedReleaf, CanvasRX, Peloton Pharmaceutical, Aurora Deutschland, H2 Biopharma, BC Northern Lights, Larssen Greenhouses, CanniMed Therapeutics, Anandia, HotHouse Consulting, MED Colombia, Agropro, Borela, ICC Labs, Whistler, and Chemi Pharmaceutical. Despite the stock’s pop higher last week, ACB remains below all its moving averages. Hold.
Canopy Growth (CGC) Canopy, the biggest of all the Canadians by both revenues and market capitalization, looks worse, but that may change when the company reports on its fiscal first quarter ended June 30 on August 14 after the market close. In the meantime, today the company announced that it would acquire the global cannabinoid-based medical researcher Beckley Canopy Therapeutics (which it helped create) and merge it with Canopy’s own research program in Europe. Beckley Canopy has made significant progress in three initial areas of research, namely cancer pain, opioid sparing and smoking cessation, and the combined teams will continue that and other health-oriented research. Hold.
Charlotte’s Web (CWBHF) The biggest seller of CBD in the U.S., and destined to sell more once its wares are on the shelves in 1,350 Kroger stores in 22 states, this stock looks pretty good. It blasted off its bottom at 11 in mid-June, pulled back to support in mid-July and then rocketed ahead on increasing volume to peak at 24, one point short of its April high. I recommended selling half that very day for a quick profit of 46%, and will hold the rest. Second quarter results will be released on August 14 before the market open. If you don’t own it, wait for the earnings report, and then, if the stock behaves well (I want to see it hold up above 16), try to buy on a normal correction. Hold.
Cresco Labs (CRLBF) The stock of U.S. multi-state operator (MSO) Cresco built a nice little base last week and then on Thursday it surged higher on the news that the company received regulatory approval to acquire Gloucester Street Capital, the parent entity of Valley Agriceuticals. Valley Agriceuticals holds one of the 10 vertically integrated cannabis business licenses granted in the State of New York, each of which gives the operator the right to operate one cultivation facility and four dispensaries in the state. Valley Ag already has two dispensaries operating in Bardonia and New Hartford and two more scheduled to open in Williamsburg, Brooklyn and Huntington, Long Island within the next two weeks. New York is still a medical-use market, but adult-use will surely come, making it one of the most important markets in the world. Cresco’s second quarter results will be released on August 21 after the market close. Hold.
Cronos Group (CRON) Canadian Cronos, which is 45% owned by Altria, has climbed back to the bottom of its previous base between 14 and 15, but remains under pressure, as investors have digested last Thursday’s report on the second quarter and found no reason to push the stock higher. And the reasons to me are clear; revenues were just $10.2 million, up 202% from the year before (that’s both small potatoes and a slow growth rate compared to its peers) and the stock is still expensive even for this sector, now selling at 118 time revenues. That’s mainly a premium for Altria’s expertise, but so far, there’s no evidence that Altria has helped. Interestingly, the company did report a surprise profit ($0.22 per share), while analysts had on average expected a loss of $0.03. But the stock remains heavy, so I’m going to take more profits off the table here, selling half our position. Sell half.
Curaleaf Holdings (CURLF) CURLF is another MSO, with the inside track to be the biggest in the U.S. once its acquisition of Grassroots is complete. But the stock has been slowly giving up the gains that came on the announcement of that acquisition. Hold.
Innovative Industrial Properties (IIPR) The one and only REIT focused on the cannabis industry, IIPR has been a big winner for us, but now it’s in correction mode, partly due to a secondary offering in July that brought in $188.4 million.
The firm’s second quarter report, released on Wednesday after the market close, revealed rental revenues of approximately $8.3 million in the quarter, representing a 155% increase from the prior year’s second quarter. Net income available to stockholders was $0.30 per diluted share, and IIP paid a quarterly dividend of $0.60 per share on July 15, representing an approximately 33% increase from the first quarter 2019 dividend and a 140% increase over the second quarter 2018 dividend.
And then just today, the company announced the acquisition of a 23,000-square-foot industrial facility and an approximately 31,000-square-foot greenhouse facility in Scott Township, Pennsylvania that would be leased to a division of PharmaCann. This marks IIP’s fourth transaction with PharmaCann and brings IIP’s portfolio to 27 properties located in Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, Ohio and Pennsylvania, totaling approximately 2.1 million rentable square feet which were 100% leased with a weighted-average remaining lease term of approximately 15.5 years. IIP’s average current yield on invested capital is approximately 14.5% for these 27 properties.
As to the stock, it may be building a base at 100, but I believe the fate of the REIT sector in general may be as much a factor in the stock’s movement as the fortunes of the company. Hold.
KushCo Holdings (KSHB) KSHB remains stuck in a 19-month trading range bounded by 4 and 7. But the stock is cheap, the company is growing fast and the non-plant-touching business—focused on packaging and industrial gases used by the cannabis industry—provides great diversification to the portfolio. If you like the story, you could buy some here, though officially, I’ll stay on Hold.
MedMen (MMNFF) MedMen is one of the major MSOs, with 37 retail locations and operations in 12 states, including big cities Los Angeles, Las Vegas and New York. Growth is good; revenues grew 873% in the second quarter, to $29.9 million. And the valuation appears quite reasonable compared to its peers, at just 2.5 times revenues. But the stock continues to sink; last Friday it fell through support at 2. And our loss is growing uncomfortably large. Still, I’m going to hold a little bit longer to see if buyers can take charge. Hold.
Organigram (OGI) OrganiGram is a second-tier Canadian producer in my book, but it has supply deals with every Canadian province, it’s one of the lowest-cost producers thanks to its three-tiered growing technology, and it’s growing fast, with revenues up 784% in the second quarter to $30.4 million. Also by my measurements, the stock is “reasonably” valued. As to the stock’s action, it had a big run earlier this year and is still giving up some of those gains, though possibly bottoming here. Hold.
Turning Point Brands (TPB) Turning Point Brands is the old smokeless tobacco company that’s transitioning successfully into the cannabis business. Second quarter results, released two weeks ago, sparked a good surge in the stock off a possible bottom at 36, but now the stock is drifting lower again as we wait for buyers to return to the sector. In this portfolio, TPD is a lower-risk diversification play, and we are currently overweighted in it, but once the sector resumes its uptrend, I expect to reduce our position in favor of the stronger stocks of faster growers. Hold.
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. And investors are quickly discovering the stock, as it’s surged 50% since its July bottom! Second quarter results are expected after the market close today. If you don’t own it, wait for the report, and then try to buy on a normal pullback. Buy.