The Worst Day for Cannabis Stocks
Yesterday was the worst day of the year for cannabis stocks, with HEXO (no longer in our portfolio) leading the way down with a plunge of 22.5% after the company announced that revenue for the fiscal fourth quarter, ended July, would be $14.5 to $16.5 million, well short of analysts’ expectations of $24.8 million.
Every stock in our portfolio fell as well, to varying degrees, lending unanimity to the move that may actually be good, in that massive participation in a selloff can often mark the end of a move. Remember, the cannabis sector has been trending down for months.
But until we see a real uptrend develop, with real volume behind it, we can’t be sure the downtrend is over—though certainly, there could be a bounce. Still, the long-term prospects remain very bright for this, the fastest-growing industry in America, so today I’m going to review our strategy, and then give brief updates on the stocks in the portfolio.
Strategy
My goal, as ever, is to get you invested in the stocks of the companies that will be the leaders of this industry five and 10 years from now, as it grows into a $50 billion industry in the U.S. and Canada. At the same time, given that the dangers of buying and holding are very clear, I want you to be more heavily invested in stocks when they are trending up, and less heavily invested when they are trending down.
Sadly, we have not been as defensive as I would have liked in recent months. After lightening up at and after the top, we bought back in too early (in retrospect), and thus are now under water for the year.
But the market moves in waves, and at the exact moment the greatest number of investors throw in the towel on cannabis stocks, the sector will begin a new uptrend. So, short-term, the strategy is to minimize losses, so that you have capital to commit when the trend turns up again.
What to Do Now
Taking things on a stock-by-stock basis, the portfolio will now sell half of its positions in three stocks—Alcanna (LQSIF), Innovative Industrial Properties (IIPR) and OrganiGram (OGI)—and all of its position in Village Farms (VFF).
Alcanna (LQSIF) Thinly traded Alcanna, which is diversifying from the slow-growth retail alcohol industry in Canada to the fast-growth cannabis industry, is a good value, even by traditional measures, but the stock plunged 7% yesterday and is now nearing my loss limit of 30%. We’ve been overweight in the portfolio and will now reduce the position by half. Sell half.
Aphria (APHA) We’ve also been overweighted in APHA, which fell 14% yesterday and is now back where it bottomed in December. But I’m not going to sell any here (we’ve taken profits before) because Aphria is not only the largest marijuana producer in Canada by revenues, it’s also the most attractive valuation-wise, by my measurements. The company will release results for the three months ended August 31 on October 15 before the market open, and that could bring buyers back to the sector.
Aurora (ACB) Aurora, contrarily, remains expensive—even as it hits lows not seen since November 2017. The portfolio has been underweight for many months, and will continue to hold.
Canopy Growth (CGC) CGC also looks terrible, as investors sell out of what used to be the Canadian market leader. But there is one piece of good news. Canopy has named a new CEO, and it’s the CFO of major shareholder Constellation Brands, David Klein. The portfolio continues to hold a minimal 1% position, patiently awaiting the end of the bottoming process.
Charlotte’s Web (CWBHF) Colorado-based Charlotte’s Web is America’s biggest seller of CBD, and its stock is one of the best-looking in the portfolio, down just 3% yesterday and still well above its June and early October low. If you’re underinvested in the sector and looking to buy low, you could nibble on CWBHF here.
Cresco Labs (CRLBF) The third-largest multi-state operator (MSO) in the U.S., CRLBF lost 6% yesterday, falling to its lows of December. Valuations are not bad, and fundamentally, the company has great promise, but until the trend turns up, waiting is the best policy.
Cronos Group (CRON) Fundamentally and financially, Cronos seems to have a lot going for it. But technically, its chart looks terrible, now tagging its lows from last November. And valuation-wise, it still looks expensive. The portfolio has taken profits and is underweight, so will hold, but if you don’t own it, look elsewhere.
Curaleaf Holdings (CURLF) Curaleaf is the largest position in our portfolio, as well as the leading MSO in the U.S., and valuation-wise, the stock looks almost reasonable. Shares did plunge 8% yesterday, but it’s still well off its early October bottom, so there is growing sponsorship down here. This should be high on your watch list.
Green Thumb Industries (GTBIF) This Chicago-based MSO is our most recent addition, and its chart looks fairly awesome for this sector, still above its August and September lows. Plus, it only fell 2.5% yesterday. If you haven’t bought yet, and you’re underinvested in the sector, you could buy a little here.
Innovative Industrial Properties (IIPR) IIPR is the REIT whose stock peaked in July, way after the rest of the cannabis sector; we took out a profit of 608% in June—and it’s been correcting since. But this week it fell through its 200-day moving average, losing 10.6% yesterday, and to me that’s sign to lighten up further. This stock was a great anomaly on the upside, and it’s possible that it will take a long time to cool off. We’ll sell half. Sell half.
Organigram (OGI) OrganiGram has been the portfolio’s biggest Canadian position, partly because we’ve done well buying low and selling high and partly because the financial prospects for the company are good. But the stock fell 14% yesterday, most likely because analysts see in the company many similarities to HEXO. The portfolio will now sell half. Sell half.
Turning Point Brands (TPB)With a dividend of 0.8% and a PE of 14 and a PS of 1.2, TPB is actually a good value by traditional measures. Unfortunately, the stock has been savaged in recent months as fears of vaping spread; as of early last week, it was 61% off its July high! But buyers have been stepping in since then, and if we can see this trend mature a bit—and the sector bottom—we could average back in soon.
Village Farms International (VFF) Village Farms International is the Canadian greenhouse grower of tomatoes, cucumbers and peppers that’s diversifying into marijuana (in Canada) and hemp (in the U.S.), and it looks good by traditional valuation measures. But yesterday’s 9% drop means our loss is now beyond our 30% limit and thus the stock must be sold. Sell all.