Blast-Off for Aphria!
“Most people give up just when they’re about to achieve success. They quit on the one-yard line. They give up at the last minute of the game, one foot from a winning touchdown.” - Ross Perot
It’s been a tough few months for cannabis investors, but no downtrend lasts forever, and yesterday’s blast-off by Aphria (APHA), which sparked buying across the sector, is a sign that the worst has almost certainly passed. Now we just need to see some follow-through buying, and charts hitting higher highs and higher lows as they develop renewed uptrends.
In the meantime, watching the performance of individual stocks is critical, as their action will tell us which stocks will lead the next advance and which stocks will be left behind. In fact, I’ve already homed in on one stock that’s performed impressively over the past two months, and today that stock, Trulieve (TCNNF), will be added to 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. But identifying those leaders is not always easy, as we were reminded this week by the news that it’s been 25 years since Netscape Navigator was the dominant internet browser. Today, Netscape is toast.
Thus, while it’s certainly possible that Canopy, Aphria and Aurora will be leading the industry in Canada five years from now, while Curaleaf and Green Thumb and Cresco Labs lead the market in the U.S., it’s by no means a sure thing—which is why staying on top of newer arrivals is important, and why I continue to manage a list of 148 companies in the sector, most of which are small and riskier than the stocks in our portfolio.
What to Do Now
Coming into today, the portfolio is about one-third in cash, and we will use some of that by committing 5% of the portfolio to Trulieve (TCNNF). Details below.
Alcanna (LQSIF) Thinly traded Alcanna, which is diversifying from the slow-growth retail alcohol industry in Canada to the fast-growth cannabis industry, looks like a good value by traditional measures, and it’s here to provide diversification, but the stock remains weak, building a base at 3.3 while our position sits close to my loss limit of 30%. We sold half our position last week.
Aphria (APHA) Aphria was the portfolio’s second-largest position going into this week, and yesterday’s 25% jump on an excellent earnings report added to its weighting. Revenues for the first fiscal quarter of 2020, for the period ended August 31, were $126.1 million, down 1.9% from the immediately preceding quarter and up 849% from the prior year. And the good news is that Aphria reported its second consecutive quarter of profits; EPS was $0.07, up from $0.05 in the immediately preceding quarter—while some analysts were still expecting a small loss. To me, this shows that management, which was overhauled after the short-sellers’ attack last year, is doing a great job. Aphria is currently the leading cannabis seller in Canada and one of a handful of licensed producers that has agreements with every province in Canada. It’s made great strides lowering costs through automation. And it’s now preparing for the advent of legal vapes, edibles and beverages in Canada. If you don’t own it, you can buy some here. By my measurements, APHA is still a good value in this sector.
Aurora (ACB) Aurora is the second-largest producer in Canada but its stock remains expensive, and is still in a downtrend. The portfolio has been underweight for many months, and will continue to hold.
Canopy Growth (CGC) Canopy’s website says its vision is to be the number one cannabis company in the world. Well, it already was number one, but right now it’s third in Canada, its stock is still expensive, and it’s trending down. And when major investor Constellation Brands (STZ) announced quarterly results two weeks ago, one reason for investors’ disappointment was the drag that the CGC investment has been on the company. 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 working hard to stay that way. Last week the company announced an alliance with Nielsen to develop retail market analytics that will help the company grow its presence in the category. CWBHF is now trying to base between 13 and 14, 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 bottomed just five days ago but since then the stock has been up every day, telling us that bargain-hunters are interested. And there’s some good news today; the company was granted licenses for adult-use sales in all five of its existing Illinois dispensaries. (The legal adult-use market in Illinois begins in January 2020.) It’s a little tempting to buy more here, because I do think the valuation is not bad, but the fact is the stock is still under all its moving averages, so I will wait.
Cronos Group (CRON) Fundamentally and financially, Cronos seems to have a lot going for it. But technically, its chart looks terrible, and valuation-wise, it still looks expensive. The portfolio remains underweight.
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. Technically, the stock has been building a bottom at 6 for the past three months, but so far, there’s no sign of buying power—though two weeks ago the stock surged on the news that the company’s executive chairman. Boris Jordan, had bought 100,000 shares on the open market. That’s not the kind of news you hear very often in this sector, but I think it was great timing on Jordan’s part. If you don’t own any, you could follow Jordan’s lead.
Green Thumb Industries (GTBIF) This Chicago-based MSO came in right behind Curaleaf in revenues in the second quarter, and its stock is cheaper—which is one reason it was our most recent buy. But a bigger reason is the chart, which looks healthy, still trading above its August and September lows and waiting for buyers to take charge. If 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 has been correcting since. We’ve taken profits four times this year, and the stock is now a minimal part of the portfolio, which is good, because its stock is looking worse and worse. Still, the long-term is bright. This week the company announced the acquisition of a 156,000 sq. ft. property in Warren, Michigan for $19 million that will be leased by LivWell Michigan, a licensee of LivWell Holdings, a private company that currently operates marijuana stores in Colorado and Oregon.
Organigram (OGI) Located in New Brunswick, OrganiGram is a second-tier Canadian producer that we’ve done well with, buying low and selling high—though our latest sell, just last week, was obviously ill-timed, given the big buying volume over the past three days. Valuation seems reasonable, and if we can see this buying translate into a renewed uptrend, we could buy again.
Trulieve (TCNNF) Trulieve is the leading medical marijuana company in Florida, the third-most populous state in the U.S. The company has 29 stores today but is aiming for 44 by year end—and has already bought licenses in California and Massachusetts and a dispensary in Connecticut. Second-quarter revenues were $57.9 million, up 149% from the previous year, while adjusted EBITDA was $31.6 million. But what I like best about TCNNF is the chart, which has a clear pattern of higher lows and higher highs since its August bottom. The portfolio will buy a 5% position now, because I like to keep things simple, but you may be able to get a better price on a pullback.
Turning Point Brands (TPB) With a dividend of 0.8% and a P/E of 14 and a P/S of 1.2, TPB is actually a good value by traditional measures—and it’s well managed, too! Unfortunately, the company’s growing vaping business has been viewed as a liability by investors recently. Somewhere, this downtrend will end, and my plan is to still own some of the stock when it does. In the meantime, there are better opportunities for new buying.