Every year, Cabot’s top technical analyst, Mike Cintolo, puts out a report in mid-December spotlighting 10 low-priced stocks that are ripe to bounce into the New Year—and this year I expect at least one cannabis stock to be on the list, particularly because the rest of the market has been so strong. I’ll let you know when the report comes out.
In the meantime, what are we to make of the continuing weakness in cannabis stocks? First, it’s a reminder that trends can and do go to extremes. Cannabis stocks were red-hot early in the year, leading the parade, and now they’re stone-cold. Lepers.
But that will change, by year-end at the very latest, as tax-loss selling forces fade and investors come sniffing for bargains to put in their Christmas stockings. In fact, growing numbers of our stocks have already built bottoms—and after bottoms come uptrends, particularly when the fundamentals are so good. After all, this is still the fastest-growing industry in America.
One of the problems, however, is that the growth in Canada hasn’t been quite as good as expected. The slow increase in the number of stores has meant that there aren’t enough outlets for the legal crop, so prices have fallen, causing revenues to fall below expectations.
The other risk that remains—in some cases—is earnings reports. One big one is due tonight, with a few others after that, and traditionally, we don’t like the risk of buying a stock just before its earnings report, particularly when the sector is still weak. So if you don’t own those yet, just wait.
Changes
I’m making four changes to the portfolio today. Charlotte’s Web (CWBHF) will be sold, while Aphria (APHA), Cresco Labs (CRLBF) and Organigram (OGI) will all be downgraded to Hold.
Aphria (APHA) Aphria leads the industry by revenues, it has growing earnings, and measured by price/sales ratio (PSR), its stock is the best value of the Canadian licensed producers in this sector—all of which are factors that contribute it being the largest position in the portfolio. Also, the stock has come down to the level where it found support at the market bottom last December. However, we now have a small loss on our remaining position (we sold half in April at 8.15), and I don’t want to see it get larger, so I will be watching carefully to see if the stock can hold up at this level. HOLD.
Aurora (ACB) Aurora is the second largest producer in Canada, so it’s a stock I want to own going forward. But unlike Aphria, the company doesn’t have earnings, and its stock still looks expensive, which is why we’ve taken profits in ACB three times since April and now hold a minor position. On the bright side, the stock has been basing between 3.5 and 3.8 for more than a month, and that’s encouraging. Quarterly results will be released after the market close today. HOLD.
Canopy Growth (CGC) Canopy used to be the biggest producer in Canada, but the bigger they are, the harder they fall, and 2019 has been tough for the company, from the firing of its CEO in July to this morning’s fiscal Q2 report, in which the company took a restructuring charge of $32.7 million and recorded an inventory charge of $15.9 million. As a result, net revenue was $76.6 million, down 15% from the year before. On the bright side, the company has $2.7 billion in cash—which is one reason its stock is still valued higher than any other. The other reason is that Constellation Brands (STZ) is a major investor, and thus is expected to be a big asset in the cannabis beverages market, which starts next month. The stock gapped down after the report, and the portfolio will continue to hold a minimal position, trusting that the bottom is near. HOLD.
Charlotte’s Web (CWBHF) Colorado-based Charlotte’s Web is America’s biggest seller of CBD, with its products found in more than 9,000 retail outlets, including Kroger and Vitamin Shoppe. But competition is growing, with even Chinese hemp farmers an increasing low-cost threat. Quarterly results, reported Wednesday morning, saw revenues of $25.1 million, up 42% from the year before, and adjusted EBITDA of $0.7 million, down from $5.3 million the year before. The difference came from investing in production, distribution, R&D and extraction capacity, which management promises will pay off in time. But investors didn’t like the results, and the stock gapped down through 10 as a result. This not only makes the chart look worse than ever, it’s also brought our loss to an intolerable level—30% is my limit for this portfolio. Thus, we will now sell. SELL.
Cresco Labs (CRLBF) Chicago-based Cresco Labs is the fourth-largest multi-state operator (MSO) in the U.S. and is destined to get even larger once its acquisition of Origin House, which is big in California, is complete. Last week the company announced the official kickoff of its community impact incubator program, part of its SEED (Social Equity and Educational Development) initiative designed to provide qualifying social equity applicants with the resources, knowledge, and guidance needed to successfully apply for dispensary licenses in Illinois. Additionally, the company debuted its largest advertising initiative yet to bolster consumer awareness in California of its namesake cannabis brand, Cresco. Called “Excellent Everyday Cannabis,” the campaign highlights the importance of quality and consistency for everyday cannabis consumption. The stock remains above its lows of early October, which is encouraging, and its valuation looks good relative to its U.S. peers, which is one reason the portfolio remains overweight the stock. But until third quarter results are released (probably next week), buying is just too risky, so I’ll downgrade the stock to hold for now. HOLD.
Cronos Group (CRON) Tobacco giant Altria owns 45% of Cronos and is expected to be increasingly useful as the consumer market for cannabis grows, first in Canada and then eventually in the U.S. And valuation-wise, the stock looks attractive today. But technically, the stock is still weak, and the third quarter earnings report, released Tuesday, didn’t help. Revenue was $12.7 million, up 238% from the year before but short of expectations of $14.1 million, while adjusted EBITDA was a loss of $23.9 million, compared to a loss of $3.2 million in the previous year. During the quarter, Cronos completed the acquisition of Redwood Holding, which gets the company into the hemp market in the U.S. under the Lord Jones brand, and just this week it launched the new PEACE+ CBD brand. Cronos intends to leverage Altria’s sales and distribution network for these products. Additionally, the IPO of Cronos Australia was completed in October, and the company’s Israel facility continues to move closer to operational readiness. The portfolio remains underweight, waiting for the stock to turn back up—which it absolutely will do in time! HOLD.
Curaleaf Holdings (CURLF) Curaleaf is the leading MSO in the U.S. with 49 dispensaries in 12 states, but technically, the stock is just two weeks off its bottom and there’s been no notable buying pressure, so it’s possible that the stock will get down to 4, where it bottomed last December. Third quarter results will be reported November 19, after the market close. HOLD.
Green Thumb Industries (GTBIF) This Chicago-based MSO has 13 manufacturing facilities, licenses for 95 retail locations and operations across 12 U.S. markets. It came in right behind Curaleaf in revenues in the second quarter, and its stock is cheaper, too. As for the chart, the three-month bottom at 8 is still intact, telling us there is some appetite for the stock at that level. Third quarter results will be reported November 20 after the market close. HOLD.
Innovative Industrial Properties (IIPR) IIPR was a big winner for us, remaining strong for months after the cannabis sector topped out in March, but it’s been in correction mode since July, and now the correction might be over! The firm reported Q3 results after the market close on November 6 and the stock is up since then. Rental revenues were $11.2 million, up 201% from the prior year, while net income available to common stockholders was $0.55 per diluted share, up 314% from the year before. Additionally, the firm paid a quarterly dividend of $0.78 per share, representing a 30% increase from its second quarter 2019 dividend and an approximately 123% increase from a year ago. Since the start of 2019, IIPR has acquired 30 properties in nine states, entering into new tenant relationships with Cresco, DYME, EGP, Grassroots, Green Leaf, LivWell, Maitri, MJardin, Trulieve, Vertical and two other licensed operators in California, while expanding its tenant relationships with AWH, GPI, Holistic, PharmaCann, The Pharm and Vireo. Notably, as cannabis companies find cash increasingly tight, IIPR offers a way for them to cash out the value of their property and simply become tenants. We’ve taken profits in IIPR four times this year, and the stock is now a minimal part of the portfolio, held mainly because this one-of-a-kind public REIT is still growing—and because long-term, there’s still great potential for this well-managed company. HOLD.
MariMed (MRMD) Recent addition MariMed is the lowest-priced stock in the portfolio and therefore, to some degree, the riskiest. And to add to the risk, there’s the matter of the explosion and fire at its GenCanna subsidiary in Kentucky last Thursday. No one was injured in the incident at the facility, which the company had envisioned making a processing hub for several Midwestern states, but one side effect is that MariMed just yesterday delayed the filing of its quarterly report until November 18, saying the fire made getting certain financial information from GenCanna difficult. However, management did provide a “snapshot” (at noon) of the quarter, and the good news is that the market shrugged it off; the stock barely moved. In short, revenues were $11.2 million, up 231% from the year before, while operating income was $1 million, compared a loss of $0.5 million the year before. Additionally, last week the company announced that operations at its New Bedford, Massachusetts production facility would commence immediately and that its Middleborough, Massachusetts dispensary would open in the next few weeks under its new retail brand Panacea Wellness. Fundamentally, MariMed, being small, has certain vulnerabilities, but management has sensible plans for growing by acquiring its consulting clients, and the stock looks like a good value relative to other MSOs. The stock bottomed at 0.66 a month ago, rallied to over a dollar, and has now pulled back in a normal correction. BUY.
MediPharm Labs (MEDIF) is the first fully licensed extraction-only cannabis company in Canada, focused on providing value in the middle of the chain while competing with neither growers nor retailers. The company has five long-term private and white label agreements (customers include Canopy, Cronos, TerrAscend, and Auscann) and it’s expanding into Australia while planning for export to Asia Pacific and Europe. So the future is bright. However, third quarter results, released Tuesday, failed to please investors. Revenues were $43.4 million, up 38% from the immediately preceding quarter (there were no revenues a year ago) and adjusted EBITDA was $10.1 million, 31% higher than the second quarter. As for the stock, it had a great October, climbing from its bottom at 2.3 to a recent high of 4.1, but after the report, selling volume was heavy and the stock is once again below all its moving averages—plus we now have a small loss. Prudence says downgrade to Hold. HOLD.
Organigram (OGI) OrganiGram is a second-tier Canadian producer that boasts three-level growing technology that makes the most efficient use of its floor space. It’s one of only three Canadian producers with distribution agreements in all 10 provinces. Plus, the company has four consecutive quarters of positive EBITDA. However, on Monday, the company issued a surprise projection, saying that that when it officially reports fiscal fourth fiscal quarter revenues (ended August 30), they will be lower than third quarter revenues—roughly $16.3 million in Q4 versus $24.8 in Q3. As a result, there will be a loss instead of a profit—though management still anticipates it will have a positive adjusted EBITDA for the entire year. The problem, particularly acute for OrganiGram because it is mainly a grower, is that the regulated market has developed slower than expected, mainly because of slower than expected store openings in Ontario. We’ve taken profits in OGI twice this year, and now our remaining position stands at a small loss. Selling is a possibility here, but with the bad news already out, I see more potential for a bounce in the weeks ahead, so I’ll simply downgrade it to Hold. HOLD.
Trulieve (TCNNF) Trulieve is the leading seller of medical marijuana company in Florida; it opened the doors of its 39th Florida location last week in Wesley Chapel, and eventually can be expected to take the lead when adult-use marijuana becomes legal in that state. Equally important, the stock has been the strongest in the sector since it bottomed in late August, as institutional investors impressed by real earnings and good management voted with their dollars. Second quarter revenues at Trulieve were $57.9 million, making Trulieve the #1 cannabis company in the U.S., at least for the moment, and third quarter results will be released on November 18, after the market close. The stock has pulled back from 11.7 to 10 over the past three days, but the volume has been normal, so this looks like a good entry point to me, particularly because TCNNF has a PE ratio of just 11 today. BUY.
Turning Point Brands (TPB) Turning Point has a long history of selling other tobacco products, like snuff and chewing tobacco, and it pays a small dividend too, currently 0.7%. The company expanded very successfully into the vaping distribution business over the past few years, but that came back to bite them in recent months as the vaping scare soured investors on vaping stocks. Still, the company is growing, as it has also embraced the CBD business in recent months as part of its push into NewGen (New Generation) products. Third quarter results, reported November 1, saw revenues of $96.8 million, up 16% from the year before, and earnings of $0.56 per share, up 17% from the year before. Smokeless Products (27% of sales) increased 20.4% from year-ago to $26.2 million. Smoking Products (31% of sales) increased 7.6% from year-ago to $30.2 million. And NewGen Products (42% of sales) grew 20.5% to $40.4 million on accelerating Nu-X (CBD) momentum. The company’s CBD brand RipTide started the quarter in 9,000 stores and ended the quarter in approximately 16,000 stores. Additionally, management is now “reviewing strategic alternatives” for its third-party vaping distribution business—which of course means they might dispose of it. Investors liked the report a lot, sending the stock up on big volume, and TPB has been wedging higher since, a good sign. Having taken profits on the way down, I’m tempted to buy back in here, but I’m going to wait a little longer to see if buying power persists. HOLD.