The disappointing quarterly results from high profile Canopy Growth and Aurora have now made the consensus nearly unanimous: There’s too much legal pot in Canada and not enough places to sell it. As a result, the Canadian Marijuana Index is now 70% off its high. The situation looks grim. But that’s how it always is at bottoms—remember 2008?
U.S. cannabis stocks have been no picnic either (the U.S. index is currently 62% off its high), but there has been notable strength in some U.S. stocks, in part because money is shifting from Canada to the U.S. and in part because some of these U.S. stocks are looking pretty cheap.
Marijuana Index
So what group do I favor going forward? Long-term, I believe U.S. companies will be the industry leaders because of their size (Canada’s population is roughly the same as California’s). But short-term, given that cannabis is still illegal at the federal level in the U.S., and that sales of edibles, vapes and beverages will begin in Canada in less than a month, and that the Canadian stocks in generally are deeply oversold, I like the prospects of some of the Canadian stocks.
However, with year-end-tax selling a factor, it’s still hard to be bullish on the sector at the moment, so I continue to hold roughly 40% of the portfolio in cash, and to hold underweight (small) positions of stocks that have great long-term promise but that are currently weak.
Technically, one of the criteria I’m looking for in stocks is an uptrend—which is technically defined as a pattern of higher highs and higher lows. Trulieve (TCNNF) and Turning Point Brands (TPB) qualify today, and Green Thumb (GTBIF) and MediPharm (MEDIF) are on the verge, but none of the others do yet.
News
Yesterday, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act), which has Democratic Presidential candidate and former prosecutor Kamala Harris as one of its sponsors. The bill would (1) lift the federal ban on cannabis, (2) expunge past convictions for cannabis crimes ,(3) allow the Small Business Administration to support entrepreneurs and businesses in the cannabis sector, (4) provide grants and funding to communities most damaged by the war on drugs and (5) allow physicians affiliated with the Veterans Administration to recommend medical cannabis as a treatment for PTSD, pain management and anxiety. The bill now heads to the full House.
Meanwhile, at the other end of the Democratic spectrum, Presidential candidate Joe Biden recently reiterated his opposition to legalization, expressing fears that marijuana is a gateway drug and saying he’d like more research into the matter.
What to Do Now
Green Thumb Industries (GTBIF) is upgraded to Buy.
MariMed (MRMD) is downgraded to Hold.
Turning Point Brands (TPB) is upgraded to Buy, and the portfolio will now double its position in the stock.
Aphria (APHA) Aphria leads the Canadian cannabis 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 to it being the largest position in the portfolio. But the stock has been unable to resist the selling of Canadian cannabis companies. It continues to build a bottom in the 4 region. HOLD.
Aurora (ACB) Aurora is the second largest producer in Canada, so it’s a stock I want to own going forward. But the company doesn’t have earnings like Aphria, and its third quarter report, released after the market close last Thursday, was not at all well received by investors. Revenues were $85.2 million, up 187% from the year before, while adjusted EBITDA was a loss of $39.7 million, improved from last year’s loss of $67.6 million. The earnings number was better than analysts expected—but mainly because the cost of production has fallen—and revenues were lower than expected. Even worse were two other pieces of news. First, the company said it’s halting construction of its Denmark grow facility in an effort to manage cash wisely, and second, the company offered holders of some its convertible notes the chance to convert them to stock at a 6% discount—effectively diluting the shares of current shareholders. As a result, the stock remains under heavy pressure. However, the company will be ready to sell gummies and chocolates next month when it is legal, and I remain optimistic about the long-term. The portfolio holds a minimal position. HOLD.
Canopy Growth (CGC) CGC is down 66% from its highs of earlier this year, and back to where it was two years ago—and I think that’s low enough, technically. But the stock remains expensive relative to its peers, so I won’t buy until I see some strength. The portfolio holds a minimal position. HOLD.
Cresco Labs (CRLBF) Chicago-based Cresco Labs is the fourth-largest multi-state operator (MSO) in the U.S., and destined to get even larger once its acquisition of Origin House, which is big in California, is complete. And the stock looks good compared to its Canadian peers, building a bottom at 5.5 over the past month. But third quarter results should be released any day now, and until then, hold is the prudent rating. The portfolio holds a heavy position in the stock. HOLD.
Cronos Group (CRON) Cronos is Canadian, so same old story. Plus, it’s the most expensive of its peers on a price-to-sales basis. The portfolio remains underweight, waiting for the stock to turn back up. HOLD.
Curaleaf Holdings (CURLF) Curaleaf reported third quarter results after the market close Tuesday, and the results were very good. Total revenues were $73.2 million, up 200% from the year before. Retail and wholesale revenue grew more than threefold to $50.7 million, primarily due to organic growth in Florida and New York and acquisitions in Arizona and Maryland. And gross profit on cannabis sales was $23.6 million in the quarter, resulting in a 47% margin, the increase due to “the mix in retail revenue over wholesale revenue and continued improvement in the operating capacity of the Company’s cultivation and processing facilities.” Adjusted EBITDA was $9.0 million, compared to a loss of $3.2 million the year before. Additionally, looking ahead, pro forma revenues (accounting for the closed and pending acquisitions of Acres Cannabis and Phytotherapeutics Management Services) were a robust $129 million, which could put Curaleaf at the top of the industry (just ahead of Aphria), at least briefly. Also in the works is the acquisition of Grassroots, currently the largest private MSO, for $875 million. The portfolio currently holds a heavy position in the stock, but I’m not averse to averaging up if the sector in general improves and CURLF offers a decent entry point. At the moment, the stock has had two strong weeks off its bottom, including a strong past two days that’s taken the stock well above its (still downtrending) 50-day line. A normal pullback is likely. HOLD.
Green Thumb Industries (GTBIF) This Chicago-based MSO has 33 stores in 11 states (California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New York, Ohio and Pennsylvania) and is gearing up to sell in New Jersey as well. And like CURLF, its stock has had two strong weeks and broken above its downtrending 50-day moving average. But GTBIF actually looks healthier, because it has a more solid bottom formation and its 50-day moving average is closer to turning up. And last night, third quarter results were released. Revenues were $68 million, up 296% from the year before and up 52% from the immediately preceding quarter. Net loss was $17.1 million, compared to a net loss of $22.2 million in the immediately preceding quarter. Yesterday’s strength combined with today’s strong open mean the stock has turned the corner. If you don’t own it, try to buy on a normal pullback. BUY.
Innovative Industrial Properties (IIPR) IIPR was a big winner for us into July, but then it lost half its value correcting into October, and now, having reported good third quarter results two weeks ago, it’s trying to get a new uptrend going. Fundamentally, growth at the company is on track. Last week the company acquired a $20.3 million property in Danville, Pennsylvania that will be leased to Green Thumb Industries. That brings IIP’s portfolio to 42 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, Ohio and Pennsylvania, totaling approximately 2.9 million rentable square feet. IIP’s average current yield on invested capital is approximately 13.6% for these 42 properties. The stock is still building a bottom. HOLD.
MariMed (MRMD) Recent addition MariMed is the lowest-priced stock in the portfolio and it’s also our biggest loss today, but if we can hang onto it, I think it will do well in 2020; in some respects, the company is an undiscovered bargain. However, the stock has weakened over the past week, so I’m going to downgrade it to hold—and if necessary, I’ll sell. HOLD.
MediPharm Labs (MEDIF) MediPharm 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 stock fell last week after its third quarter report disappointed investors, but it’s stabilized at 3 since then, and if I can see some upward movement, I’ll put it back on buy. HOLD.
Organigram (OGI) OrganiGram “pre-warned” last Monday that its fiscal fourth fiscal quarter results (ended August 30—to be announced November 25) would be poor. In addition to the slow pace of opening legal Canadian stores, OrganiGram was also hurt by lower yields, the result of a previously mentioned change in growing protocols that didn’t work. The stock sold off all week, but it’s been up every day this week, so the worst is probably over. Looking ahead, the company anticipates that Quebec will have more than double its retail presence by March 2020, so demand for its output will rise substantially. Additionally, the company will have vaporizer pens, edible products and a powdered drink mixing and packaging line to support the Company’s plan to launch a variety of dried powder formulation beverage products in early calendar 2020. HOLD.
Trulieve (TCNNF) Trulieve is the strongest stock in the entire cannabis universe, up eight weeks in a row—and with good reason. The company is the leading seller of medical marijuana in Florida and eventually I expect it to take the lead when adult-use marijuana becomes legal in that state. Third quarter results, released after the market close on Monday, saw revenues of $70.7 million, up 150% from the year before and up 22% from the immediately preceding quarter, and adjusted EBITDA of $36.9 million, up from $31.6 million in the immediately preceding quarter. During the quarter, the company saw 19% more Florida patients, driven primarily by the introduction of smokable flower, increasing patient count to 214,827. And it opened six additional dispensaries in Florida, bringing the total to 35 at September 30 (the number is now 39). With a PE ratio of 13, TCNNF looks like a decent value today, but technically, the stock is a bit high. Try to buy on any small correction. BUY.
Turning Point Brands (TPB) Turning Point Brands is a well-managed company with a long history of selling other tobacco products, like snuff and chewing tobacco, and it pays a small dividend too, currently 0.7%. Investors piled into the stock from early 2018 to July 2019, sending the stock from 20 up to 57. But as the cannabis sector weakened, TPB was hit with an additional blow, the spread of vaping fears—and three weeks ago, the stock was back at 20. But on November 1 the company released an excellent quarterly report (which included great strides selling CBD) noting that it was considering “options” for the vaping business. That’s code, of course, for selling. Since then the stock has come back to life, and I think it’s at a decent entry point now. We previously took profits in April and September and now I’m going to put some money back in. I’ll double the position. BUY.
Note: Because of the Thanksgiving holiday, next week’s issue of Cabot Marijuana Investor will be published on Wednesday, November 27.