Marijuana stocks have been building a meaningful bottom since November—and there are good and bad aspects to that.
On the good side, it means that you’ve had the opportunity to buy low—so you can sell high later on, or just hold to build long-term profits. On the bad side, it means that until the sector revives, any money invested in the stocks (in general) will not perform as well as money in sectors that are currently strong.
But it’s possible that the kickoff to the renewed uptrend was sparked by this morning’s excellent report by industry leader Canopy Growth (CGC). The action of the stocks in the days ahead will tell us a lot.
In the meantime, the long-term prospects for the industry remain excellent, and with most of the quality stocks having bottomed, the long-term risk/reward ratio looks very favorable for the sector’s best stocks.
Fundamentally, many companies, in both Canada and the U.S., continue to suffer from slower-than-expected openings of retail outlets. And the newest bad news from Canada is that Labrador, Quebec and Newfoundland, having seen the troubles caused by vaping illness in the U.S., have banned cannabis vaping devices in their provinces—and that means the gains from Cannabis 2.0 will be a bit less than expected.
But Ontario still aims to triple its number of legal marijuana outlets this year. And somewhere down the road, the holy grail of federal legalization in the U.S. will be achieved. My goal is to have you invested in the stocks of the best U.S. marijuana companies when that day arrives. However—and now we’re looking rather far ahead—it’s quite possible we’ll be selling when that day arrives.
Remember, marijuana stocks peaked when marijuana was legalized in California, Colorado and Canada, so the odds are very good that the stocks will peak on the day it becomes legal across the U.S. The market always looks ahead.
So the key to making profits is to buy when the news is bad (like now) and the stocks are down—and then to sell when the stocks are up and the news is great.
Final note: The number one mistake of amateur investors is holding onto losing stocks—watching their losses get even larger. Experienced growth stock investors know that cutting losses is critical, especially when a stock has no support level in sight. So, while the best marijuana stocks have bottomed and are building bases and even nascent uptrends, if one of your marijuana stocks is hitting new lows, you should consider selling.
Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.
Stock Updates
Akerna (KERN) to Hold.
Planet 13 (PLNHF) to Hold.
Akerna (KERN) Based in Denver, Akerna provides software that serves both the companies in the U.S. cannabis industry and the government entities regulating them, with products that track cannabis from seed to sale. Thus, it’s legal nationwide, and attractive for the diversification it adds to the portfolio. However, results for the second fiscal quarter of 2020 were released yesterday and the market wasn’t impressed. Revenues were $3.3 million, up 28% from the year before, but fairly flat from the immediately preceding quarter. Gross profit was $1.7 million, up 33% from the year before. And gross profit margin was 50%, up from 49% the year before. So, trends are in the right direction, but not as strong as investors would have liked. The stock sold off on the news, but recovered later in the day, and it’s now sitting above 7.0, where it found support in mid-January. This is worrisome, and reason enough to downgrade the stock to hold. HOLD.
Aphria (APHA) Aphria is the largest Canadian holding in the portfolio, as it’s the biggest seller in Canada, and its stock is not as overvalued/overexposed as Canopy. The stock has weakened in recent weeks, falling from support at 5 down to nearly 4, but it gapped up after Canopy’s results this morning, so I think buying here is fine. BUY.
Aurora (ACB) Aphria, Aurora and Canopy were our first three Canadian stocks back in 2017, and while they’ve ridden the same waves since then, and we’ve taken out nice profits in all three, Aurora is now at risk of drowning. Last week the company announced the departure of its CEO, as well as a plan to lay off 10% of employees in pursuit of profitability. And this week the company announced quarterly revenues of $52.7 million, down 26% from the previous quarter, as the average net selling price of consumer cannabis dropped 10%. Even worse, management expects little to no growth in the current quarter. The portfolio remains extremely underweight in the stock—holding in part because the company has major production capability—but if you’re losing your shirt in the stock, selling may be the appropriate course. HOLD.
Canopy Growth (CGC) Canopy reported fiscal Q3 results today, and the market was thrilled. Revenue was $124 million, up 49% from the year before. Gross margin was 34%. And operating expenses were down 14% from the prior quarter, as the company, like its peers, works to reduce costs. Canopy maintained its position as the industry leader, with 22% of the Canadian recreational market. Interestingly, 43% of revenues were from business-to-business sales; 15% was international (mainly Germany), 12.2% was Canadian adult-use; and 12% was Canadian medical. Lastly, because more than 50% of the company’s shares are held by residents of the U.S., and the majority of Canopy’s directors are U.S. citizens, the company is now considered a United States domestic issuer, so will now prepare its financial statements in conformity with U.S. general accounting principles. The stock spiked higher this morning after the results, and thus remains in the uptrend that began in early November. The portfolio averaged up at the end of January, but if you’re light in the stock, you could buy here, or wait for a possible pullback. BUY.
Cresco Labs (CRLBF) Humans are pattern-detecting machines, and the pattern I see in CRLBF is a perfect (so far) inverse head-end-shoulders, with the first shoulder at 5.0 in October, the head down at 4.5 in December, and the second shoulder again at 5 just this week. So if all is well, it’s up from here! Chicago-based Cresco this week announced the addition of former Molson Coors marketing executive Greg Butler as Chief Commercial Officer. BUY.
Cronos Group (CRON) Cronos is one of the smaller Canadian marijuana providers—but tobacco giant Altria owns 45% of the stock, so long-term prospects are good. The stock has established a pattern of slightly higher lows since its November bottom—and it gapped up this morning on the Canopy report. BUY.
Curaleaf Holdings (CURLF) Massachusetts-based Curaleaf, which has licenses to sell in 13 states, was the biggest legal seller of marijuana in the U.S. in the third quarter—and its stock continues to have one of the healthiest charts in the portfolio, with a pattern of higher lows since November that’s impressive. Last week the company announced that it had completed the acquisition of Select, making the company the largest cannabis operator in the U.S. in terms of operational and wholesale footprint, with 53 open dispensaries in 14 states, supported by 15 cultivation sites and 24 processing sites. Curaleaf now employs over 2,200 people across the U.S. BUY.
Green Thumb Industries (GTBIF) GTBIF had a big day yesterday, rising 4% on above-average volume for no obvious reason. The best explanation I have is that the stock had built a nice base at 8, so up was the logical direction for the next move—and someone with big money thought so too. Headquartered in Chicago, Illinois, Green Thumb has 13 manufacturing facilities, licenses for 96 retail locations and operations across 12 U.S. markets, so it’s a contender for national leadership going forward. BUY.
GrowGeneration (GRWG) GrowGeneration operates the largest and fastest-growing chain of hydroponic and organic garden centers in North America (26 locations in nine states), all catering to commercial growers of cannabis. Like Akerna, it’s a business that’s totally legal nationwide. But like KERN, it’s also rather thinly traded, which can exaggerate volatility. Happily, the volatility has been mostly up in recent weeks, making GRWG our strongest stock. If you haven’t bought yet, I suggest waiting for a pullback to the 25-day moving average (at least), which is currently around 5.0. BUY.
Innovative Industrial Properties (IIPR) IIPR is another diversification play—which again is in a totally legal industry. And its stock has been strong, too! Structured as a REIT, the company currently owns 49 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia, totaling approximately 3.2 million rentable square feet, which were 98.9% leased to cannabis companies. Two weeks ago the company announced a sale-leaseback transaction with Green Thumb Industries for its licensed cannabis processing facility in Toledo, Ohio. This mark IIP’s second deal with GTI, the previous being completed last November for a property in Pennsylvania. If you don’t own it, look to get in around 90. BUY.
Organigram (OGI) New Brunswick-based Organigram is a smaller Canadian producer that has had the same troubles as the bigger companies, even though it’s practiced prudent cash management. Fundamentally, all seems well here, but the chart reveals less support by investors, so I’ll leave it on hold for now. HOLD.
Planet 13 (PLNHF) Planet 13 is a vertically integrated company that operates the world’s biggest cannabis store, located in Las Vegas, Nevada, and it has big plans to expand into California and eventually other tier-one markets nationwide. Last week the company announced a record-breaking January driven by strong traffic, but investors were not impressed. The stock is trying to build a base at 1.50, but risks slipping below that level, so I’m getting a little worried. I’ll now downgrade to Hold. HOLD.
Trulieve (TCNNF) It’s been eight weeks since short-sellers attacked TCNNF in mid-December (when it was the strongest of all cannabis stocks), and the good news is that the stock has stabilized very nicely since then, building a base at 10, and gapping up with the Canadians this morning. The company, the market leader in Florida, opened the doors to its 44th Florida dispensary this morning (in Pensacola). BUY.
Turning Point Brands (TPB) TPB seems to have bottomed last week, and if it can build a base here at 22, that will be a good sign. HOLD.