Recovery Under Way
From top to bottom, the Marijuana Index fell 88% from early 2018 to last month’s market low, and now the recovery has begun. However, while the first three weeks of the recovery for the broad market have seen a fairly consistent uptrend, the recovery for the marijuana sector was characterized by a strong surge in the first week or so and then a period of stabilization—in effect the building of a short base. In short, marijuana stocks, while tracing out a positive pattern, are still not following the path of the broad market.
Nevertheless, the long-term prospects for the sector look great from here, both because the stocks have fallen so far, and because the fundamental growth in the industry is still exceptional. For example, in the latest reported quarter, the average revenue growth of the companies in the portfolio was up 120% from the year before. Also promising—many of these companies are now solidly profitable on an operating basis.
But I’m not adding any new stocks to the portfolio yet (we did a little averaging up three days after the bottom). Short-term, I think the broad market is due for a pullback, which is necessary to spread fear and uncertainty among investors—and if we do get such a pullback, it will be interesting to see how marijuana stocks behave.
At this point, time is as much a factor as anything. We need to put a little more distance between us and that market bottom for the market to be on solid footing again—and of course we need to see a clearer path to economic recovery than we see today.
In the meantime, following are updates on all the portfolio stocks along with thoughts about additional buying as the market regains its footing.
Stock Updates
Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.
Canopy Growth (CGC) Canopy stock rocketed off the bottom for six solid days and since then has been building a nice base in the low teens. Management of the company that is vying for the leading market share in Canada continues to work to cut costs, a fact that investors are increasingly appreciative of. HOLD.
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 company finally released its fourth-quarter results two weeks ago and the market barely blinked; the stock was up for the day, even though restated results for first three quarters of 2019 reduced revenues just a bit.
Revenues for the fourth quarter were $7.3 million, up 70% from the year before, but thanks to an inventory write-down (there’s still too much legal marijuana in Canada), the loss grew. As for the stock, it’s been building a base in the 6 region is and is now above its 15-day moving average. HOLD.
Curaleaf Holdings (CURLF) Massachusetts-based Curaleaf, which has 54 dispensaries, 15 cultivation sites and 24 processing sites in 17 states, is the biggest legal seller of marijuana in the U.S. and is thus a leading contender to be the Philip Morris of the industry. The stock bounced well off the bottom and is now stabilizing in the 4 region. HOLD.
GrowGeneration (GRWG) GrowGeneration operates the largest and fastest-growing chain of hydroponic and organic garden centers in North America, all catering to commercial growers of cannabis. Of its 27 locations in 10 states, 10 were built or acquired in 2019. Fourth-quarter revenues were $25.4 million, up 180% from the year before, and adjusted EBITDA was $2.2 million, up from a loss the year before. Looking ahead, the company projects revenues of $130 - $135 million in 2020 and adjusted EBITDA of $11.5 - $13.5 million. Adapting to coronavirus, the company “is focusing more on internal growth versus external growth for the next few quarters.” As for the stock, it’s rather volatile, and not quite in synch with the rest of the sector, but the recovery from the lows has been strong and the stock’s forward P/E ratio is now just 14. HOLD.
Innovative Industrial Properties (IIPR) IIPR is the only publicly traded REIT in the U.S. that caters to the cannabis industry, and that makes it hard to analyze, simply because there are no true comparables. Nevertheless, it’s been a great investment for us and I expect growth to continue. Interestingly, the stock was the target of a short-seller’s report last week but the timing was terrible (there are few ready sellers now) so the stock barely budged. The buyers are in charge of this stock now. HOLD.
Trulieve (TCNNF) Trulieve is the market leader in Florida, with 45 medical dispensaries, as well as nascent operations in California, Massachusetts and Connecticut. Fourth-quarter results, released last week, saw revenues of $79.7 million, up 122% from the year before and adjusted EBITDA of $45.0 million, up $36.9 million the year before. The company says it’s coping well with the coronavirus situation and expects to maintain its over 50% market share in Florida. The stock was up very strongly and persistently off its March low, and while it’s weakened a bit in recent days, it’s still above its 50-day moving average. Also, it has a forward P/E ratio of just 9. HOLD.
Turning Point Brands (TPB) TPB is the oldest company in the portfolio (by far), having built a solid business in the smokeless tobacco industry before diversifying into the growthier vaping and CBD markets. The stock was very strong off the boom and is now building a very nice base centered on 21. HOLD.
Watch List
As the recovery progresses, these are the stocks most likely to be added to the portfolio.
Akerna (KERN) It’s relatively small and thinly traded—even in this crowd—but I like it for diversification and its business model; Akerna is aiming to be the leading provider of seed-to-sale tracking software for the industry, adding value through the entire chain of operations from production to regulation to retail. In the latest quarter, revenues were $3.3 million, up 28% from the year before.
Aphria (APHA) Leading the way in Canada (at least for now) is Aphria, which saw $144 million in revenues in its latest quarter, up 96% from the year before. Last year the stock went through the wringer, weathering a well-timed attack by short-sellers, but this year it’s rebounded with a vengeance; it’s been one of the strongest stocks in the sector since the bottom.
Cresco Labs (CRLBF) Cresco is one of the leading vertically integrated multi-state cannabis companies in the U.S., with operations in 11 states, including 18 production facilities, 31 retail licenses, and 21 operational dispensaries. All new this year are five locations in Illinois and, coming soon, the first adult-use dispensary in downtown Chicago. In the latest quarter, revenues were $36.2 million, up 184% from the year before.
Green Thumb Industries (GTBIF) Headquartered in Chicago, Illinois, GTI has 13 manufacturing facilities, licenses for 96 retail locations and operations across 12 U.S. markets (California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and Pennsylvania), so it’s a contender for national leadership going forward. Revenues in the fourth quarter were $75.8 million, up 265% from the year before.
Planet 13 Holdings (PLNHF) Headquartered in Nevada, Planet 13 is famous for its Las Vegas retail store, the biggest marijuana outlet in the world—until coronavirus put the tourism business in a deep freeze. But the company quickly shifted gears and now the customer mix has shifted from 15% local to 100% local, many of whom are served by the company’s mushrooming delivery service. In the final quarter of 2019, revenues were $16.5 million, up 100% from the year before, and the company has pre-announced that first quarter of 2020 revenues will be $16.6 million.
Tilray (TLRY) Based in British Columbia, Tilray was one of the earliest marijuana companies to expand globally, and the company now has customers in 15 countries on five continents. In the last quarter of 2019, revenue was $46.9 million, up 202% from the year before.
Stocks Failing
Stocks we’ve previously sold that have failed to bounce well are Aurora (ACB) and Organigram (OGI). If you still own either of them, I recommend selling, as investors are signaling that both companies have liquidity problems.