The Dow hit a new high today, but marijuana stocks didn’t; their correction, which was richly deserved, is now one month old. And the fact is this correction is likely to run further, mainly because the broad market still needs a correction.
Now, this doesn’t rule out a good bounce that takes marijuana stocks back near their highs. Anything is possible in the market. But what the charts are telling me today (on top of the elevated sentiment measures I’ve mentioned previously) is that short term, there’s still more potential on the downside than on the upside.
Yesterday brought a nice one-day bounce, but there was precious little follow-through today. As I write, the majority of stocks in our portfolio are trading near their 50-day moving averages—with some above and some below.
The ones worth mentioning are the outliers.
The two strongest, from a relatively short-term perspective, are Curaleaf (CURLF) and Trulieve (TCNNF). These companies, which are the portfolio’s two largest holdings by a small margin, are shaping up to be high-quality leaders of the industry.
The three weakest are GrowGeneration (GRWG), Innovative Industrial Properties (IIPR) and TerrAscend (TRSSF). The first two are the totally legal companies whose stocks have had big runs and could easily see a big rest (and IIPR is influenced by interest rates, as well). TerrAscend may be losing support (again, relative to the rest), because it’s a second-tier multistate operator. Or it may be that business is slowing. We’ll know more when fourth quarter results are released on March 23, before the market open.
In the meantime, I’m going to lighten up further in the portfolio, to reduce our losses should the correction continue, by selling a third of our positions in those three weakest stocks: GRWG, IIPR and TRSSF. This will take our cash position from 54% to roughly 58%.
As I write, the portfolio is now outperforming the Marijuana Index YTD (34.9% to 33.2%) and if this correction continues, that difference will grow.
As for news, yesterday Curaleaf released its fourth quarter results, which were very impressive, and announced a major acquisition.
Revenues for the quarter were $230 million, up 205% from the year before, while the net loss was $0.05 per share, down from a loss of $0.06 the year before. Gross profit on marijuana sales was $110 million, resulting in a 48% margin, compared to $22.0 million in the fourth quarter of 2019, but because the company is still investing so much in growth, the net loss per share was five cents, down from six cents the year before.
As for the acquisition, coming off its big acquisition of Grassroots in the U.S. in 2020, Curaleaf is now moving into Europe in a big way, acquiring EMMAC Life Sciences Limited, for roughly $286 million, to be paid 85% in Curaleaf subordinate voting shares and 15% in cash.
EMMAC Life Sciences is Europe’s largest vertically integrated independent cannabis company, with operations across the United Kingdom, Germany, Italy, Spain and Portugal, and thus the acquisition will make Curaleaf the undisputed global cannabis market leader based on revenue.
EMMAC plans to significantly increase its cultivation capacity in 2021, and to exceed 10 tons per year by 2022, in order to accommodate growing demand for cannabis across the major European medical and adult-use markets, as well as export markets.
Bottom line, this makes CURLF a stock you’ll want to own, but I think you’ll get a lower-risk buying opportunity in the future.