Time for One New Addition
The good news this week is that the state of Connecticut appears close to marijuana legalization, as the state Senate passed legislation early Tuesday morning, with an unexpectedly close 19-17 vote. Today—the last day of the 2021 session—the bill heads to the House of Representatives, which is expected to approve it. But you never know.
In any case, the long-term trend remains clear, and there’s no question that eventually, marijuana will be legal nationwide, just as it is in Canada. But as I’ve said before, the odds are very good that stocks in the sector will peak at the time—just as they have done at other major legalization events—so it’s important to invest heavily before that time comes.
In other news, last week I announced that the final two quarterly reports from our portfolio holdings were in: Canopy (CGC) and Cresco (CFRLBF). But I was mistaken. Little Jushi (JUSHF), the smallest company in our portfolio by revenues, yesterday released its long-delayed full-year 2020 results as well as its first-quarter 2021 results. For 2020, total revenues were $80.8 million, up 690% from the prior year, and for the first quarter of 2021, revenues were $41.7 million, up 385% from the first quarter of 2020. Adjusted EBITDA for the quarter was $3 million. For the second quarter, the company is looking for revenues to be between $45 and $48 million and EBITDA to be between $4 and $6 million. Additionally, Jushi recently announced it will open its 20th BEYOND/HELLO retail location nationwide and its 13th store in Pennsylvania on June 11.
Columbia Care (CCHWF) announced the launch of Forage, an online cannabis discovery tool that suggests products depending on the user’s desired mood and experience, and syncs with their local dispensary’s inventory and pricing to enable online orders.
Trulieve (TCNNF) completed the acquisition of Solevo Wellness and its three West Virginia dispensary permits. Trulieve now has nine dispensary permits in the state as well as cultivation and production assets.
Portfolio Changes
Today, our portfolio is 79% invested, 21% in cash. We shifted from fully invested to 40% cash in February as the sector peaked, and had as much as 64% in cash at the late-March bottom, but since then we’ve been easing back in, focusing on directing our cash into the stocks best positioned to lead the next advance.
As I write, our portfolio is up 30.7% YTD, while the Marijuana Index is up 6.6%.
And now it’s time for a new addition—or, to be precise, the return of a previous holding.
But first some context.
When this advisory was launched in 2017, there were no major vertically integrated U.S. producers; the leaders were the Canadians. At the end of 2017, we owned the leading five Canadian stocks in the industry, as well as a few small U.S. companies and a variety of peripheral companies.
In May 2018, we added a Canadian company named Hydropothecary. In mid-October, when the Canadian legal market opened up and all the Canadian stocks looked unsustainably high, we sold half of each of the six Canadian positions, taking a profit of 68% in Hydropothecary, which by that time had changed its name to HEXO, keeping the name Hydropothecary for its medical marijuana division.
From there, the entire sector corrected very sharply, at one point making our remaining holding in HEXO a small loss, but in November, as the stocks recovered, we bought back in, and doubled up in HEXO, which then soared up to a May peak, taking our profit to 101%. It was the portfolio’s largest position.
But then the sector went into a longer and deeper correction. We sold half our position of HEXO in June for a profit of 30%, and the remainder in July for profit of 1%.
And I really hadn’t paid much attention to HEXO since, mainly because the Canadian cannabis stocks have looked terrible.
But as experienced investors know, the market has cycles, and eventually what has gone down can come up again. That’s what I’ve noticed in the behavior of the Canadian stocks recently. Trouble is, the fundamentals at most of them are horrific; many show revenue declines (the result of an imbalance of supply and legal outlets in Canada), while the fundamentals of the U.S. leaders are booming.
The exception is HEXO, which is growing fast.
HEXO (the name is exactly the same as the stock symbol) is one of Canada’s lowest-cost producers, with 1.8 million sq. ft. of production capacity. The quarter ended January 31 (fiscal second quarter) saw revenues of $32.9 million, up 93% from the year before.
All the big Canadians have been doing deals lately, trying to “buy” efficiency (Tilray and Aphria; Canopy and Supreme). And just two weeks ago, HEXO joined the crowd, announcing the acquisition of Redecan, which will create the Canadian market leader for adult-use marijuana. Redecan is the largest privately owned producer in the country, and like HEXO, focused on low-cost production.
HEXO’s next quarterly report will be released before the market opens on June 14, so there’s a little added risk involved in investing right now. But I believe the charts have bottomed, and fundamentally, HEXO looks like the best choice here, so we’ll start small, using a fourth of the portfolio’s cash.
Just note that this will now be the portfolio’s smallest company by revenues, and it’s another low-priced one, so volatility is to be expected.