There’s no doubt about it: this market stinks.
Every major index has been hitting new lows, the news is terrible (raging inflation and soaring interest rates), and investors have grown increasingly fearful, as the profits of 2021 have quickly evaporated in the bear market of 2022.
And even the best cannabis stocks, which had been holding up above their March lows, have now fallen through that support level. The charts look terrible.
But experienced investors know that just when all seems lost is when the bear market ends. The sellers run out of ammunition, bargain prices beckon, and control of the market shifts from the last sellers (the least sophisticated individuals) to the first buyers (the most expert institutional investors.)
Trouble is, it’s hard to identify that point until it’s past. But I think we’re close.
And I know that the bargains that have developed in the cannabis sector over the past 15 months will eventually prove very attractive to investors.
The one problem for the industry, which is now becoming apparent in quarterly reports, is that revenue growth is slowing, as growth from acquisitions and new-store openings is offset, to some degree, by an abundance of supply as well as competition that has brought lower retail prices. Still, as more and more of the country goes legal (New Jersey is on board, and New York will soon follow) and usage spreads, growth is guaranteed, and there’s little doubt that this industry will eventually be as pervasive as the alcohol industry is and the tobacco industry was.
But I don’t see an uptrend yet. And until we do, caution is advised. Our portfolio is now 47% in cash, and I’m going to raise that to over 50% today with the sale of Tilray (TLRY). Details below.
Cresco Labs (CRLBF)
Chicago-based Cresco is still working on the acquisition of Columbia Care (CCHWF), which theoretically could make Cresco the industry leader by revenue, but will probably require so many divestments that it will fall short of taking the crown. Still, the company is a wholesale leader and its stock remains the portfolio’s cheapest on a price to sales basis—just 1.25. The company will report first-quarter results on May 18, before the market opens.
Curaleaf (CURLF)
Curaleaf reported first-quarter results on Monday. Revenues were $313 million, up 20% from the prior year but down 2% from the fourth quarter of last year. The loss was three cents per share, continuing the company’s tradition of small losses as it invests for growth. In the quarter, the company opened 11 new retail dispensaries, closing the quarter with 128 locations. It completed the acquisition of Bloom Dispensaries, celebrated the opening of the New Jersey market (where it currently has one adult-use dispensary but will soon have three), and is preparing for the opening of the New York market, where it already has four medical dispensaries. Curaleaf was the revenue king of the industry in the first quarter, with $320 million, and management claims that Curaleaf International is the largest vertically integrated cannabis company in Europe, with operations in eight European countries and Israel. In the quarter, it completed the acquisition of the U.K.’s first private clinic specializing in cannabis, and started sales in Italy.
Green Thumb (GTBIF)
Green Thumb reported first-quarter results last week. Revenues were up 25% from the previous year to $242.6 million, but that was down less than a percent from the fourth quarter of 2021, as the company mentioned “pricing headwinds” in Pennsylvania, Nevada and Massachusetts. Still, the company recorded its seventh consecutive quarter of positive net income, a record $0.12 per share. It had two stores operating in New Jersey on opening day. And the company has plenty of cash, $175 million at the end of the quarter. GTBI is now the portfolio’s largest position.
Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties, has a great business as the country’s leading landlord for cannabis companies, and the stock now provides a hefty 5.4% yield. Last week the company reported first-quarter results. Revenues were $64.5 million, up 50% from the prior year and up 9.5% from the fourth quarter of 2021. Year-to-date, the company has acquired six properties in Arizona, California, Maryland, Massachusetts, New Jersey and Pennsylvania and executed lease agreements to provide additional improvements at properties in Massachusetts, Michigan and New York. As of May 4, 2022, IIP owned 109 properties. But IIPR stock is still expensive, trading at a price-sales ratio (PSR) of 15, while the average REIT trades at a PSR of 9.4. IIPR is now the portfolio’s smallest position.
Organigram (OGI)
There’s been no news from Organigram, which is the number three producer of cannabis in Canada, but I’m still optimistic about the stock because while the chart is no longer holding above its March low (it’s 10 cents below it) it is still the best-looking chart of the bunch.
TerrAscend (TRSSF)
TerrAscend is the smallest of the vertically integrated multistate operators in our portfolio, but it’s unusual because it has operations in both the U.S. and Canada—and the possibility that Canopy Growth (CGC), a major shareholder and a major player in Canada, may someday acquire the company or increase its partnership in some way. First-quarter results will be released tomorrow, May 12, after the market close.
Tilray (TLRY)
The largest cannabis company in Canada, Tilray is infamous for its stock, which peaked at the crazy price of 300 in September 2018, and then fell all the way to 2.4 in early 2020, having lost more than 99% of its value, making it a prime example of the extremes to which irrational investors can go. In my latest issue I wrote that I would stick with the stock as long as it held above its March low (technically 4.78), and it hasn’t, so out it goes. On the optimistic side, short interest on the stock has hit a record high, and at some point, those shorts are going to be caught out and forced to buy this stock back, potentially fueling a big advance. But I can no longer wait for it. SELL
Trulieve (TCNNF)
While it has long been the biggest seller of marijuana in Florida, where it has a 46% market share, Trulieve expanded across the country in the past year (it had seven acquisitions in 2021), with the October acquisition of Harvest Health & Recreation being the big one. But it has no presence yet in New York or New Jersey, two states that will be important markets going forward—so I expect to see some action on that front soon. First-quarter results will be released tomorrow, May 12, before the market open.
Summing Up. The portfolio is selling its stake in Tilray (TLRY), which brings our cash position to over 50%, and I’ll plow it back into the leaders when the sector turns up.