It’s Time to Buy!
After a nine-month-long and very deep correction, during which the Global Cannabis Index fell 54% and many stocks fell farther, there was strong buying in the sector on Friday and Monday, signaling that the correction in the sector is likely over.
Reported reasons for the strength included speculation that tobacco giant Altria (MO) may buy the 55% of Cronos Group (CRON) that it doesn’t own, as well as news of Republican efforts to support the States Reform Act, which would enable taxing cannabis sales at the federal level.
But not to be forgotten is the fact that after nine months of correcting, these stocks had become cheap, sellers had become exhausted, and thus the conditions had been created which enable the start of a new uptrend in the sector. This new uptrend is not certain; further lows are still possible if year-end tax-selling forces take hold. But I believe the odds are very good that the bottom has been seen, and thus I will now use half of our portfolio’s 35% cash position to average up in two of our current holdings and add two new stocks to the portfolio.
The cash will be invested equally in current holdings Cresco Labs (CRLBF) and Trulieve (TCNNF) and new positions Verano Holdings (VRNOF) and Village Farms (VFF).
Update on all stocks below:
Canopy Growth (CGC) released its third-quarter results last Friday, reporting revenues of $131 million, down 3% from the year before and a loss of three cents per share. The Canadian market has been challenging, as excess supply has led to price-cutting. Nevertheless, Canopy says it maintained market leadership in premium flower while increasing market share in vapes and edibles in the Canadian recreational cannabis market. Additionally, Canopy announced a plan to acquire the #1 edibles company in North America, Wana Brands, when it becomes legal to do so. But management pushed out its positive adjusted EBITDA target due to the Canada supply challenges and a delayed revenue ramp in the U.S. The portfolio remains underweight in CGC. HOLD
Cresco Labs (CRLBF) will report its third-quarter results tomorrow before the market opens. Good growth is definitely expected, though probably up less than 100% from last year, but the reason I want to average up in the stock now is that it has been identified as a decent value by Cabot’s value analyst, Bruce Kaser, and that CRLBF is one of the pure marijuana stocks that’s now trading above its 50-day moving average. BUY
Curaleaf (CURLF) released its third-quarter report on Monday. Revenue was $317 million, up 74% from the year before, while the loss per share was 8 cents, up from a loss of 5 cents last year. Adjusted EBITDA was $71 million, an increase of 69% from the year before, while cash flow from operations was $52 million, or 16% of revenue—all good. Since the end of the quarter, the company has agreed to acquire Tryke Companies, a vertically integrated MSO operating in Nevada, Arizona, and Utah that will bolster Curaleaf’s leadership positions in those states. The portfolio is already overweight in Curaleaf, and the stock is not above its 50-day moving average, so we’ll sit tight. HOLD
Green Thumb (GTBIF) will release its third-quarter results after the market close today, and I expect them to be good. But the portfolio is already overweight in Curaleaf, and the stock is not above its 50-day moving average, so we’ll sit tight. HOLD
GrowGeneration (GRWG), our hydroponics retailer, will report third-quarter results before the market open tomorrow, and the results should be very good, as the company has been aggressive on the acquisition front. But the stock, which outperformed the sector on the way up to the February top, has been one of the weaker performers since then (it’s now 64% off its high), and until we see real strength, I see no reason to buy. The portfolio is underweight the stock. HOLD
Innovative Industrial Properties (IIPR) reported excellent third-quarter results last week. The REIT saw revenues of $53.9 million, up 57% from the prior year, and funds from operation (FFO) of $1.71, up 34% from the year before. From July 1 through last week, the company made five acquisitions for properties located in California, Illinois, Maryland, Missouri and New York, and executed four lease amendments to provide additional improvement allowances at properties located in Illinois, Maryland, Massachusetts and Michigan. As of November 3, 2021, IIP owned 76 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington, representing a total of approximately 7.5 million rentable square feet, which were 100% leased with a weighted-average remaining lease term of approximately 16.7 years. Our portfolio, which has taken profits in IIPR several times, is once again overweight in the stock because it keeps going up. It’s definitely the strongest stock in the portfolio. By some measures, it’s overvalued, but demand for yield is high these days and IIPR provides plenty of that. Just make sure you’re aware of the tax consequences of investing in a REIT before you buy. BUY
TerrAscend (TRSSF) is the smallest of the producers in our portfolio, and thus has the potential to be a faster grower, but right now its chart is only average for the group. TerrAscend will report third-quarter results before the market open on November 16. The portfolio remains underweight the stock. HOLD
Trulieve (TCNNF) acquired Harvest Health & Recreation in the third quarter and thus is almost certainly the biggest cannabis company in the world—though third-quarter results won’t be released until before the market open on November 15. The company has the market-leading position in Florida, has six quarters of profitability under its belt, and is now expanding fast across the country. And short-term, its stock has been one of the strongest of the past week. The portfolio will now average up. BUY
Verano Holdings (VRNOF) is a new addition for the portfolio. Headquartered in Chicago, the vertically integrated multistate operator has 87 retail locations in 11 states (Illinois, Florida, Arizona, New Jersey, Pennsylvania, Ohio, Nevada, Maryland, Massachusetts, Michigan, Arkansas) as well as 11 cultivation and production facilities. Focused on growing margins through vertical integration, the company has completed 12 acquisitions already. Second-quarter results saw revenues of $199 million, up 164% from the year before (making it the fastest-growing plant-touching company in the portfolio), and third-quarter results will be released before the market open on November 16. When the company came public in April, the stock was at 20, but it’s bottomed at 10 a couple of times in the past month, and is now above its 50-day moving average. BUY
Village Farms (VFF), headquartered in Canada, is a major grower of greenhouse vegetables (tomatoes and cucumbers in particular), that has transitioned to the fast-growing cannabis industry. Its wholly owned marijuana subsidiary, Pure Sunfarms, is one of the largest producers —and one of the top-selling brands – and has been EBITDA-positive since commencing sales in Q4 2018. In the U.S., mainly in Texas, the company has been focused on the CBD market, and in the past quarter acquired Balanced Health Botanicals, a cannabinoid platform with a top-five CBD brand. Third-quarter results, announced just yesterday, saw revenues of $72.4 million, up 68% from the year before, while EPS was $0.01, unchanged from the year before. Our portfolio has owned VFF twice before. Our first venture, from April through October 2019, brought a loss of 36%, while our second, beginning in October 2020, brought a profit of 87% from the first sale of a third in February 2021, and a profit of 31% from the final two-thirds sale in March. BUY