April 28, 2021

It’s been eleven weeks since the marijuana sector topped, sending the Marijuana Index down 50%. But as the picture of this correction gets clearer, every day I get a little more bullish about the possibility that the sector is ready to turn up again.

Two weeks ago, acting on this belief, I used half our cash to average up in the industry leaders and add one new small stock to the portfolio and today I’m doing just a little more buying, averaging up in another small operator.

After this buying, the portfolio will be roughly 29% in cash, and going forward, we’ll continue to take our cues from the market, always working to own the market’s leaders as we move closer and closer to full federal legalization.

Full details in the issue.

Cabot Marijuana Investor 421

Time For A Little More Buying
One of the many adages about investing in stocks says, “Never sell a dull market short.” The theory, basically, is that if the market isn’t going up or down, it’s likely to go up, given that that’s the long-term trend of the market and that a “dull” market is eventually likely to be followed by an exciting market.

Well, the marijuana sector has been “dull” for only a few weeks, but before that the sector had a broad decline that pulled the marijuana index down 50% in just 10 weeks, so it’s logical that the sector’s next major move will be up. Additionally, the broad market is still acting well, with major indexes hitting record highs frequently, so it makes sense that the marijuana sector should turn around and rejoin the party, eventually taking the industry leaders out to new highs.

However … I learned long ago that you can’t tell the market what it should do; all you can do is measure the probabilities of what it might do and then invest accordingly, all while managing your risk properly. We’ll get into the details of what that means today below, but first a review of our strategy.

Strategy
It’s been a while since I wrote at length about the investing strategy of Cabot Marijuana Investor, so let me go into a little detail today, particularly for our newer readers.

It starts with the time-tested Cabot strategy of investing in growth stocks; ideally you want a stock with a good chart (going up), as well as a company with healthy fundamentals (growing revenues and earnings) and a story that says further great growth is likely. Whenever there’s a disagreement, the chart wins, so given that virtually all of the leading marijuana companies have very rapid revenue growth today and the prospect for much more in the future, the charts are a major focus of mine today.

After stock selection, market timing is critical. Ideally, you’re heavily invested in the market leaders when the market trend is up (thus gaining more than the market on the way up), and you hold a substantial amount of cash when the market trend is down (thus losing less than the market on the way down). Obviously, if you gain more on the way up and lose less on the way down, you can easily outperform the market (or in this case, the sector), and that’s what we’ve done by a wide margin (up 440% vs 66%) since we started in August 2017.

When investing in one industry, however, especially a young, fast-growing one like marijuana, some adjustments to the system are needed. First, instead of looking at the broad market to guide our market timing, we look at the Marijuana Index. Doing this has allowed us to shift substantially to cash very near the sector’s major tops (most recently on February 10, when I shifted the portfolio from fully invested to 42% in cash). More recently, just two weeks ago, the sector action told me to put half our cash back in. It had grown to 64%, so now it’s down to 32%.

Additionally, because this is a sector with a fairly small number of true industry leaders, my strategy has been to hold core positions of the leaders through thick and thin, reducing exposure in market downtrends, and then increasing exposure to the top prospects (as determined mainly by chart action) as the trend turns up, while slowly rotating out of the weakest performers and pivoting to high-potential newcomers. (This year we got out of Village Farms (VFF) for a profit of 31%, and two weeks ago we added Columbia Care (CCHWF).)

Finally, as you apply this strategy to your own portfolio, there’s no need for you to duplicate my portfolio. The fact is, you should own stocks outside the marijuana sector as well, because diversification is a key investment strategy, one I trumpet repeatedly in my other advisory, Cabot Stock of the Week. But you should understand the strategy, and apply it as you deem appropriate for your own portfolio.

Marijuana Index

The Marijuana Index shows clearly the great advance from the broad market’s bottom (back in March 2020) to the marijuana sector’s parabolic blowoff top on February 10, followed by a sharp correction that most recently bottomed on April 20. However, this is slightly misleading. When you separate the Canadian stocks from the U.S. stocks, you see that the U.S. stocks actually bottomed on March 30—and it’s the U.S. stocks that I’ve been favoring for many months. Now, there’s no certainty that the sector won’t fall below that recent low; in fact, if the broad market weakens, it’s quite possible. But I’ve been encouraged by the action of individual stocks, as well as the impressive fundamental growth of both our stocks and the industry as a whole, so I’m optimistic that the sector is beginning to turn up here.

What to Do Now
The only change I’ll make to the portfolio today is to average up (finally!) in Jushi (JUSHF), doubling the size of our initial small investment and taking the portfolio’s cash level down to 29%. In your own portfolio, you can buy any of the stocks rated buy if they fit your investing strategy and you feel underinvested in the sector. But don’t go all in yet; until we see some real strength on the upside, we can’t truly say the sector’s correction is over.

CURRENT RECOMMENDATIONS

Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.

Stock Updates
Canopy Growth (CGC)
With a market capitalization of $10 billion, Canopy remains the most highly valued marijuana company in the world, and that’s partly because of the long-term potential of its relationship with major shareholder Constellation Brands (STZ). However, it’s the weakest stock in our portfolio, mainly because its main business is in Canada, which suffers from oversupply of marijuana and a shortage of legal retail outlets, particularly in Ontario. Last week the stock bounced off its 200-day moving average (having fallen 56% from its February 10 peak), and there’s a decent chance that marks a bottom. But I wouldn’t buy it here. Trading volume has been low, and the sad reality for Canopy (which has been a favorite of institutional investors) is that when marijuana is finally legal under U.S. federal law, a lot of the institutional money that’s in Canadian marijuana stocks will be shifted into U.S. stocks. CGC is the smallest position in our portfolio but I’m still holding, in part because it’s one of our oldest holdings and in part because I expect the Constellation Brands partnership to yield good long-term results, both in Canada and in the U.S. HOLD.

Columbia Care (CCHWF)
Added to the portfolio just two weeks ago, Columbia Care is a New York-based vertically integrated multistate operator, with 87 dispensaries and 27 cultivation and manufacturing facilities in 10 states (Arizona, California, Colorado, Florida, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania and Virginia). And there’s an international angle, too. Two weeks ago, the company announced the launch of its proprietary solid-fill cannabis powder capsule for medicinal use throughout the United Kingdom. The patent-pending capsules, which were first developed and commercialized in the U.S., incorporate a portfolio of primary and secondary cannabinoids and are available in a number of formulations with various THC and CBD doses. Patients over 65 in particular prefer the familiarity of capsules over other delivery methods, like smoking. Columbia’s fourth quarter of 2020 saw revenues of $76.1 million, up 228% from last year (making this the third-fastest grower in the portfolio) and first quarter results will be released Monday, May 17 before the market open (there have been no earnings yet). CHWF bottomed at 5.25 at the end of March and has been building a base at 6 since, so this looks like a nice place to begin buying if you’re underinvested in the sector. Just note that because of its low price and trading volume, you should expect CCHWF to be more volatile than most of the other stocks in the portfolio—and that can be good or bad! BUY.

Cresco Labs (CRLBF)
Cresco is one of the four leading marijuana companies in the U.S., with 24 operational dispensaries, 29 retail licenses and 15 production facilities in 9 operational states. What differentiates Cresco from its competitors is its Consumer Packed Goods (CPG) approach to the business, developing brands (Cresco, High Supply, Mindy’s Edibles, Good News, Remedi, Wonder Wellness Co. and FloraCal Farms) and selling them wholesale through more than 830 dispensaries across the country. In fact, the company claims to be the number one cannabis wholesaler in the U.S. The good part of that strategy is that it’s enabled fast growth—up 292% from the prior year in the latest quarter. The bad part is that it will result in lower profit margins, which is why CRLBF trades at a price/sales ratio of “only” 5, while the average marijuana company in our portfolio (not including the non-plant-touching companies), trades at a price/sales ratio of 9. In any event, the future is bright, and the company is preparing for U.S. legalization, having recently finalized a shelf prospectus and registration statement that will help the company up-list onto a major U.S. exchange as soon as permitted. CRLBF bottomed at 11.1 at the end of March and has stayed above that level since (the one day on the chart that says otherwise isn’t “real”) and it can be bought here if you’re feeling underweighted in the sector. BUY.

Curaleaf (CURLF)
Based in Massachusetts, Curaleaf remains the revenue king of the industry, with fourth quarter revenues of $230 million, up 205% from the year before, thanks in part to its acquisition of Grassroots. The company now counts 105 dispensaries in 23 states supplied by 23 cultivation sites and over 30 processing sites, as well as seven consecutive quarters of positive adjusted EBITDA. Thus, fundamentally, it looks like the one to own (the U.S. equivalent of Canopy). However, the stock is expensive, with a price/sales ratio of 13, and most important of all, it has failed to stay above its late March low of 14—and that’s not a pattern I like, so I’m rating it hold. Curaleaf will release its first quarter results after the market close on May 10. HOLD.

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb has 31 stores in nine states, but licenses for 97 retail locations in 12 states—so the path to growth is clear. In the fourth quarter, the company claimed second place among U.S. vertically integrated marijuana companies, with $177 million in revenues, up 134% from the year before, and posted its second consecutive quarter of positive EPS (eleven cents, up from four cents), so trends are great. Just a month ago, the stock gapped down big after a Chicago Tribune article cited unnamed sources in claiming there was an open federal investigation into the company for possible “pay-to-play violations” related to growing and distribution licenses in Illinois and several other states. But the company immediately rebutted the story and there’s been nothing on the topic since, so I assume that’s the end of it. More importantly, the stock bottomed at 24.5 on the rumor and has been working its way slowly higher since. First quarter results will be released after the market close on Wednesday, May 12. BUY.

GrowGeneration (GRWG), our hydroponic retailer focused on serving the commercial marijuana grower, has grown rapidly by acquisition. The company currently has 53 stores, which include 8 locations in Colorado, 18 locations in California, 2 locations in Nevada, 1 location in Arizona, 2 locations in Washington, 7 locations in Michigan, 1 location in Rhode Island, 5 locations in Oklahoma, 2 locations in Oregon, 5 locations in Maine, 1 location in Florida and 1 location in Massachusetts. And just yesterday the company announced that it had signed a lease in Jackson, Mississippi for the future site of a GrowGen garden center, designed to coincide with the implementation of Mississippi’s new medical cannabis program. As for the stock, it was an absolute rocket in late 2020 (being one of the totally legal companies in the marijuana industry and thus easy for institutions to buy), but this year it’s acted much more like the rest of the bunch. One difference, however, is that GWG bottomed early, on March 5 (likely profit-taking after the awesome gain in 2020), and since then the stock has rallied and then twice found support at 40, which looks like an attractive buying level. BUY.

Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties owns 69 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington, totaling approximately 6.2 million rentable square feet which are 100% leased. And the list continues to grow, as marijuana companies have found it attractive to convert their buildings to cash. Last week the company announced the acquisition of a property in Windsor, Michigan that will be leased to Green Peak Industries (known as Skymint Brands) for $15.6 million. IIP already owns and leases seven other properties in Michigan to Skymint, which is Michigan’s leading vertically integrated cannabis company and claims, “SKYMINT Brands are perfect for daily wellness, healing, or just getting high on life.” The yield on the stock is now 2.9% (though you should know the tax consequences of a REIT before you buy) and might be expected to increase as the company eventually slows its pace of investment. As for the stock, it looks darn good, having bottomed on March 5 and trending slowly higher since, though repelled twice at the 200 level. If you don’t own it, and a REIT makes sense for your portfolio, you can buy here. BUY.

Jushi Holdings (JUSHF)
With 32 retail locations in five states, little Florida-based Jushi is the smallest company in our portfolio as measured by revenues, but it’s growing like the wind! In fact, unofficial fourth quarter results, released just last week, showed revenues of $32.3 million, up 438% from the year before. The auditors are still working on the fourth quarter results, but management last week cited unofficial first quarter revenues of $41.6 million (impressive!)—and one hopes that the auditor either catches up or is replaced. As for the stock, it bottomed at 5.7 in late March, tested that level for a few days in mid-April, and has seen some impressive buying over the past six days. Our initial investment in stock last October was small and I never found a dip that would enable averaging up, but I like the picture I see here (it tells me other investors are climbing on board), so I’ll double our investment now. Note: as with CCHWF, the low price tells you to be prepared for greater volatility. BUY.

TerrAscend (TRSSF)
TerrAscend is another smaller producer (revenues of $65.3 million in the fourth quarter), and like JUSHF, its chart is showing the effects of buying as investors look for less-discovered stocks. A month ago, the stock suffered briefly when the CEO stepped down over “differences in philosophy over management style and culture,” but today the chart says all is well as it builds a nice base at the psychologically important 10 level. On a fundamental note, it’s worth remembering that Canopy Growth (CGC) owns about 29% of TerrAscend’s shares, which would offer the Canadian giant a quick entry into the U.S. market when legal. BUY.

Trulieve (TCNNF)
The biggest seller of marijuana in Florida, with 81 stores, a 51% market share and a record of profitability since 2017, Trulieve is a well-managed company with excellent prospects as it expands into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia). Revenues are the slowest-growing among the four U.S. industry leaders (Q4 saw $168 million, up “only” 111% from the year before), but the company’s record of profitability has been impressive. Still, sometimes favorite stocks get overbought, and that looks to be the case with TCNNF today, as the stock is notable for the way it has fallen below its late March low. I can’t say I’m terribly concerned at the moment, but this is the one big U.S. operator that I didn’t buy more of two weeks ago (partly because the portfolio is already overweight the stock) and I still don’t think it justifies a buy rating. Note: management will release first quarter results on Thursday, May 13, before the market open. HOLD.

Turning Point Brands (TPB)
Turning Point Brands, with a diversified non-plant-touching business focused on rolling papers, chewing tobacco, vaping supplies and CBD, has long been the portfolio’s low-risk diversification play. Though growth is slow for the sector, management is experienced, the small dividend is safe, and everything is legal nationwide. Last week the company announced an $8.7 million strategic investment in Docklight Brands, a consumer products company with CBD products including Marley and Bloody Mary Jane (a Bloody Mary drink mix with CBD). And just yesterday the company released its first quarter results, showing revenues of $107.6 million, up 18.7% from the year before and earnings of $0.80 per share, beating analysts’ estimate of $0.64 per share and up 57% from the year ago. The company’s Zig-Zag products segment (cigarette and cigar papers and pre-rolled cones) accounted for 38% of sales in the quarter and was up 41% from the year before. The company’s Stoker’s products segment (chewing tobacco) accounted for 27% of total net sales in the quarter and was up 10% from the year before and the company’s NewGen products segment (CBD and vaping paraphernalia) accounted for 35% of sales in the quarter and was up 6% from the year before. Additionally, the company noted that it had repurchased 119,031 shares at an average price of $48.16, an anomaly when many cannabis companies are still selling shares. And management revised forward guidance for 2021, projecting revenues of $422 to $440 million (up from previous guidance of $412 to $432 million). As for the chart, it bottomed at 46 on March 5, tested that level just last week, but then gapped higher after yesterday’s excellent report. If you don’t own it yet, you can buy it here. BUY.

Final note: Somewhere down the road, the U.S. government will legalize marijuana—though there’s still no clear idea of when. Amateurs may wait to invest until that day, but experience tells me the sector is likely to peak at that event just as it has at previous major legalization events (namely Colorado, California and Canada), so odds are I’ll be advising selling then, whenever it is. As all experienced investors know, good news brings tops; bad news brings bottoms.

The next Cabot Marijuana Investor issue will be published on May 26, 2021.

Cabot Wealth Network
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