If there is one message I want you to take home from today’s issue, it’s that cannabis stocks are cheap. Really cheap. And they may never be this cheap again.
So if you’ve got some cash sitting around that you want to “risk” in a long-term investment, consider the stocks I’ve rated buy.
In the meantime, our portfolio, which has beaten the index in each of the past four years, is 58% in cash, waiting patiently for the turn.
Full details in the issue.
Yours for wealth and wisdom.
Cabot SX Cannabis Issue: June 29, 2022
Stronger Companies in a Weaker Market
By some measures, the cannabis industry looks terrible. The average stock in the sector is down 54% YTD and down 83% from the sector high of February 2021.
As they’ve collapsed, many cannabis stocks have fallen below March 2020 lows—while the S&P 500 is up about 77% from then.
At the same time, the number of cannabis stocks in the sector has shrunk from 167 stocks back in 2018 to fewer than 90 today, as acquisitions enlarge the industry leaders and delistings eliminate the failures.
In many ways, this process reminds me of the collapse of technology stocks after the dot-com bubble that peaked in March 2000. But technology stocks didn’t disappear after that bubble; the cream of the crop came back healthier than ever.
And so will the best-run cannabis stocks after this downturn is over.
Part of the problem today, of course, is that the entire market is down, so much that it’s commonly regarded as a bear market. I don’t pay much attention to labels. But I do recognize that the trend is down, and I know that it will be hard for this sector to put together a new uptrend until the broad market turns up as well.
But I absolutely know that it will, because the leading companies in the industry, whose stocks we own in our portfolio, have all built solid vertically integrated diversified operations that are either profitable now or will easily turn profitable once managements ease off on the furious growth efforts that have characterized the industry so far.
Furthermore, these stocks are now cheaper than ever!
Last month I told you that the average price/sales ratio (PSR) of the six multistate operators in our portfolio (excluding the REIT) was just 2.87. Now it’s down to 2.33, a number that compares extremely favorably to the average PSR in the alcohol industry (2.77) and the tobacco industry (2.63). But those two industries are mature and stagnant and at risk of further regulation, while the cannabis industry has great growth ahead, given the continuing state-by-state trend toward legalization.
Speaking of legalization, where progress tends to come incrementally until a tipping point has been reached, the SAFE Banking Act has hit yet another wall in Congress and won’t be included in the final version of an economic stimulus bill.
But a new bipartisan bill with similar aims was filed recently by Democratic U.S. Rep. Troy Carter of Louisiana and Republican U.S. Rep. Guy Reschenthaler of Pennsylvania. This bill, dubbed the CLIMB Act, for Capital Lending and Investment for Marijuana Businesses would guarantee that financial institutions working with marijuana companies would be protected from federal regulators, bolster business lending to state-legal marijuana businesses and protect federal agencies such as the Small Business Administration that could issue grants and loans to cannabis companies.
Time will tell if this is the step that gets financial institutions into the cannabis industry big-time, but there’s no question that we will get there eventually.
In the meantime, my advice is to stay the course. We own the best companies in the business, and until any of them are acquired by larger entities—possibly well-known giants in the alcohol, tobacco and pharmaceutical industries—these are the companies whose stocks have the best chance to shine when the sector turns up again.
And when they do, we’ll quickly get fully invested and watch our profits mushroom once again.
For the record, this advisory was started in mid-2017, and while we didn’t beat the index over the reminder of that year (the index was up 152% while we gained “only” 121%), we have beaten the index every year since. And the cumulative effect of beating the index has been remarkable; while the index is actually down 48% since mid-2017, our portfolio is up 112%—and will be up much more at the end of the next upleg. I hope you’ll stick with us.
The marijuana index shows the last 12 months of a downtrend that has lasted over 16 months and erased 83% of its value. Is 90% possible? Certainly! And that’s why we’re not doing any new buying here. But we’re holding on tight because the upside potential for our stocks is much greater than the downside.
|Stock||Shares||Current Value||Portfolio Weighting||Price Bought||Date Bought||Price 6/29/22||% Change|
|Cresco Labs (CRLBF)||6,115||$15,837||7.6%||$3.99||4/30/20||$2.59||-35.1%|
|Green Thumb Ind. (GTBIF)||2,051||$17,308||8.4%||$7.25||04/30/20||$8.44||16.4%|
|Innovative Ind. Prop. (IIPR)||43||$4,756||2.3%||$18.81||11/17/17||$109.39||481.6%|
Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.
What to Do Now
If you’re a new subscriber, or you’re underinvested in the sector, I think buying some of these stocks here (those rated buy) will work out very well—but there’s no rush. Until we see the sector turn up—and ideally, the broad market too—cash is the more sensible option. Today the portfolio is 58% in cash, and that’s where it will stay today.
Cresco Labs (CRLBF)
Chicago-based Cresco saw first-quarter revenues of $214 million, as YoY growth slowed to 20%. And the company, which has long prioritized the wholesale market, maintained its position as the #1 seller of branded cannabis products in the U.S. But retail revenue is growing, and was up 44% year-over-year, to $119 million. The company opened four new stores in the quarter (three in Florida and one in Pennsylvania), and now has 50 stores in 10 states. And when the acquisition of Columbia Care (CCHWF) is complete—Columbia has 84 stores and had first-quarter revenues of $123 million—the company will have a stronger retail network, which should justify a higher valuation multiple. But as it stands today, this stock remains the portfolio’s cheapest on a price to sales basis—just .79. At least one analyst expects to see the company turn profitable in the second quarter, but the stock remains weak, hitting new lows frequently. Aggressive risk-takers could buy here. BUY
With 131 retail locations in 22 states, Massachusetts-based Curaleaf was the second-largest multistate operator by revenues in the first quarter (just $5 million behind Trulieve), and Cresco’s acquisition of Columbia, when completed, will make it a contender, too—so it’s a horse race between those three. But Curaleaf is the clear leader on the perception front; its market capitalization of $3.6 billion tells us investors expect a lot from the company and its PSR of 2.8 is the second-highest of our U.S. operators. Some of that is due to its international operations; Curaleaf has operations in eight European countries as well as Israel. Some may be due to the perception that the company’s R&D based on rigorous scientific research will pay dividends in the future as the industry goes more mainstream. And some may be due to the company’s strong balance sheet—$243 million in cash at the end of the first quarter. In any case, the future is bright, and the chart looks pretty good for this sector, as it bottomed back on May 10 and is still above that level today. CURLF is the portfolio’s largest position. BUY
Green Thumb (GTBIF)
Where Green Thumb stands apart from our first two holdings is its record of posting quarterly profits—seven in a row so far. But that hasn’t helped the stock, which is down 78% from its high of 2021. Headquartered in Chicago, Green Thumb was the third-largest cannabis company in the U.S. in the first quarter (but will fall to fourth after Cresco’s acquisition of Columbia is complete), and like the others, it’s been growing both organically and by acquisition. The company currently has 77 operating retail locations in 15 states (California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania and Virginia). It’s building a national portfolio of brands that address the customers’ spectrum of well-being (from healthy to comfortable to happy). As for the stock, the main trend remains down, though the fact that the stock has found support at 9 over the past week is a thin ray of sunshine. BUY
Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties, has a great business as the country’s leading landlord for cannabis companies, and just two weeks ago announced the acquisition of a property in Texas that will be leased to Texas Original, which is one of three vertically integrated cannabis license holders in Texas, and the only provider headquartered in the state. Texas Original currently operates a production and dispensary facility in Austin as well as the state’s largest distribution and delivery network, but the medically legal Texas cannabis program is still extremely small! In fact, while Texas is the second most populous state with nearly 30 million residents, and the illicit cannabis market in Texas may be $6.0 billion, the state’s medical cannabis program has approximately 26,000 registered patients and 580 physicians. So there’s great opportunity! As of June 15, 2022, IIP owned 111 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 8.4 million rentable square feet (including approximately 2.6 million rentable square feet under development/redevelopment). And the company is still growing at a good pace, as first-quarter revenues were up 50% from the year before. But the stock has collapsed with the rest of the sector (even though one could argue that this is a REIT, not a cannabis company), and the reasons are not hard to find. First, IIPR was a very big winner until last year, partly because it’s legal for all institutions to own the stock, while many are still leery of the cannabis sector—and all great investors know that big winners that soar to irrational heights can turn into big losers when the bubble pops. Second, the stock, even down 57% from its peak, is still expensive, trading at a price-sales ratio (PSR) of 13.8, while the average REIT trades at a PSR of 7.9. Third, we’re in a bear market. The 6.3% yield may be tempting to some, but the biggest risk I see here is that as investing in cannabis becomes increasingly legal, the forces that inflated this stock until last year may never return. We’ve taken profits numerous times and IIPR is now the portfolio’s smallest position. HOLD
OrganiGram is the number three producer of cannabis in Canada, and number one in dried flower, with its flagship brand Edison. And with first-quarter revenues up 117% from the previous year, it’s the fastest-growing company in the portfolio—which is partly possible because it’s the smallest. Plus, it turned EBITDA-positive in the first quarter as gross margins improved thanks to economies of scale and increased automation. However, the stock is the weakest in our portfolio by one measure; it’s the only one to fall below its 2020 low. But that’s mainly because it’s Canadian, and the Canadian cannabis stocks have fallen harder than the U.S. stocks as competition has led to unexpectedly low cannabis prices. On the bright side, OrganiGram recently received $6.3 million from British American Tobacco (BTI), which increased its equity position to 19.4% and could easily increase that in time. BUY
As the smallest of the vertically integrated multistate operators in our portfolio, TerrAscend is a potential acquisition target—perhaps by Canopy (CGC), a major player in Canada—but that’s not why we own it; the company is doing fine on its own. First-quarter results, released May 12, saw revenues of $49.7 million, down 7% from the year before but up half a million from the fourth quarter of 2021. The company entered the Michigan market with the acquisition of Gage Growth in March, and while the Michigan market is experiencing pricing pressure, the Gage brand has a 60 to 70 percent premium over market prices, plus the company is planning to acquire five additional dispensaries in Michigan. But the real focus going forward is on New Jersey, Pennsylvania and Maryland, three key markets that are moving forward with adult-use cannabis sales. Sales in New Jersey began in April—TerrAscend has given guidance that stores in New Jersey would hit a $40 million run rate at some point within the first year of adult-use—and Pennsylvania and Maryland are expected to make the transition within the next 18 to 24 months. As for the stock, its chart is weak, typical of stocks in the sector. HOLD
While it has long been the biggest seller of marijuana in Florida, where it has a 46% market share and does 70% of its business, Trulieve has been expanding across the country in the past year (it had seven acquisitions in 2021), with the October acquisition of Harvest Health & Recreation (the largest cannabis transaction to date) being the big one. And on June 16 it announced the opening of a new medical dispensary in New Port Richey, Florida, bringing the count to 167 dispensaries in in 11 states, with leading market positions in Arizona, Florida, and Pennsylvania. Trulieve’s early focus on Florida led to an impressive 17 consecutive quarters of profitability, but earnings fell into the red the past two quarters as the company expanded aggressively. Still, earnings should return soon, particularly since the company now has the industry’s leading footprint in Pennsylvania, and CEO Kim Rivers is optimistic that Pennsylvania (as well as Maryland) will soon legalize recreational marijuana. Speaking of Rivers, it’s notable that on May 24, she acquired 14,000 shares of the company at a price of $14.45 a share for a total purchase value of about $202,300. She now owns just under 2.5 million shares. (Investing experts know that insider selling often means nothing—because executives often need to diversify—but insider buying is a good sign.) First-quarter results saw revenues of $318 million, up 64% from the prior year (the fastest growth in the portfolio among the U.S. providers as well as the biggest in the industry)—so growth trends are good. As for the stock’s chart, it bottomed at 12.79 back in early May and has been battling to hold above that level lately, which is slightly encouraging. BUY
The next Cabot SX Cannabis Advisor issue will be published on July 27, 2022.
About the Analyst
Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.
Under his leadership, Cabot advisories have been honored numerous times by Hulbert Financial Digest, Dow Jones MarketWatch and Timer Digest as the top investment newsletters in the industry.
After working in this business for more than 33 years, Timothy says, “There are 8 things I know.
- The business of investing can provide great rewards to those who work at it and are willing to learn. Those who refuse to learn will lose money.
- To succeed as an investor in growth stocks, it’s best to buy when upside potential dwarfs downside potential, to cut losses short, and to let winners run.
- To succeed as an investor in value stocks, it’s best to buy low and hold patiently, until the stock is fully valued.
- Your greatest enemies are your own emotions and the daily news (generally bad) which distracts you from a long-term focus. Try to ignore them both.
- On the other hand, use your imagination to consider how great companies might evolve, remembering the power of the unforeseeable and the incalculable. When it began renting DVDs by mail, did anyone imagine Netflix could become a leading producer of content? When it began selling books, did anyone imagine Amazon would eventually sell almost everything?
- For over two centuries, the long trend of the markets has been up, reflecting the growth of asset values, and I recommend that you invest in synch with that trend. Your greatest ally is time.
- However, there will always be bull markets and bear markets, and you can use these to your advantage, particularly if you pay close attention to both chart patterns and investor sentiment.
- Lastly, have faith in the ability of intelligent, innovative men and women to adapt, as they always have, and to solve the problems of the future in ways that are unimaginable to people of today. Invest in these people when you can.
Timothy has appeared on numerous podiums as an investing expert, including Bloomberg TV and the World Money Show, led Investor’s Business Daily discussion groups and been interviewed by Dow Jones MarketWatch,TopStockAnalysts.com, VoiceAmerica.com, AOL Finance and numerous other business news organizations.