February 24, 2021

Yesterday was a rough day for stocks in the marijuana sector. Today was better. But overall, I continue to hold the opinion that the sector peaked two weeks ago and that it needs a longer cooling-off phase—a real correction.

Such a correction can take many forms, and it’s hardly worth speculating about what form this one will take. Yet by managing your portfolio carefully, based in large part on the action of each stock, you can get through this correction with minimal pain and be well-positioned to add to your gains when the uptrend resumes—because in the long run, this remains a fantastic sector to be invested in.

Full details in the issue.

Cabot Marijuana Investor 221

“Legal Weed Stocks Dip Despite New Jersey Governor Signing Recreational Cannabis Bill Into Law”
That was the headline on one of my news sources yesterday morning, implying that the action of the stocks in light of that legalization event was somehow illogical. But as you know if you’ve been reading my advice, legalization events are exactly when stocks top out—because after that, there’s no more good news coming. In fact, what is likely to follow in New Jersey is a protracted political argument about exactly who gets to open marijuana stores, and where they can be located, and how high the taxes should be, and perhaps who should be specific beneficiaries of those taxes. In Massachusetts, it was two solid years from the time we voted until the first stores opened (though it’s almost certain New Jersey will be quicker).

Now, I’m not saying that the New Jersey legalization event is the only reason marijuana stocks fell big yesterday morning. The market as a whole was down, in part thanks to Jerome Powell’s comments about inflation.

But Powell is just the figurehead who’s most visible today. The biggest reason for the decline, in my opinion, is that the market needs it. After 11 solid months of up action, investor sentiment has become too bullish. Just look at the enthusiasm for electric car stocks, for Special Purpose Acquisition Companies (SPACs)—which have no earnings but high potential, for GameStop-type stocks, for anything the Reddit crowd is pushing on Robinhood, for Bitcoin, and yes, for marijuana stocks—and think about how different this environment is from the environment of March 2020. That was a great time to buy stocks; this isn’t.

This is the beginning of the time when the newcomers who have had a lot of fun “playing the market” in recent months learn what a broad market downtrend can do.

How long this downtrend will last and how deep it will go, no one knows. But you don’t need to know. All you need to do is follow the system: Own stocks that are going up. Sell stocks that are going down. And when not enough are going up, hold cash.

Two weeks ago, just as the sector peaked, our Marijuana Portfolio was up 48% YTD while the Marijuana Index was up 91% (in part due to the Canadian stocks that had rebounded from an oversold position late last year). That’s when I advised selling, based mainly on the action of the charts—which were showing unsustainable parabolic action—but also on the elevated sentiment among investors.

Today, the Index has given up nearly half of its gain, while our portfolio has lost far less, thanks to holding plenty of cash and just one Canadian stock. And today I’m going to stick with this defensive position, as the odds are good that these stocks will decline further.

Admittedly, it’s tempting to look at Tuesday’s dip—especially on short-term charts—and conclude that this is a decent short-term buying opportunity; CGC, for example, has fallen to its 50-day moving average. Traders might succeed at that. But we are investors, investing for profits both long-term and short-term, and a careful study of our stocks’ longer-term charts tells us that buying here is a dangerous proposition, as downside potential currently outweighs upside potential.

If the downtrend continues, we will lighten up further, likely getting out of some stocks totally as we have done in previous major downtrends; that can clear the way for fresh portfolio additions with better prospects. Alternatively, if the sector finds support soon and strengthens—and the broad market does the same—we will get back in, focusing as always on the biggest, strongest and fastest-growing companies. Either way, by the end of the year, I have little doubt that we’ll have notched another healthy gain.

Strategy
The long-term strategy is to develop core holdings of the companies that will lead this fast-growing industry five and 10 years from now—though, there’s no certainty who those leaders will be. So our short-term strategy is to listen to the stocks, owning those with the strongest charts and the best fundamentals, and then switching incrementally to stronger stocks or to cash as the shorter-term cycles of the sector evolve.

In the background of all this, of course, is the trend toward legalization in the U.S. With marijuana still illegal in the U.S. under federal law, risk-averse institutions have been favoring Canadian stocks (which trade on the NYSE or Nasdaq, while U.S. marijuana companies are relegated to Over The Counter and Bulletin Board exchanges) and the non-plant-touching companies in the industry (we have three in the portfolio). Someday that will change, leading (presumably) to a flood of institutional money into the bigger U.S. companies as they uplist to the major exchanges. It should be interesting (and profitable) to ride that wave.

Marijuana Index

What to Do Now
The portfolio is making no changes today, having sold heavily two weeks ago. But if you haven’t yet, consider some of these selling rules that have proven useful over time: Take partial profits when stocks are unreasonably extended (long-term charts still show this). Cut losses short at 20%. Never let a good profit turn into a loss. And if you have a profit of 100% or more, don’t lose more than half of it.

CURRENT RECOMMENDATIONS

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

Stock Updates
No Changes

Canopy Growth (CGC)
With a market capitalization of $13 billion, Canopy is 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); Canopy already has the #1 position in Canada in CBD beverages—admittedly a small category now, but with huge potential. The fourth quarter saw revenues of $153 million, up 23% from the year before (slow for this sector) and the promise of a turn to profitability in 2021. As for the chart, after topping 56 two weeks ago, it fell through its 50-day moving average and bounced off 32 yesterday and the odds are it needs more time to cool off. HOLD.

Cresco Labs (CRLBF)
Cresco is one of the leading U.S. marijuana companies, with 20 operational dispensaries, 29 retail licenses and 15 production facilities in nine operational states. And just last week the company announced the closing of its acquisition of Verdant Creations dispensaries in Cincinnati, Chillicothe, Newark and Marion, Ohio. These acquisitions bring the company’s dispensary presence in Ohio to five – the maximum allowed by the state. What differentiates Cresco from its competitors is its Consumer Packed Goods (CPG) approach to the business, developing brands (like Mindy’s Edibles, Good News and High Supply) and selling them wholesale through more than 830 dispensaries across the country. As for the stock, it broke out to all-time highs at the start of February (a good thing), topped two weeks ago above 17, and bounced off its 25-day moving average yesterday at 14.5. A deeper pullback is likely. HOLD

Curaleaf (CURLF)
Based in Massachusetts, Curaleaf was the revenue king of the industry in the third quarter; revenues were $182 million, up 195% from the year before, thanks in part to the acquisition of Grassroots. The company now counts 101 dispensaries in 23 states supplied by 23 cultivation sites. Curaleaf is focused on vertical integration through continued investment in cultivation and processing along with expanded retail channel ownership and wholesale distribution; right now, the company’s products are sold in 1,300 stores. The stock broke out to record highs in December when it crossed above 12, ran as high as 18 two weeks ago, and dipped to its 25-day moving average yesterday, but odds are it will visit its 50-day moving average (now at 14.5) or worse. Fourth-quarter results will be released March 9 after the market close. HOLD.

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb has 31 stores in nine states, but licenses for 96 retail locations in 12 states—so the path to growth is clear. In the third quarter, revenues were $157 million, up 131% from the year before. That was relatively slow growth for this sector, but the quarter did bring earnings of $0.04 per share and analysts are looking for $0.43 per share for all of 2021, so the company is one of the leaders on the earnings front. The stock broke out to an all-time high in January when it crossed 25, peaked two weeks ago at 39, and just tagged its 25-day moving average yesterday; the 50-day moving average is down at 29. Fourth-quarter results will be released March 17 after the market close. HOLD.

GrowGeneration (GRWG), our hydroponic supplier, continues to grow fast by acquisition. Last week it announced the purchase of Grow Warehouse, a four-store chain of hydroponic and organic garden stores in Colorado and Oklahoma that brings in annual revenues of approximately $20 million. And just yesterday it announced the acquisition of San Diego Hydroponics & Organics, a four-store chain of organic, hydroponic and aquaponics garden centers in San Diego, California with annual revenues approaching $10 million. This acquisition brings the total number of GrowGeneration hydroponic garden centers to 50 stores. In California, the country’s largest legal cannabis market, GrowGeneration now has 17 stores, with eight of those stores located in Southern California. Just last month, the company pre-announced fourth-quarter revenues of $61.5 million, bringing full-year 2020 revenue to $192 million, up 140% from 2019. Same-store sales increased 63% for full-year 2020, compared to the previous year. The company also raised its 2021 revenue guidance to $335 million - $350 million and raised its 2021 adjusted EBITDA guidance to $38 million - $40 million. GrowGeneration plans to have 55 garden center locations by the end of 2021. As for the stock, it was an absolute rocket in recent months, crossing 20 in November, and topping 66 two weeks ago. But over the past two weeks it’s come down with the sector, and yesterday it plunged below—but finished above—its 50-day moving average. And that’s okay for now. We’ve taken profits in GRWG several times and it’s still our largest holding. HOLD.

Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties owns 67 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Virginia and Washington, totaling approximately 5.7 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. Like GrowGeneration, this business is totally legal nationwide and thus the stock can be bought without legal worry by institutional investors. But unlike GRWG, the stock kept climbing after the marijuana sector turned over, hitting a new high just last week. The divergence, however, was short-lived, and GRWG joined the crowd on the downside yesterday, falling to its 50-day moving average before rebounding, rather impressively. Fourth-quarter results will be released today after the market close. HOLD.

Jushi Holdings (JUSHF)
With 32 retail locations in five states, little Jushi is the smallest company in our portfolio as measured by revenues; the third quarter saw just $24 million. But the company is growing fast; that revenue was up 594% from the year before. And the stock has done very well in the four months we’ve owned it. Most recently, it’s been running with the crowd, both up and down, and nearly touched its 50-day moving average yesterday before rebounding solidly. Interestingly, our initial buy of JUSHF was small; I intended to average up as our profits grew. But that never happened, as the advance was too strong. So I didn’t sell any JUSHF two weeks ago when I lightened up on everything else, and our position is still smaller than our average. HOLD.

TerrAscend (TRSSF)
TerrAscend is the first producer with scale operations in both the U.S. and Canada, in part thanks to the early (and growing) interest of industry heavyweight Canopy Growth (CGC), which owns about 29% of its shares. And business is growing fast, so fast that management opted to announce preliminary fourth-quarter results last week. Revenues were $65 million, up 152% year-over-year, and adjusted EBITDA was $26 million, representing growth of 46% quarter-over-quarter. Additionally, TerrAscend reiterated its 2021 guidance for net sales of $360-380 million and adjusted EBITDA of $140-160 million. Official fourth-quarter results will be released March 23 before the market open. As for the stock, it’s been one of our strongest recently, hitting a new high this Monday and holding firmly since. The sellers have no power here—yet. HOLD.

Trulieve (TCNNF)
The biggest seller of marijuana in Florida, with 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 industry leaders (Q3 saw $136 million, up “only” 93% from the year before), but the company’s record of profitability is impressive. As for the stock, it peaked with the sector two weeks ago and nearly tagged its 50-day moving average yesterday before rebounding above its 25-day moving average. Fourth-quarter results will be released March 23, before the market open. HOLD.

Turning Point Brands (TPB)
Turning Point, with a diversified non-plant-touching business focused on chewing tobacco, rolling papers, 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 (raised just this week) is safe, and everything is legal nationwide. Fourth-quarter results, released two weeks ago, saw revenues of $105 million, up 31% from the year before, and EPS of $0.84, up 105% from the year before. As for the stock, it only recently broke out to record highs, having been held down by the vaping crisis in 2019. Its pullback since the high of two weeks ago was standard for the sector (almost tagging the 50-day), and while TPB has bounced less than our average stock since, the main trend looks fine. In fact, if I had to buy one of these stocks today, TPB is the stock I’d choose, given the short-term downside potential for the whole sector. HOLD.

Village Farms (VFF)
Village Farms’ main business is growing vegetables, in both Canada and the U.S., but the higher growth new businesses it’s embarked on are growing marijuana in Canada for the wholesale market (it’s the lowest-cost greenhouse producer in the country) and growing CBD (and eventually marijuana) in the U.S. The stock may never be hot—the company’s revenues grew just 12% in the third quarter from the year before—but I like the long-term prospects and I like the diversification. And now I like management too, for their recent news release about conditions in Texas. In short, their facilities have been unimpacted by the recent freeze and power outages; they have their own wells and redundant power generators. The stock peaked with the sector two weeks ago, tagged its 25-day moving average yesterday and rebounded nicely today. Fourth-quarter results will be released before the market open on March 16. HOLD.

Watch List
I’m not particularly keen on doing any new buying today, but when the environment is better these may be contenders.

Columbia Care (CCHWF)
Based in New York, Columbia has 76 dispensaries in nine states, served by 24 cultivation and manufacturing facilities. Third-quarter revenues were $48.7 million, up 120% from the year before, and the chart looks good.

HEXO (HEXO)
HEXO is a second-tier vertically integrated Canadian producer that trades a little more calmly than the high-profile leaders of the industry in that country (CGC and TLRY in particular). Third-quarter revenues were $29.5 million, up 103% from the year before, and the loss was just a penny a share, which is encouraging.

The next Cabot Marijuana Investor issue will be published on March 31, 2021.

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