January 26, 2022

The first news is the renaming of our advisory, from Cabot Marijuana Investor to Cabot Sector Xpress Cannabis Advisor, which is explained in today’s issue.

While the broad market was falling apart over the past week, several of our cannabis stocks held firm above their December lows, telling us that after an 11-month downtrend, the selling pressures are pretty much spent in that sector.

Today’s issue brings a few tweaks to our portfolio, but no big changes, as we are well positioned for the sector’s next uptrend.

Full details in the issue.

Sector Overview

Preparing for the Next Uptrend
First topic: the name change. With Cabot’s growth, we’ve decided to organize our sector advisories, which include Greentech and Gold & Metals, into their own separate group, Sector Xpress. Another change in the name is that marijuana is out, while cannabis is in. The world has changed since we started this advisory four and a half years ago, and cannabis now better reflects the focus of investors and industry experts.

But nothing else in the advisory has changed, and as a result, I feel confident that the system that has brought us these results over the past four years…

…will continue to guide us to index-beating returns in the years ahead. And what is that system? I like growth, particularly double-digit growth (three of our portfolio companies were still growing at greater than 100% rates as of the latest quarter). I like positive earnings and high profit margins. I like low valuations—relative to others in the sector. And above all, I like strong charts.

Admittedly, none of the charts in the sector can be called strong today, but some are certainly holding up better than others; three of ours are notable for having held above their 2021 lows even as the broad market plunged in the past week.

Finally, I like to invest aggressively when the sector is strong and to retreat to a partial cash position when the sector is weak. Last year I moved to a 45% cash position on February 10, getting out on the exact day of the top, but I started buying again in mid-April, and that was clearly too soon.

Still, I have no doubt that an upturn is coming, because the industry’s fundamentals are still terrific, with great growth forecast as currently legal states see sales grow and legalization continues to spread into new states. Mississippi is expected to legalize medical this year, while North Carolina and South Carolina have a strong chance of doing the same, and Rhode Island is likely to legalize recreational.

According to this graph from Curaleaf, the industry will grow at a compound annual rate of 14% over the next five years, with revenues growing to $47 billion—at which point the legal cannabis industry will be roughly half the size of the current illegal market, and still far smaller than the alcohol and prescription drug markets, with which it will become increasingly competitive.

Of course, the stocks that I recommend will, in general, be growing even faster, as the industry consolidation continues.

And it’s those stocks that you should really focus on, as opposed to ETFs—as I explained in my December issue. With so many small companies failing, the long-term trends of the ETFs are not good, and the results of the Index in my table above confirm it.

Marijuana Index

That marijuana index continues to tell a sorry tale, showing an 11-month correction that’s erased 69% of its value. But a turn will come.

PORTFOLIO

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

What to Do Now
Two weeks ago, we sold our final position in Canopy Growth (CGC), which was once the most popular cannabis stock in the world, and since then has suffered the downward slide typical of the most popular. And we sold half our position in Innovative Industrial Properties (IIPR), moving from overweight to underweight. At the same time, we averaged up in ScottsMiracle-Gro (SMG) and Verano (VRNOF), two of the stocks that have since proven their resilience by holding above their December lows. Today, we’re going to lighten up more on the weakest stock by selling a third of Curaleaf (CURLF), and our remaining small piece of GrowGeneration (GRWG). The portfolio is currently 20% in cash, and these moves will bring our cash to roughly 27%, which seems rather high, but we’ll quickly deploy it when we identify the leaders of the next uptrend. Details below.

New Recommendations

CURRENT RECOMMENDATIONS

Cresco Labs (CRLBF)
Chicago-based Cresco is one of the five leading marijuana companies in the U.S., with 47 operational dispensaries, 47 retail licenses and 20 production facilities in 10 operational states. It’s the market share leader in Illinois and is strong in Pennsylvania. And this month it announced the opening of its 10^th store in Pennsylvania, in Ambler, a Philadelphia suburb whose employers include major pharmaceutical companies like Johnson & Johnson, Merck and Janssen. So Cresco is growing, but with revenues up 41% in the third quarter it’s growing more slowly than the leaders. Reflecting that, it’s the cheapest on a price/sales basis. On the technical side, CRLBF had established 6 as a base in December and early January, and while it dipped briefly below that level last week, it’s back above it now. HOLD

Curaleaf (CURLF)
Based in Massachusetts, Curaleaf remains the revenue king of the industry (though Trulieve may surpass it when the fourth-quarter numbers come out), and it’s still growing at good speed; third-quarter revenues, at $317 million, were up an impressive 74% from the year before. Curaleaf now operates in 23 states with 121 dispensaries, 25 cultivation sites and over 30 processing sites. And just last week it announced the completion of the acquisition of Bloom Dispensaries, an Arizona company with four dispensaries (in Phoenix, Tucson, Peoria, and Sedona) and 2021 revenues of roughly $66 million. At the same time, Curaleaf announced plans to open two additional dispensaries in Florida, bringing its footprint in the state—where it had a 15% market share last year—to 44. So growth is good. On the product side, the company’s Select brand, which it sells wholesale, has a chance to be the Marlboro of the industry. But CRLBF stock is rather expensive (with a 4.8 price/sales ratio) and the stock has failed to hold up above its December lows, falling decisively through in recent days. Curaleaf was our largest holding coming into today, but it no longer deserves it, so I’ll now reduce our position by a third. SELL A THIRD

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb is one of the five U.S. industry leaders, with 16 manufacturing facilities and 73 operating retail locations in 15 states (California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania and Virginia). The company’s most recent acquisition brought it one of the two vertical licenses in Minnesota, along with five retail locations (in Eagan, Hibbing, St. Cloud, St. Paul and Willmar). Third-quarter revenues, at $234 million, were up a solid 48% from the prior year. And the company recorded its fifth consecutive quarter of positive earnings, which makes it stand out among the majority in this industry who are spending money as fast as they make it. As for the stock, it bottomed at 18.40 back on November 3, and has held above that level fairly well since. As I write, it is at risk of falling through, and if it does, I will lighten up in the future. But for now, I’ll hold and give it a little more rope. Fourth-quarter results will be released before the market open on Tuesday, March 1. HOLD

GrowGeneration (GRWG)
Based in Denver, GrowGeneration is not a marijuana company, but a hydroponic products retailer focused on serving commercial cannabis growers—and today I’m going to sell the stock. From the time we first invested just over two years ago until its peak in February, the stock was up an incredible 1,328%. (We sold half our position on that top day.) But since then, the stock is down 88%. And just two weeks ago, we finally got news of a fundamental problem, as the company revised (downward) its projections for 2021 results. The problem: a slowdown in the hydroponics market that saw same-store sales in the fourth quarter decrease 12.3%. Lesson: when stocks are hot, valuations can expand to ridiculous levels, but when they cool off, they can fall hard, and for much longer than expected. We’ve been underweight the stock since March, and will now sell our remaining position. SELL

Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties, has been a great diversification play over the years, bringing astounding profits, but since peaking in November, most of the action has been on the downside. The portfolio sold half its position two weeks ago because it had been overweight, and the stock no longer deserved it, and we’ll sit with the remaining portion for a while, and watch how the stock acts. The company has a great business as the country’s leading landlord for cannabis businesses, and the stock provides a hefty 3.1% yield. But the stock’s valuation went to the moon, and now we’re watching the spaceship come back to earth. HOLD

TerrAscend (TRSSF)
As the smallest of the vertically integrated multistate operators in our portfolio, this company has the potential to be a faster grower, but the third quarter saw revenues grow just 29% from the year before, which is a bit slow for this crowd. Then in September TerrAscend announced the acquisition of Gage, which should bring it a leadership position in the Michigan market. TerrAscend already has a strong share of the Pennsylvania market, with six dispensaries, and additional dispensaries in New Jersey, Maryland and California. It’s the lowest-priced stock in the portfolio, which means extra risk. And it’s rather expensive, selling at 4.2 times revenues. But the stock’s chart has held up above the 4.9 level hit way back in November, and that’s good considering the action of the broad market. The portfolio remains underweight the stock. HOLD

The ScottsMiracle-Gro Co (SMG)
ScottsMiracle-Gro is the biggest and oldest company in the portfolio. The stock yields 1.7%. And though it is unlikely to be a big winner, the stock fits into our portfolio because the company’s fastest-growing division is Hawthorne, which serves the commercial cannabis industry. With the stock down, the company is planning to buy back as much as $300 million of stock, after buying back $113 million in 2021. And the best news is that the stock is the strongest (or least weak) in our portfolio, well above its low of early December. Fourth-quarter results will be released on February 1 before the market open. BUY

Trulieve (TCNNF)
While it has long been the biggest seller of marijuana in Florida, where it has a 46% market share, Trulieve is now very close to being the biggest seller of marijuana in the world, thanks to its October acquisition of Harvest Health & Recreation, which added great strength in the western U.S. and resulted in Trulieve operating in 11 states, with leading market positions in Arizona, Florida, and (maybe) Pennsylvania. (With so many companies claiming strength in Pennsylvania, it’s hard to know who’s ahead.) And there have been other acquisitions, as well, bringing multiple names to the company’s stable, so this week the company announced the re-branding of all its 14 affiliate dispensaries in Pennsylvania to the Trulieve name. Trulieve’s early focus on Florida, while other companies were expanding across multiple states, enabled it to post early profits; the company has now posted seven quarters of positive earnings. But that hasn’t prevented the stock from falling like the rest of the sector this year; and the sad news today is that TCNNF just this week has failed to hold up above its December lows. We are no longer overweight so will hold for now. HOLD

Verano Holdings (VRNOF)
Verano, the smallest of the top five vertically integrated multistate operators, has 94 retail locations in 15 states (with over 100 more planned) as well as 13 cultivation and production facilities. Its most recent acquisitions (late in December) yielded a dispensary, cultivation facility and production facility in Connecticut. Verano is notable for having triple-digit growth in the third quarter (up 106%) from the year before, and also for its chart, which has been holding above support at 10 since early October. If you’re itching to buy a true cannabis stock (rather than one of the peripheral federally legal companies), this is the one. BUY

The next Cabot Marijuana Investor issue will be published on February 23, 2022.