January 27, 2021

2021 kicked off with a bang, as investors small and large poured money into marijuana stocks in anticipation of growing legalization, so our portfolio is off to a fine start.

But the threat of a downturn is ever-present, and the longer the bull market runs, the greater my unease.

Still, I can’t argue with the trend, which by all measurements remains up, so I’m keeping the portfolio fully invested. And if you’ve got cash, the softness of recent days is now presenting some buying opportunities!Full details in the issue.

Full details in the issue.

Cabot Marijuana Investor 121

2021 Kicks Off With a Bang
A funny thing happened while I was preparing this issue yesterday. Not funny ha-ha. Funny odd.

I was updating my performance tables and noticed that the performance of the Marijuana Index year-to-date was exactly the same as its performance through all of 2020—up 29.2%. I checked the formulas, but there was no mistake. In less than one month of 2021, the index has done as well as it did through the entirety of 2020.

What is this information worth? It’s one more reminder that we’re not early in this ballgame. It’s a reminder that someday—it could be today, it could be six months from now—this uptrend will end, the sellers will take charge, and the stocks will fall to their 50-day moving averages, if not farther.

Signs that things are getting frothy, both in the broad market and the marijuana sector, have been numerous. Valuations are high. Investing is more popular among individuals than it has been at any time since the 2000 top, with social media fanning the flames this time. And money has flowed into the marijuana sector in particular, as big investors place their bets in anticipation of eventual federal legalization. (Sadly, money always rushes in at tops, and is pulled out at bottoms.)

And this month, the Canadian stocks have come to life, after underperforming severely in 2020, despite the fact that U.S. legalization will be no help to most of them. One of the attractions to the Canadian stocks today is their greater liquidity, which is partially a function of their legality. But when the U.S. goes legal (I have no opinion on when that will be), I see a risk that institutional money will be pulled out of Canadian marijuana stocks and invested in the bigger U.S. market.

Right now, however, I’m staying fully invested. The market as a whole, notwithstanding this morning’s weakness, still looks healthy. Plus, as I’ve mentioned before, previous major tops in the marijuana sector have all come when legal sales started: Colorado in early 2014, California in early 2018 and Canada in October 2018.

There’s no guarantee that pattern will hold—but if it does, the beginning of legal sales in New Jersey, the timing of which is still unknown, might bring the next top. Or maybe it was the opening of recreational sales in Arizona last Friday. Time will tell.

What is worth remembering is that after that Canadian peak, marijuana stocks fell for 17 months—so avoiding a major part of the next downturn is a wise strategy.

Last year, by staying invested on the way up and holding cash on the way down, our portfolio gained 85.5% while the Marijuana Index gained the aforementioned 29.2%. This year, we’re lagging the index, in part because we’re underweighted in those Canadians that have popped up this month.

But the year is young, and the odds are good that this year, once again, we will outperform the index, just as we have for the past three years, by following our strategy

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—but as I explained in a recent update, there’s no certainty who those leaders will be. Thus, 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 stocks that grow stronger or to cash as various stocks roll over and underperform. Additionally, I still have in the portfolio a few lower-risk peripheral stocks—which don’t deal in marijuana directly—for diversification.

Marijuana Index

What to Do Now
Stay heavily invested but keep an eye on the exit. It’s tempting to look at this morning’s selloff and declare that the uptrend is over and it’s time to sell—but just as one swallow doesn’t make a summer, one down day doesn’t make a bear market.

Last month I reminded you of the importance of the 50-day moving average in my analysis, and this month many stocks have begun to approach those averages, but so far, the majority are well above and thus the uptrends are intact.

CURRENT RECOMMENDATIONS

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

Stock Updates
Village Farms (VFF) to Buy

Canopy Growth (CGC)
As all the major Canadian marijuana stocks have reawakened this year, Canopy has joined the surge upward, keeping a lock on its position as the most highly valued company in the industry; its market capitalization is now $13 billion. That gives it a price/sales ratio of 27, which is very high, but institutional investors justify that by noting the deep pockets and retail experience of major shareholder Constellation Brands (STZ), which is almost certain to turn this company profitable and keep it a major player in the Canadian market in the long run. Additionally, Canopy has several avenues to expansion into the U.S. when it becomes legal, including options to become a major shareholder of U.S. up-and-comer TerrAscend (TRSSF). And just yesterday, the company announced that its Martha Stewart partnership would extend to CBD products for pets. A month ago, I told you CGC was the best low-risk option in the portfolio, but the stock is up 40% since then and hit a new high today, so that’s no longer true. Also, this is one of the four stocks in the portfolio that has not hit an all-time price high recently. Quarterly results will be reported February 9 before the market open. HOLD.

Cresco Labs (CRLBF)
Cresco is one of the leading U.S. marijuana companies, coming into 2021 with 19 operational dispensaries, 29 retail licenses and 15 production facilities in nine operational states. Then, earlier this month the company acquired Bluma Wellness of Florida, which has seven operational dispensaries in the state and eight more under legal control and planned to open, and that puts the company in seven of the 10 U.S. states with marijuana programs. But what really distinguishes the company 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. Cresco turned its first quarterly profit in the third quarter of this year (two cents per share) and analysts are looking for $0.18 per share in 2021. And the stock appears relatively reasonably priced for this crowd, with a price/sales ratio of just 8. Technically, the stock has run from 10 to 14 this month but is now on a sharp pullback, having nearly touched its 50-day moving average this morning. Thus it can be bought here. Lastly, this is one of the four stocks in the portfolio that has not hit an all-time price high recently. BUY.

Curaleaf (CURLF)
Curaleaf was the revenue king of the industry in the third quarter, thanks to 96 dispensaries in 23 states supplied by 23 cultivation sites—with eight more opened in Arizona as the state went legal for recreational use last week. (As a lover of maps, I was impressed to see that Curaleaf is the first marijuana producer whose map of state operations connects all the way from the east coast to the west; the critical link was provided by Oklahoma.) And the future is bright, too, with analysts looking for EPS of $0.13 in 2021. Offsetting that a bit is the fact that the stock is expensive (for this crowd), with a price/sales ratio of 20. 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 has been trending steadily higher since October, topping 16 (an all-time high) two weeks ago, and is now on a normal pullback, drawing closer to its 50-day moving average. If you don’t own it, you could buy a little here—but I’ll keep it rated Hold. HOLD.

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb has 13 cultivation and manufacturing facilities and licenses for 96 retail locations in 12 states. By revenues, the company ranked second of the U.S. producers in the third quarter of 2020, taking in $157 million, but it was one of the slower-growing majors, with revenues up “only” 131% from the year before. Still, that quarter did bring earnings of $0.04 per share and analysts are looking for $0.43 per share for all of 2021, and I think that’s one reason the stock has been so strong; it hit another all-time high on Monday! However, since then, it’s been one of the weakest, dropping 23% in just two days to tag its 50-day moving average this morning. That makes it tops for volatility today. Aggressive investors could step in here. BUY.

GrowGeneration (GRWG), our hydroponic supplier, continues to grow fast by acquisition; it now has 39 retail and distribution centers in 11 states. And it’s targeting six more states for 2021 (Missouri, Illinois, Arizona, Pennsylvania, New York and New Jersey). But with more than 1,000 hydroponic stores in the U.S., there’s no worry about lack of opportunities yet. And this company knows how to make a profit! Its first annual profit was in 2019 and the trend has been up since, with analysts looking for EPS of $0.41 in 2021. Technically, the stock was the star of the sector in 2020, up an amazing 880% (and hitting a record high last week), in part because it’s one of the few companies in the industry that are perfectly legal nationally (and thus safe for institutional investors). But I worry that someday this pleasure cruise (which has exceeded all expectations) will come to an end, so I have previously suggested taking partial profits in the stock, particularly if you’re overweighted. We’ve sold several times and it’s still our largest holding. Technically, the stock looks fine. 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. And like GRWG, I worry that it’s become overextended, up 85% from the October low to its record high last week. Still, there’s been no real selling pressure on the stock—and there’s no question that the market has much farther to grow. In fact, earlier this week, the company announced a deal with Harvest Health & Recreation (HRVSF) (one of the smaller stocks on my watch list) for the company’s cultivation and processing facility in Alachua, Florida. With a dividend of 2.5% and a solid track record of profitable operations, IIPR is still a decent buy if you’re feeling underinvested in the sector—but I’ll keep it rated Hold. 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 in sales. But with small size comes the potential for fast growth, and Jushi delivered in spades, up 594% from the year before. That pace will slow, of course, but positive earnings appear to be right around the corner, and the action of the stock, which hit another record high just yesterday, tells us investors are catching on to this story. Our portfolio is still underweight, waiting for a prudent opportunity to average up. 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). Today the company operates in Pennsylvania, New Jersey and California—as well as Canada. And the action of the stock, which soared 270% from its September low to its recent record high, says investors (or traders) have become well aware of the potential here. If you don’t own it, you could nibble in this area, as the stock has now dipped roughly halfway to its 50-day moving average. BUY.

Trulieve (TCNNF)
The biggest seller of marijuana in Florida, with a 52% 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). And today it announced the opening of its 78^th dispensary, located in Sebastian, Florida. Revenues are the slowest-growing among the industry leaders (Q3 saw $136 million, up “only” 93% from the year before), but that record of profitability is impressive. Analysts are looking for EPS of $1.24 in 2021, up from an estimated $0.47 in 2020. As for the stock, it gained 180% from its September low to its record high two weeks ago, and is now on a normal correction. If you’re feeling underinvested in the sector, you could buy a little here. BUY.

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 (revenues up 8% to $104 million in the latest quarter), management is experienced, the small dividend is safe, and everything is legal nationwide. Furthermore, while the company’s NewGen segment (CBD and vaping equipment) currently accounts for about 20% of revenues, management has a plan to increase that to 50% in the next few years. As for the stock, TPB, while up 75% from its October low, is still below its all-time peak of mid-2019; it had kept advancing far after most marijuana stocks had turned down, but in the past six months it’s been a laggard. We’re already underweight the stock and could sell some more. On the other hand, I still like the diversification—and the stock was solid as a rock in this morning’s selloff. HOLD.

Village Farms (VFF)
A month ago I was a little worried about VFF, because after a month in the portfolio, the stock had done nothing. But January has changed that, and now I’m fairly confident that this greenhouse grower can be one of our lower-risk diversified holdings for some time to come. 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 it should be safer than some of the high-profile producers when the next downturn comes. Since hitting a high of 15 two weeks ago, the stock has pulled back toward its 50-day moving average at 10.7, and I think this presents a decent entry point, so I’ll upgrade it to Buy now. BUY.

Watch List
With the portfolio currently full, I have no need to buy anything else, but if I did, these three U.S. producers’ stocks would be contenders. Note that they tend to be smaller and lower-priced and thus are likely to be more volatile.
Columbia Care (CCHWF)
Harvest Health & Recreation (HRVSF)
Planet 13 Holdings (PLNHF)

The next Cabot Marijuana Investor issue will be published on February 24, 2021.

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