March 30, 2022

It’s been a challenging year for investors in cannabis stocks, but the good news today is that the stock market as a whole is stronger, and cannabis stocks are trending higher as well, especially in Canada, where the stocks were thoroughly oversold.

So I’m adding two new Canadian stocks to the portfolio.

Full details in the issue.

Sector Overview

Promising Signs
While 37 states have legalized cannabis for medical use and 18 states have legalized it for recreational use, we are still waiting for total Federal legalization. Next week the U.S. House of Representatives is likely to pass the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act), which would eliminate criminal penalties associated with marijuana, by a slim margin.

But the Senate will almost certainly not pass it. The trend is in place, but it has not reached its endpoint.

At the state level, there’s been a delay in allowing New Jersey’s medical cannabis dispensaries to start selling recreational cannabis, but Gov. Phil Murphy says the launch is only weeks away—which should put pressure on New York legislators.

And cannabis industry advocates continue to urge lawmakers to pass the SAFE Banking Act, which would allow marijuana businesses to use banking services. But the fact is that smaller independent banks are increasingly stepping up to serve the industry—and finding it very profitable.

More important to us is what the stocks themselves are doing, and the good news today is that Cabot’s intermediate-term market timing indicator, which is used by growth stock guru Mike Cintolo to judge market strength, has now turned positive thanks to a couple of weeks of strong action by growth stocks. Additionally, a couple of other indicators, which measure unusual strength over shorter time periods, have also flashed buy signals, telling us, in effect, that the sellers have had their day, and the buyers are now in control. Thus the prospects are very good for the market as a whole, and growth stocks in particular—which includes all our cannabis stocks—to be substantially higher in the months ahead.

With the average stock in the portfolio (excepting IIPR) now trading 55% off its high, that implies a gain of more than 100% just to get back to those old highs—and I expect more. But first…

Let’s Talk About Canada
It was way back in October 2018 that Canada legalized cannabis across the country, which was great for Canadian citizens, but proved a mixed blessing for the cannabis companies trying to serve them. In short, there was massive overproduction in the industry, which led to cutbacks and “rightsizing” that are still going on today.

And it proved a mixed blessing for investors as well, as cannabis stocks, which had soared in anticipation of legalization, promptly topped and then spent the next three-plus years giving up all those gains. (It was a clear example of the old stock market adage, “Buy the rumor, sell the news.”)

Our portfolio did very well with the leading Canadian cannabis stocks in 2017 and 2018 (there were few U.S. cannabis stocks of any size back then), but we sold them all on the way down and our portfolio has been all U.S. stocks recently.

But with the recent market strength, a few of the leading Canadian cannabis stocks are showing signs of life!

My favorites, based on both their fundamentals and their technical action, are Organigram (OGI) and Tilray (TLRY). Organigram is somewhat smaller than our smallest multistate operator, TerrAscend, while Tilray, the biggest cannabis company in Canada, is roughly half the size of the U.S. leaders. Today the portfolio will take new positions in both of them; details are below.

As for the U.S. stocks, while they have not been quite as strong as the Canadian stocks in recent weeks (they weren’t as thoroughly trashed) they are certainly looking better, with several trading above their 25-day moving averages, so I’m now rating all of them buy (with the exception of IIPR).

Marijuana Index

The marijuana index shows a downtrend that lasted over a year and erased 71% of its value, with the March bottom (in concert with the broad market’s bottom) marking a likely end to the downtrend. By itself, this index, like the stocks in our portfolio, is not strong enough to conclude that the trends are up, but I believe in Mike Cintolo’s market timing indicators, which tell us the broad market is going up, and thus I believe these stocks will follow that trend.

PORTFOLIO

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

What to Do Now
All our U.S. cannabis multistate operators are now rated buy, and I’m adding two Canadian multiprovince operators as well, Organigram (OGI) and Tilray (TLRY), taking a 5% position in each. The portfolio will buy (as always) at the average price of the day after publication, but you have the opportunity, if you’re trying to reduce risk, to wait for a pullback.

New Recommendations

CURRENT RECOMMENDATIONS

Cresco Labs (CRLBF)
Chicago-based Cresco vaulted to the top of the industry last week with the announcement that it had agreed to acquire Columbia Care (CCHWF). I reported on this last week, so won’t repeat the details, but it’s clear that with Cresco’s previous leadership position in wholesale and Columbia’s big retail footprint, the company will be a major force in the industry going forward. The legacy of Cresco’s acquisitive past, however, is a failure to string together any two positive quarters of earnings—and a price/sales ratio of 1.9 (the cheapest of all the major industry players). But CRLBF remains the portfolio’s largest position, in part because I like the combination of the company’s strong fundamental position and the relatively cheap stock. CRLBF bottomed at 5 in January and March, and thus is ripe for the sector’s new uptrend. BUY

Curaleaf (CURLF)
Based in Massachusetts, Curaleaf is the dethroned revenue king of the industry, but still a major contender, and still very much respected, as illustrated by its industry-leading market capitalization of $4.8 billion and its price/sales ratio of 4.0. Like most of its peers, it’s been acquiring selectively, with the latest catch being Bloom Dispensaries, an Arizona company with four dispensaries and 2021 revenues of roughly $66 million. And like Cresco, it’s had a hard time posting profits, figuring those will come later. At the moment, growth is the priority, and with 128 retail locations in 23 states (including 45 in Florida), Curaleaf is trending in the right direction. As for the stock, it has recovered from the misguided selling on rumors of a Russian connection and is currently trading above its 25-day moving average. BUY

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb is the fourth-largest vertically integrated multistate operator in the U.S., and like the others, it’s been growing both organically (no pun intended) and by acquisition, though there have been no huge deals. The company currently has 75 operating retail locations in 15 states (California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania and Virginia). Fourth-quarter revenues, as reported earlier, grew 37% from the prior year to at $244 million. Its price/sales ratio is 3.9, just under Curaleaf’s and unlike those first two stocks, Green Thumb has been able to post positive EPS for six consecutive quarters. As for the stock, it looks very similar to the others; it bottomed at 14.8 a couple of weeks ago and has rebounded to its 25-day moving average. 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 the stock provides a hefty 3.1% yield. It’s been a great diversification play for our portfolio over the years, bringing astounding profits, but after peaking in November (long after the true cannabis stocks), the stock had a sharp correction—which I think was justified, given the stock’s sky-high valuations at the top. But since bottoming at 168 in February, it’s rallied strongly (the strongest stock in the portfolio) and now sits well above both its 25- and 50-day moving averages. There’s a decent argument for buying here, and the portfolio could certainly average up, given that it’s the smallest position in our portfolio. But I’m simply going to hold, because I think the “true” cannabis stocks are likely to climb faster as the sector turns up. HOLD

Organigram (OGI)
Organigram is the number three producer of cannabis in Canada, and number one in dried flower, with its flagship brand Edison. The company’s latest quarter saw revenues of $30.4 million, up 57% from the year before and a loss of 4 cents per share, improved from a loss of 17 cents. So, while there are no earnings yet, it’s going in the right direction. The stock’s price/sales ratio is 5.9 and its price is under 2, territory where I am generally very leery of treading. Risk is high. But so is potential reward. In December 2021, the Company acquired Quebec-based Laurentian Holdings Inc., strengthening its position in the second most populous province of Quebec, so results of that should show up in the next report. As for the stock, it actually bottomed below 1 back in September 2020, rallied to 6 in February 2021 (the sector top), and then fell steadily back down with the sector to its low a few weeks ago. BUY

TerrAscend (TRSSF)
As the smallest of the vertically integrated multistate operators in our portfolio, TerrAscend is a potential acquisition target—but that’s not why we own it; the company is doing fine on its own. Fourth-quarter results saw revenues of $49.2 million, up a hair from the previous quarter but down 1% from the year before. But as the numbers from the Gage acquisition (completed March 10) are included in the first quarter’s results, I fully expect to see growth once again. And I continue to be impressed by the stock’s long, strong base, which stretches back to November. Technical analysis tells us the longer the base, the bigger the ultimate move away from that base. TRSSF is already above both its 25- and 50-day moving averages, the strongest of the U.S. multistate operators, and much more upside is possible. BUY

Tilray (TLRY)
The largest cannabis company in Canada, Tilray is infamous for its stock, which peaked at the crazy price of 300 in September 2018, and then fell all the way to 2.4 in early 2020, having lost more than 99% of its value. But the problem was not the company; the problem was irrational investors. Tilray has been growing steadily, and it’s more than a Canadian company; it has operations in Europe, Latin America, Australia and New Zealand—20 countries in all. Last year Tilray merged with Aphria, one of its top Canadian competitors. And while it can’t own U.S. cannabis properties yet, it is paving the way, having acquired Colorado’s Breckenridge Distillery (the highest distillery in the U.S.) last December. The latest quarter saw revenues of $155 million, up 20% from the prior year, and a loss of a penny a share. Fiscal third quarter results will be released April 6. As for the stock, what I like is the support at 5, where the stock bottomed in September 2020 and where it has found support repeatedly since January of this year. The rally since then is likely to continue, given the market’s strength. BUY

Trulieve (TCNNF)
While it has long been the biggest seller of marijuana in Florida, where it has a 46% market share, 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 being the big one. The company now has 162 dispensaries in 11 states (including 112 in Florida) but it has none yet in New York or New Jersey, two states that will be important markets going forward. Fourth-quarter results, released this morning, saw revenues of $305.3 million, up 81% from the prior year, in large part due to the Harvest Health & Recreation acquisition, and adjusted EBITDA of $100.9 million, or 33.0% of revenue, compared to adjusted EBITDA of $81.4 million, or 48.3% of revenue, in the prior year. For 2022, management is guiding for revenue of $1.3 to $1.4 billion and adjusted EBITDA of $450 million to $500 million. There was no additional news. As for the stock, it looks similar to its peers, having bottomed at 17 a few weeks ago and rallied to above its 25-day line since. BUY

Verano Holdings (VRNOF)
Verano is the smallest of the top five vertically integrated multistate operators, though significantly larger than TerrAscend. And it’s the only one of our companies not to have announced fourth-quarter results. But future growth is all but assured, in part because of the company’s acquisition of Goodness Growth, announced in February, which gets the company into New York, Minnesota and New Mexico (where it can also serve Texans). When that acquisition is complete, the company will be in 18 states, with 111 active dispensaries. The company keeps announcing new dispensary openings (the latest two are in the Tampa, Florida area, bringing the company’s total in the state to 43), and Verano management claims the highest adjusted EBITDA margins in the industry, the result of careful control and vertical integration. As for the stock, it’s the same old story; it bottomed at 8.8 in March and has rallied to its 25-day moving average since. BUY

The next Cabot Marijuana Investor issue will be published on April 27, 2022.