March 31, 2021

It’s been seven weeks since the marijuana sector topped, and every day the picture of this correction gets clearer. For example, today saw a rally across the board in the sector, but if you look at the charts, you see it’s really just an inconsequential blip.

Thus, defense remains the watchword for now. In fact, I am selling one stock in this issue, taking profits and freeing up a little more cash.

Long term, however, prospects for the sector remain very bright, as was made clear by our companies’ latest quarterly reports. And of course, we will always hold the leaders of the sector.

Full details in the issue.

Cabot Marijuana Investor 321

Waiting for a Buying Opportunity
Let’s start with the good news this week.

Fourth quarter results are in for all but one of our companies (Jushi) and they were terrific, showing average revenue growth from the year before of 167%—a number that would be even higher without the presence of Turning Point and Village Farms, two stocks that have brought the portfolio lower-risk diversification. And prospects for growth in the sector remain high, as New Jersey and now New York are working on the details of creating legalized markets—though just as with Covid vaccine rollouts, every state’s got to do it their own way, which takes time.

And while this table is front of you, I want you to notice something. The four slowest-growing companies in the portfolio are companies with three- or four-letter ticker symbols, which means they’re traded on the New York Stock Exchange or the NASDAQ. One of those is Canopy Growth, which is Canadian and thus perfectly legal; one is Village Farms, which grows marijuana (and vegetables) in Canada but only hemp (and vegetables) in the U.S.; one is Turning Point Brands, which has long been in the chewing tobacco business and now sells CBD, rolling papers and other accessories for marijuana users; and the other is Innovative Industrial Properties, which leases real estate to marijuana companies. Of those businesses that are in the U.S., the important fact is that while they support and benefit from the marijuana industry, it is only through peripheral activities that do not involve growing, processing or selling the plants. In other words, they’re not plant-touching and thus they’re perfectly legal nationwide. The one minor outlier in the table is GrowGeneration (four letters, traded on NASDAQ), which sells hydroponic growing supplies to marijuana growers and is actually growing faster than the two slowest-growing U.S. plant-touching companies—though it’s hard to call 111% or 134% slow.

Bottom line, right now, the fastest-growing U.S. marijuana companies have five-letter stock tickers and are traded on exchanges that are generally avoided by institutional investors—and thus the institutional money has been flowing into (inflating) the stocks of the Canadian growers and the non-plant-touching companies, like GrowGeneration and Innovative Industrial Properties. But somewhere down the road, when our politicians in Washington finally get around to making marijuana as legal as beer, those five-letter ticker stocks will uplist to the major exchanges, and when that happens, I expect to see institutional money flood into these stocks (and to some extent, out of the others).

Of course, I don’t recommend waiting around for that day. We’ve been doing just fine since mid-2017 by following the time-tested Cabot rules for investing in growth stocks: look for leading companies with fast revenue growth and the prospect of more; trust the charts; and practice market timing (being aggressive in up markets and defensive in down markets).

Now for the Bad News
The bad news is that the marijuana sector has been in a correction since its blowoff top on February 10—a period that also saw peak action in EV stocks, cryptocurrency speculations, SPAC speculations and other things trading at unjustifiable values. The peak is rather clear in hindsight though calling it in real-time brought some anxiety. (It’s the uncomfortable calls that are often the best).

Marijuana Index

I recommended taking profits nearly across the board on February 10, and I’ve recommended selling even more since, taking the portfolio’s cash position up to 60%.

Back at the top, our Marijuana Portfolio was up 48% YTD (a crazy gain in less than six weeks!) while the Marijuana Index was up 91% (in part due to the Canadian stocks that had rebounded from an oversold position late last year). Now, our portfolio has given up 31% of its gain, while the Index has given up 72%—proving once again the value of holding cash when the tide is going out.

Of course, you don’t own all the stocks in the portfolio; you probably (and should) own others that are not in the marijuana industry. And you probably don’t own the index either—and shouldn’t. Its long-term record is terrible; it’s down over the past three years. But the way you should use market timing in your own marijuana stock investing is to stay cautious while the trend is down (like now) and to go aggressive when the sector gets going again (I’ll tell you when).

How long it will be until that day comes, no one knows; the future is not written. What experience tells me is that it will be at a time when investors aren’t so happy to be throwing money at the market, a time when the news is almost certain to be worse, and a time when losses, rather than profits, dominate the headlines.

Until then, I’ll be watching the charts carefully, and I’ll continue to keep you updated on all the important moves by all the best investments in the sector.

What to Do Now
The portfolio is making only one change today, selling our final piece of Village Farms (VFF) and holding the cash. If you think you should do some selling, too, consider some of these selling rules that have proven useful over time: Cut losses short at 20%. Never let a good profit turn into a loss. Consider selling your weakest stock. 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

Canopy Growth (CGC)
With a market capitalization of $12 billion, Canadian provider 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). Growth-wise, none of the Canadians can hold a candle to the U.S. multistate providers; even Canopy’s YoY growth rate was only 23% in the latest quarter. Still, it’s a closely watched company, so it’s little surprise that Canopy’s fourth quarter report on February 10 marked the peak for the sector this year. Since then, the stock has pulled back to 30, bounced a bit (though not impressively) and it’s now testing that level again, sitting 43% off its high (which is the worst of this portfolio). We’ve taken profits out many times and are now down to a very small position that I’m determined to hold long term, but if you don’t have a big cushion, you should consider selling (at least some) if the stock breaks down through 30. HOLD.

Cresco Labs (CRLBF)
Cresco is one of the four leading marijuana companies in the U.S., with 24 operational dispensaries, 29 retail licenses and 15 production facilities in 9 operational states. 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. In fact, in last week’s release of fourth quarter results, the company claimed leadership of the wholesale business in the U.S., with $274 million in wholesale revenue for the year. For the quarter, revenues were $162 million, up 292% from the year before, making Cresco the fastest-growing of the big four over the past year, while adjusted EBITDA was $50 million. As for the stock, it’s now 32% off its February peak (roughly average for the portfolio), and if it falls further it will likely find good support at 10. One bright fundamental note: Cresco’s Price/Sales ratio is 5.1, which is the lowest of the plant-touching companies in the portfolio.HOLD.

Curaleaf (CURLF)
Based in Massachusetts, Curaleaf remains the revenue king of the industry, with fourth quarter revenues of $230 million, up 205% 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 and the nation’s first coast-to-coast footprint, with the crucial links provided by a processing license in Oklahoma and CBD processing capabilities in Kentucky. Plus, the company boasts seven consecutive quarters of positive adjusted EBITDA. As for the stock, since peaking at 18 with the group on February 10 (when we sold half our position), the stock has pulled back to 14, bounced a bit and is now testing the 14 level again “only” 19% off its high, which is pretty good for this bunch. HOLD.

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb has 31 stores in nine states, but licenses for 97 retail locations in 12 states—so the path to growth is clear. In the fourth quarter, the company claimed second place among U.S. vertically integrated marijuana companies, with $177 in revenues, up 134% from the year before, and posted its second consecutive quarter of positive EPS (eleven cents, up from four cents), so trends are great. But the stock gapped down big yesterday morning after a Chicago Tribune article cited unnamed sources in claiming there is an open federal investigation into the company for possible “pay-to-play violations” related to growing and distribution licenses in Illinois and several other states. The company immediately rebutted the story, claiming it had no knowledge of any investigation and requested that the Tribune retract the story, and the stock did bounce with the sector today—and just closed the gap. I would love to be able to recommend buying here on the belief that this story is a sham (which I believe is likely). However, there are two good reasons not too. First, the short-term trend of the sector is down, and it’s hard to fight the trend. And second, my personal most common mistake in investing has been buying at bad news bottoms like this, assuming optimistically that the worst has passed. And too often I’ve been wrong—so I’ve learned to respect the trend. Long term, though, I think holding GTBIF will work out fine. HOLD.

GrowGeneration (GRWG), our hydroponic retailer focused on the marijuana industry, continues to grow fast by acquisition. And what I’ve been impressed by lately is that in addition to buying existing hydroponic garden centers, it’s also been buying other companies that will improve the efficiency and profitability of the business. The first was Char Coir, maker of a growing medium made from coconut fiber (which is a step toward vertical integration) and the second was Agron.io, a wholesale agriculture software platform for commercial growers that will not only lead to increased recurring revenue but also make the company’s customers more dependent on GrowGeneration. Fourth quarter results, reported last week, saw revenues of $61.9 million, up 144% from the year before (primarily due to the acquisition of 14 stores over the year). Operating costs were down, margins were up, and EPS was four cents, up 233% from the year before. Looking forward, management raised full-year 2021 guidance to $415-$430 million, and said it expects to reach over 60 Hydroponic garden centers and 15 states in 2021 and over 100 by 2023. As for the stock, it was an absolute rocket in late 2020 (being one of the totally legal companies in the marijuana industry and thus easy for institutions to buy), but it’s acted pretty much like the rest of the bunch since the February top (where we sold half our position), and now sits 27% off its high, having found support at 40 multiple times. 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 5.8 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. The yield on the stock is now 3.0% (though you should know the tax consequences of a REIT before you buy) and might be expected to increase as the company eventually slows its pace of investment. As for the stock, it has followed the path of the marijuana sector in recent weeks, and now sits 18% off its February high. HOLD.

Jushi Holdings (JUSHF)
With 32 retail locations in five states, little Florida-based Jushi is the smallest company in our portfolio as measured by revenues—but it had the fastest growth in the third quarter. What’s missing from the equation is fourth quarter results; they won’t be released until April 29. As for the stock, it was very strong up to the February top, and since then it’s traded in sync with the sector, and now sits 33% off its high. 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. So fundamentally, it has some unique attractions. But we sold half at the top and then three weeks ago, it was one of the three stocks in which I recommended additional profit-taking, mainly because of chart weakness. The other two were GRWG and IIPR, which are up slightly since then, but TRSSF is down even more; it’s now 41% off its high, just like CGC. And last week, when management reported an excellent fourth quarter (revenues of $65 million, up 152% year-over-year, and adjusted EBITDA of $26 million), we learned the likely reason: the CEO was stepping down over “differences in philosophy over management style and culture.” Clearly, this is not the best of situations, but with our portfolio’s position down to 2.5%, and the bad news out, I think we can afford to hold. Plus, it’s worth noting that TerrAscend’s Price/Sales ratio is 7.7, the second-lowest of the plant-touching companies in the portfolio. 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 four U.S. industry leaders (Q4 saw $168 million, up “only” 111% from the year before), but the company’s record of profitability has been impressive, and investors value that (as do I; though we took partial profits at the top, selling a third, it remains the largest holding in the portfolio.) As for the stock, it’s the one stock in the portfolio that actually hit a new high in March and it now sits only 14% off that high, the best of the plant-touching stocks in the portfolio. If you don’t own it and you’ve got money burning a hole in your pocket (maybe Federal stimulus money?), you could nibble here. HOLD.

Turning Point Brands (TPB)
Turning Point Brands, 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 is safe, and everything is legal nationwide. In last month’s issue, I wrote, “If I had to buy one of these stocks today, TPB is the stock I’d chose, given the short-term downside potential for the whole sector.” And that’s still true today; the stock is pretty much where it was then—and only 14% off its high, the best of the portfolio. 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. Since we bought last November, the stock has not only helped to diversify the portfolio, it’s also brought a good profit; we sold a third on February 10 for an 87% profit. But since then our remaining position has shrunk rapidly, and now I’m going to sell the rest, mindful of the rule that you should never let a profit become a loss. SELL.

The next Cabot Marijuana Investor issue will be published on April 28, 2021.

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