The marijuana sector peaked in February, corrected strong for a couple of months, and since then has been sinking slowly lower, shaking out weak hands as it prepares for its next upmove.
Fundamentals in the industry remain terrific, as I am confident third-quarter results will soon reveal, and while the trend toward legalization in the U.S. continues, it’s taken a back seat at the federal level for now, so all the action remains at the state level.
In the portfolio today, we continue to hold patiently, with the portfolio more than one-third in cash, waiting for a new uptrend—but if you’re eager to buy now (while things look cheap) I do have some suggestions.
Full details in the issue.
Sector Overview
The biggest trade show in the marijuana industry, MJBiz.com, ran last week in Las Vegas and I was there once again, to take the pulse of the industry and get a look at what’s ahead. The attendee count was 26,998, down a bit from the record 31,523 in 2019 (the 2020 show was virtual), but I have little doubt that a new record will be set next year as COVID concerns fade and the industry continues to boom.
The good news: Both new and mature markets are still growing. U.S. sales were $17.2 billion in 2020, up 40% from 2019, and are expected to hit $36 billion by 2025 and $64 billion by 2030 (roughly the size of the current illicit market). Competition is strong, which is healthy. And even Amazon, whose expertise is getting people what they want, is backing lobbying for legal marijuana.
The bad news: The administration in Washington continues to ignore voters’ appetite for legalization. But individual representatives in Washington continue to craft measures that would chip away at illegality, the leading of which are these:
Secure and Fair Enforcement Banking Act (SAFE)
Cannabis Opportunity and Administration Act (CAOA)
Marijuana Opportunity Reinvestment and Expungement Act (MORE)
Veterans Medical Marijuana Safe Harbor Act
Eventually, full federal legalization will be achieved, though even then, states will have different rules, just as they do for alcohol. In the meantime, with the illicit market for marijuana in the U.S. still double the size of the licit market, there’s plenty of room for growth, if those consumers accustomed to buying from a friend can be persuaded to buy from a store instead.
The key obstacle, of course, is price. Those stores pay taxes, while the friendly neighborhood dealer doesn’t. But there is a way to get prices down, and it’s simply this: to increase efficiency.
In my opinion, that was the common thread of the companies exhibiting at MJBiz.com. They are aiming to become more efficient. And the most common ways to do this are by increasing scale (often by merging with competitors), by improving process control and by automating, replacing people with machines.
So there were plenty of machines on display in Las Vegas: machines that measure nutritional content of soil and water, machines that combat mold and mildew, machines that harvest and trim plants, machines that extract THC, machines that assemble and fill cartridges, and machines already widely used in the food industry to manufacture chocolates, gummies and other edibles.
Going forward, I have no doubt that these efforts to increase efficiency will see prices come down, putting pressure on those neighborhood dealers. Eventually, however, full legality is almost certain to bring the oversight of the FDA—all in the name of making products safe—and that, of course, will put upward pressure on prices.
In the meantime, as forward-looking investors, the best we can do is to focus, as always, on owning the industry leaders. That means the biggest, the fastest-growing, the most profitable and—more important than anything—the stocks with the strongest charts.
Today there’s not much strength to be seen in the sector, with the exception of Innovative Industrial Properties (IIPR), which is really a REIT.
But the fundamentals of the industry remain strong, with rapid growth the norm for leaders, so eventually, a new uptrend will arrive to take these stocks back up to their old highs and beyond. All you need to get there is patience.
Marijuana Index
There’s nothing particularly new here. You see the sector’s peak in February, the correction since then, and now the basing pattern, preparing for the next uptrend.
PORTFOLIO
| Stock | Shares | Current Value | Portfolio Weighting | Price Bought | Date Bought | Price 10/27/21 | % Change |
| Canopy Growth (CGC) | 1,096 | $14,241 | 3.7% | $6.95 | 08/22/17 | $12.99 | 86.9% |
| Cresco Labs (CRLBF) | 4,086 | $31,546 | 8.2% | $3.99 | 4/30/20 | $7.72 | 93.5% |
| Curaleaf (CURLF) | 5,411 | $54,973 | 14.2% | $4.76 | 12/20/18 | $10.16 | 113.4% |
| Green Thumb Ind. (GTBIF) | 2,051 | $45,115 | 11.7% | $7.25 | 04/30/20 | $22.00 | 203.4% |
| GrowGeneration (GRWG) | 873 | $18,551 | 4.8% | $4.33 | 12/20/19 | $21.25 | 390.8% |
| Innovative Ind. Prop. (IIPR) | 174 | $45,271 | 11.7% | $18.81 | 11/17/17 | $260.33 | 1284.0% |
| TerrAscend (TRSSF) | 2,926 | $16,590 | 4.3% | $4.79 | 10/7/20 | $5.67 | 18.4% |
| Trulieve (TCNNF) | 759 | $19,746 | 5.1% | $10.29 | 10/17/19 | $26.00 | 152.7% |
| Cash | $140,849 | 36.4% | |||||
| Total | $386,883 | ||||||
| YTD CHANGE | -5.2% | ||||||
| INDEX YTD CHANGE | -6.8% | ||||||
Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.
What to Do Now
Third-quarter reports are right around the corner for most of our stocks, and I have little doubt that the reports will be good. But until we see real strength in these stocks, there’s no reason to be aggressive. The portfolio is now more than one-third in cash, ready to buy more, and when we do buy more, it will be of the strongest stocks. In the meantime, the only change to the portfolio this month is an upgrade of Trulieve (TCNNF) to buy.
New Recommendations
CURRENT RECOMMENDATIONS
Canopy Growth (CGC)
Canopy was the most popular marijuana company in the world a couple of years ago, but because the Canadian market didn’t grow as expected, all the Canadian stocks have retreated dramatically, and CGC is now off 78% from its all-time high, a relative bargain. On the plus side, the company’s diligence cutting expenses resulted in a profit of $0.84 per share in the second quarter. On the negative side, revenue growth was just 23% from the year before, which is a glacial pace for this industry. Still, I’m sticking with our underweight position. Constellation Brands (STZ) is a major shareholder, and Martha Stewart, who originally put her name on the company’s CBD gummies, is the company’s official strategic advisor. Also, Canopy owns a chunk of TerrAscend, which is designed to pave the company’s entry into the U.S. market, so long term, I expect the company to be a force in both the U.S. and Canadian markets. Short term, however, the best I can say is that CGC is holding above its low of earlier this month. Third-quarter results will be released on November 5, after the market close. HOLD
Cresco Labs (CRLBF)
Chicago-based Cresco is one of the four leading marijuana companies in the U.S., with 40 operational dispensaries, 47 retail licenses and 20 production facilities in 10 operational states. And earlier this month the company announced the acquisition of Laurel Harvest, which will bring two dispensaries in Pennsylvania and licenses for four more. What differentiates Cresco from its competitors is its Consumer Packed Goods (CPG) approach to the business, developing brands (Cresco, High Supply, Mindy’s Edibles, Good News, Remedi, Wonder Wellness Co. and FloraCal Farms) and selling them wholesale through more than 830 dispensaries across the country. (I’m on the lookout for the “Marlboro” of cannabis, and Cresco has the best chance of owning it.) This focus on wholesale means lower margins, but that also translates into a cheaper stock. And that’s one reason the stock has been identified as a favorite by both the cannabis analyst at Jefferies and Cabot’s own value expert, Bruce Kaser. Additionally, Cresco was one of the two plant-touching companies that grew revenues at a greater-than-100% rate in the second quarter. So, even though the stock is moving to new lows today, it remains a buy for value-oriented investors. Third-quarter results will be released on November 11, before the market open. BUY
Curaleaf (CURLF)
Based in Massachusetts, Curaleaf remains the revenue king of the industry (second-quarter revenues were $312 million), though Trulieve’s acquisition of Harvest may end that—and it’s the largest position in the portfolio. Curaleaf now operates in 23 states with 109 dispensaries, 22 cultivation sites and over 30 processing sites. It’s the second of the two plant-touching companies in the portfolio that grew revenues at a greater-than-100% rate in the second quarter. Also, Curaleaf’s Select brand is a contender for “Marlboro” status; this month the company announced a co-branding partnership with Rolling Stone that will bring “Rolling Stone by Select” products to market early next year. So the future is bright—and the stock’s leading market capitalization of $7 billion reflects the fact that investors know that. However, CURLF, like the sector, shows no sign of strength; the best I can say is that right now it’s sitting on the 10 level, which just might provide support. Third-quarter results will be released on November 8, after the market close. BUY
Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb is one of the four U.S. industry leaders, with 16 manufacturing facilities and 65 operating retail locations in 14 states (California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New York, Ohio and Pennsylvania). And the company has turned a profit for four consecutive quarters, which is impressive in this group. But the stock hasn’t been able to fight the trend; as I write, it’s trading 43% off its February high, which is the smallest drawdown of our plant-touching companies. And that’s one reason the portfolio remains overweight in the stock. Third-quarter results will be released on November 10, after the market close. HOLD
GrowGeneration (GRWG)
Based in Denver, GrowGeneration is not a marijuana company, but a hydroponic products retailer focused on serving commercial cannabis growers, and still growing rapidly by acquisition. In the second quarter, revenues were up 190% from the year before, so it’s one of the portfolio leaders by that metric. But technically, the stock has lost more ground than most of our stocks; it’s now 68% off its high. GRWG has been a great holding for the portfolio, providing totally legal diversification away from the plant-touching companies, but if the stock can’t get going when the sector strengthens again, it may be time to part company. For now, I’ll hold. One interesting news item this month is that the company has invested in (and has the option to purchase 100% of) Total Grow Control, a Houston-based company “specializing in facility design, nutrient delivery systems, water filtration solutions, and a complete integrated control platform operated from a cloud-based user interface,” which is a clear part of the trend toward efficiency. Third-quarter results will be released on November 11, after the market close. HOLD
Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties, has been our other great diversification play, and this stock is still strong, hitting record highs in recent days! So why is IIPR strong while GRWG is weak? The main difference is yield; IPR pays a nice dividend. There’s no way the stock could be called cheap, but the company is still small and fast-growing, so I’m sticking with our overweight position. Third-quarter results will be released on November 11, before the market open. BUY
TerrAscend (TRSSF)
TerrAscend operates several synergistic businesses, including The Apothecarium, a cannabis dispensary with several locations in California; Arise Bioscience, a manufacturer and distributor of hemp-derived products; Ilera Healthcare, a Pennsylvania medical marijuana cultivator, processor and dispenser; and Valhalla Confections, a manufacturer of cannabis-infused edibles. It’s the smallest producer in the portfolio, and it hasn’t made a profit yet. But prospects are good because Canopy Growth already owns 29% of the company, in part because it will enable the Canadian giant a quick entry into the U.S. market when legal. Additionally, TerrAscend is looking for approval to buy Gage Growth, a leading cultivator in the fast-growing Michigan market. Upon completion of the transaction, the combined business will have operations in 5 states and Canada, including 7 cultivation and processing facilities and 23 operating dispensaries serving both medical and adult-use cannabis markets in the U.S. and Canada. As for the stock, it’s now 64% off its high, it’s the lowest-priced stock in the portfolio (which increases risk), and we hold an underweight position. HOLD
Trulieve (TCNNF)
The biggest seller of marijuana in Florida, with a 46% market share, Trulieve announced three more dispensaries in the Miami area just yesterday, bringing its total in the state to 108. And while its early concentration in Florida led to unusually early profits (for this industry), the company has recently been expanding into other states, and is now in eleven. But the big news here is the closing of the acquisition of Harvest Health, which makes Trulieve the pro-forma industry leader, with combined second-quarter revenues of $318 million, and adds leadership positions in Arizona and Pennsylvania as well. Most important of all, the stock has been a standout in the sector over the past month, demonstrating growing investor support as it climbed above both its 25- and 50-day moving averages (though it’s since retreated a bit). Third-quarter results will be released on November 15, before the market open, and while it will be too early to see how the acquisition is being integrated, it will be interesting to see how the market reacts. I’m upgrading to buy now, mainly because of the stock’s action. BUY
On Deck
Ayr Wellness (AYRWF)
With bases in both New York and Florida, Ayr is vertically integrated with operations in eight states: Arizona, Florida, Illinois, Massachusetts, New Jersey, Nevada, Ohio and Pennsylvania. The stock bottomed at 20 in September and has impressively held above that level since. WAIT
Tilray (TLRY)
After famously topping at 300 at the 2018 sector top and again at 67 this February, high-profile Canadian TLRY is now down testing the psychologically important 10 level. It’s not a stock I’ve recommended yet, but the company has been busy, buying Aphria earlier this year and investing in struggling MedMen, which will give it a foothold in the U.S. market when legalization arrives. Third-quarter revenues, reported October 7, were $168 million, up 43% from the year before, and then on October 19, the stock saw an impressive surge of buying, though the stock has pulled back since. WAIT
The next Cabot Marijuana Investor issue will be published on November 24, 2021.