September 29, 2021

The marijuana sector peaked in February, bottomed from late March to mid-April, and since then has been building a base, preparing for a resumption of the big advance.

Fundamentals in the industry remain terrific, as second quarter results have recently revealed, 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 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

Since the marijuana sector peaked in February, the Global Cannabis Stock Index has lost 50% of its value. That’s the cost of investing in hot young growth industries. But the fundamentals of the industry remain exceedingly attractive, so there’s no question that eventually, this long slow bottoming process will give way to a new uptrend.

Trouble is, it’s entirely possible that we’ll have to sit through a broad market correction first; history tells us that the September/October period often brings big corrections. However, if we do get a big correction, I don’t expect the marijuana stocks to fall much more. They’ve already had their correction, so they’re already cheap enough.

Bottom line: If you’re not already invested in this exciting sector, I think you can start nibbling now, focusing on the stocks I’ve rated buy. But until we see real strength develop, there’s no urgency. As for all you readers who are already invested, patience is the prescription. Eventually, the great fundamentals of these stocks will lead to a new advance.

One small factor that I spend very little time thinking about is legalization. Someday, federal legalization will come. But right now, our representatives in Washington have other things on their minds; even among the most socially progressive, and most capitalist-friendly, marijuana legalization is on the back burner. But that will change.

In the meantime, our dual focus on the leading companies in the industry (measured by revenues and earnings) and the strongest stocks in the sector (measured by chart strength) will keep us in the stocks that are most likely to lead the next advance.

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

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

What to Do Now
I remain cautiously optimistic that the sector’s uptrend will resume soon; the stocks have fallen far enough, and the fundamentals of the industry remain terrific. But until we see real strength, there’s no reason to be aggressive. The portfolio is now one-third in cash, eager to buy more, and when we do buy more, it will be shares of the strongest stocks—and possibly Ayr Wellness (AYRWF), which is profiled at the end of this advisory. If you’re underinvested in the sector and want to buy now, I suggest Cresco (CRLBF), Curaleaf (CURLF) and Innovative Industrial Properties (IIPR), if a REIT is appropriate for your portfolio.

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 76% 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, and it has a deal to acquire privately held Acreage Holdings when marijuana becomes legal in the U.S. The only real news in the past month was the launch of the company’s first-ever CBD vape, named whisl, which is available in “three uniquely formulated options to help consumers dial in to their desired effect – focus, calm, or winding down before bed – as their needs and activities shift throughout the day.” These are:

• Tune In Pod: Focus on the task at hand.
• Intermission Pod: Relax throughout the day.
• Fade Out Pod: Get ready for bed.

Whisl will be available on store shelves at 3,000+ Circle K convenience stores nationwide beginning October 1, marking Canopy’s largest national retail launch yet, with a cost of $39.99 for the starter kit and $19.99 per package. HOLD

Cresco Labs (CRLBF)
Chicago-based Cresco is one of the four leading marijuana companies in the U.S., with 37 operational dispensaries, 47 retail licenses and 20 production facilities in 10 operational states. 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. This focus on wholesale means lower margins, but that also translates into a cheaper stock.

In fact, in today’s issue of Cabot Turnaround Letter, chief analyst Bruce Kaser wrote, “The market has turned away from companies involved in the legalized cannabis/marijuana industry…Yet, from a pure investment perspective, the group has considerable appeal. First, the shares of most companies have fallen sharply from their previously over-hyped prices. Fundamentally, the industry is growing rapidly in the United States, in no small part due to cannabis’ medicinal properties that can be separated from its recreational uses. Many companies produce wide profit and cash flow margins, backed up by sturdy balance sheets…One company that looks interesting is Chicago-based Cresco [which] generates nearly $1 billion in revenues, produces $250 million of EBITDA and could produce a positive net income this year. The CEO is an attorney who also is an adjunct law professor at the prestigious Northwestern University law school. The board chairman, Tom Manning, previously was chairman and CEO of Dun & Bradstreet, previously a long-serving top executive at the highly regarded Cerberus private equity firm as well as a former CEO of Ernst & Young’s Asia operations, and is a Stanford MBA graduate. Other board members and senior executives have impressive, mainstream professional backgrounds as well. Cresco sells at about 9x estimated 2022 EBITDA. Many other cannabis majors have similar traits, which we will explore as we ramp up our understanding of this nascent industry.”

As for news, earlier this month, the company announced the closing of its acquisition of Cultivate in Massachusetts, which includes roughly 42,000 square feet of active flowering canopy, three operational dispensaries located in Leicester, Framingham, and Worcester, and an operating platform that enables the company to pursue market share growth in the largest adult use cannabis market in the northeast. And just last week, the company announced an agreement to acquire Bay, LLC d/b/a Cure Pennsylvania, for $90 million. This will add three operating dispensaries that will be immediately accretive for Cresco.

Cresco is rated buy because it’s one of the two plant-touching companies in our portfolio still growing revenues at a rate of more than 100% year over year (the other is Curaleaf), and because of the value picture Bruce has outlined. BUY

Curaleaf (CURLF)
Based in Massachusetts, Curaleaf remains the revenue king of the industry, though Trulieve’s acquisition of Harvest may end that. Curaleaf now operates in 23 states with 109 dispensaries, 22 cultivation sites and over 30 processing sites. And last week the company announced the release of Cliq by Select, a “breakthrough hardware system from its Select brand designed to significantly upgrade the consumer’s vaping experience.” Where CURLF stands out for me today is its chart. It’s the only one of the pure plant-touching companies that’s currently trading above its 50-day moving average. Simply put, that means investors have been buying.

Curaleaf is rated buy because it’s one of the two plant-touching companies in our portfolio still growing revenues at a rate of more than 100%, year over year, and because it has the strongest chart of the plant-touching companies, now trading above its 50-day moving average. If you don’t own it yet, try to buy on a pullback. BUY

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb is one of the four U.S. industry leaders, generating revenue in 12 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. The news this month was the announcement of the opening of Rise Bloomfield, the company’s third store in New Jersey and 65th in the country. As for the stock, it’s been an average performer in the sector, and I’d like to see a little more strength before restoring a buy rating. HOLD

GrowGeneration (GRWG)
Based in Denver, GrowGeneration is not a marijuana company, but a hydroponic products retailer focused on the 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, it’s lost more ground than most of our stocks; it’s now 62% off its high. This month’s news tells us the growth continues; on September 15, the company announced the opening of two new hydroponic garden centers in Los Angeles County, California, one in downtown Los Angeles and one in Long Beach, which will be the company’s 63rd and 64th stores. GrowGeneration 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, with the stock basing at 25, I’ll hold. HOLD

Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties, has been our other great diversification play, and this stock is still strong! The news this month was the purchase of a property in Missouri that will be leased to a subsidiary of Calyx, and the extension of its relationship with Goodness Growth Holdings with the acquisition of 92 acres in New York adjacent to one of IIP’s properties leased to Goodness Growth, where they will partner on the development of 324,000 square feet of industrial space. As of September 27, IIP owned 75 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington, representing a total of approximately 7.3 million rentable square feet. The stock pays a dividend of 2.3% and thus is attractive to income-focused investors. The portfolio averaged up in the stock two months ago (it’s now our third largest holding), but if you don’t own yet, you can buy now. Just be sure you understand the ramifications of REIT dividends on your taxes. 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 it, in part because it will enable the Canadian giant a quick entry into the U.S. market when legal. And the stock has turned up in recent weeks, reflecting some better-than-average buying activity. So I’m sticking with it. On the news front, the company recently announced that it has received pre-qualification approval for cultivation, processing and retail licenses from the state of Michigan that is a key closing condition for TerrAscend’s previously announced acquisition of Gage Growth. Upon completion of the transaction, the combined business will have operations in five states and Canada, including seven cultivation and processing facilities and 23 operating dispensaries serving both medical and adult-use cannabis markets in the U.S. and Canada. HOLD

Trulieve (TCNNF)
The biggest seller of marijuana in Florida, with 91 dispensaries and a 51% market share, Trulieve has been expanding into other states, but the big event will come when the $2 billion acquisition of Harvest (HRVSF), first announced in May, is complete, because that will make the company the clear national (and global) leader by revenues. Geographically, it will be a winner, too, tying Trulieve’s east coast strength to Harvest’s west coast strength. Historically, Trulieve has stood out for its early profitability, the result of focusing expansion on one state (Florida), and profits are expected to continue. Meanwhile, on the product side, this month the company announced the launch of a new line of high-quality cannabis concentrates, dubbed Live Resin. Created using a proprietary blend of propane and butane on flower that has been frozen immediately after harvest, the result is a strain-specific and full-spectrum concentrate that is exceptionally flavorful and contains higher levels of cannabinoids and terpenes than other concentrates and provides patients with a powerful and richly aromatic experience with a broader sensation of effects. As for the stock, it’s been an average performer for the group, losing 50% of its value from the top and bouncing somewhat impressively in recent weeks. I could put it back on buy now, because it’s almost through its 50-day moving average, but I’ll leave it on hold a little longer—partly because a nasty October surprise is still quite possible. HOLD

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. A main focus of the company is high-quality plants; its brands are Kynd Flower, Origyn Extracts and Levia infused seltzer. Second-quarter revenues were $91.3 million, up 222% from the year before, and there are no earnings yet. But revenues are expected to keep growing at more than 100% through 2022, in part due to pending acquisitions in Pennsylvania, Illinois and Nevada. Ayr expects to have 62-70 dispensaries open by year end 2021. Its busiest dispensary is in Henderson, serving an serving average of 1,500 customers per day, with an average transaction of $66—which works out to nearly $100,000 per day! The stock is close to breaking above its 50-day moving average. WAIT

The next Cabot Marijuana Investor issue will be published on October 27, 2021.