Cabot Marijuana Investor 1220

As we near the end of 2020, I’m thankful that 2020 was so very good to the leading marijuana stocks, and that we managed, overall, to ride the trend quite profitably.

As I write, the uptrend is intact and we remain fully invested, but as the calendar turns to 2021, there’s a chance that the trend (and the trend of the broad market as well) might turn down.

Thus I’m on alert.

But I learned long ago not to argue with the trend of the market, so until the trend changes, I recommend staying heavily invested.

Full details in the issue.

Cabot Marijuana Investor 1220

The Point of Peak Perception?
It’s a truism of investing that stocks bottom when the news is terrible and pessimism and fear are the prevailing sentiments—but peak when the news is good and optimism and greed reign.

You have only to look back to March for a perfect example of the former, which occurred as investors dumped stocks as the enormity of the pandemic became apparent.

The question today is whether the market—and the marijuana sector in particular—have come so far and so fast since that bottom that we are now likely at or near a top.

And the answer is that no one knows. The market thrives on making fools of people who think they know where the market is going next.

Nevertheless, by examining the evidence carefully, I believe we can get an idea of the potential for the market to move higher or lower from here.

On the Positive Side:
First, the long-term trend of the market, over the centuries, is up, reflecting the growing value added by our civilization. That’s why it pays to invest.

Second, the fundamentals of the leading companies in the marijuana sector remain extremely favorable. Revenue growth at the companies in our portfolio averaged 170% in the latest quarter. And that was not the result of any huge outlier; the median growth rate was 131%.

Third, the legal situation continues to improve, with the state-by-state march toward legalization continuing and the incoming federal administration almost certain to be more friendly to the industry than the outgoing.

Fourth, the leading stocks in the sector are still strong today—and as experienced momentum investors know, the final phase of a bull run can be very profitable.

On the Negative Side:
Stocks are extended to the upside by many measures.

First, since the market’s March bottom, the S&P 500 is up 71%, the Nasdaq Composite is up 94%, the Marijuana Index is up 245%, and our marijuana portfolio is up 202%.

Second, the current PE ratio of the S&P 500 is now 39.9, while the forward PE ratio is 24.4, both high numbers that indicate investors are very bullish about rising earnings in the year ahead. And the valuation of marijuana stocks is far higher.

Third, despite the downside action that brought most stocks in the sector down yesterday, the average stock in our portfolio is still very near its recent peak (less than 8% off its high) and thus still has big potential downside; our average stock is 94% above its 200-day moving average—an average that it can be expected to return to (at least) in a serious correction/bear market.

Fourth, as the new year begins, tax considerations are likely to prompt profit-taking of some of 2020’s winners and see some of the proceeds moved into stocks that were sold for a loss near the end of 2020. It’s a short-term factor, but it can be powerful.

Bottom Line:
The party is still going on, but the liquor is running out, but we’re still having a good time, but it’s getting late.

Marijuana Index

What to Do Now
Stay heavily invested but keep an eye on the exit. Trends can and do often run farther than expected, so it’s totally possible that animal spirits will keep this momentum going. If so, we’ll happily ride the trend. But I will be watching carefully for signs of exhaustion and a change in trend, in both marijuana stocks and the broad market, and will sell to preserve profits when I think it’s wise.

In many cases, the 50-day moving average provides a fine guide to the main trend; as long as the stock is above that level, the trend is up—and a pullback to that level provides a fine buying opportunity. But in a big bear market, stocks can rip through their 50-day moving averages like tissue paper and keep falling until they find their 200-day moving averages. So take a look at those 200-day moving averages from time to time to remind yourself what the real downside potential is.

Lastly, if you arrived at this party late and still feel underinvested in the sector, make a note to arrive earlier next time. And if you don’t want to wait—you want to buy now—I do have some suggestions below but recommend that you take care to cut losses short if trends turn down. I’ve seen too many emails from readers this year who have held on to stocks I sold long ago (ACB, CWBHF, MMNFF and OGI, for example) that there has been no reason to hold.

CURRENT RECOMMENDATIONS

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

Stock Updates
Jushi Holdings (JUSHF) to Hold.
Turning Point Brands (TPB) to Hold.
Village Farms (VFF) to Hold.

Canopy Growth (CGC)
Canopy has pulled back to its 50-day moving average over the past month, typifying the weak action of the Canadian marijuana stocks. And until the group strengthens, I see no reason to add another Canadian stock. But I’m sticking with CGC (underweight at the moment) because it has the backing of alcohol giant Constellation Brands (STZ), because it has top brands like Tweed and Martha Stewart, and because it has numerous cross-border deals that will enable it to grow as the U.S. market expands. If you really want to invest in a marijuana stock now, the pullback means this is your lowest-risk opportunity in the portfolio—however, note that analysts see negative EPS continuing for the next two years as the company works to cut costs and grow revenues. HOLD.

Cresco Labs (CRLBF)
Cresco is one of the leading U.S. marijuana companies, with 19 operational dispensaries, 29 retail licenses and 15 production facilities in 9 operational states. 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 7000 dispensaries across the country. The company turned its first quarterly profit in the third quarter of this year (two cents per share) and analysts are looking for $0.22 per share next year. Technically, the stock topped near 11 a month ago and has been building a very nice base centered on 10 since then—which is rather encouraging. The 50-day moving average is at 9 and rising, and the closer it draws to the stock, the lower your risk. CRLBF can be bought here. BUY.

Curaleaf (CURLF) was the revenue king of the industry in the third quarter, thanks to 96 dispensaries in 23 states supplied by 23 cultivation sites—and the future is bright, too, with analysts looking for EPS of $0.14 in 2021. The stock hit a record high of 13 two weeks ago and has pulled back a bit since, but the 50-day moving average down at 10.9 tells us there’s more potential downside. HOLD.

Green Thumb (GTBIF) is one of the hottest stocks in the portfolio, hitting a record high just this Monday. Of course, volume was a bit light, thanks to the holiday, but it’s still a sign of strength for the Chicago-based company that has 13 manufacturing facilities and licenses for 96 retail locations. Green Thumb saw a profit of two cents per share in the third quarter and analysts are projecting EPS of $0.42 in 2021, so trends are good. For momentum investors who like to chase strength, this is one of the top candidates. BUY.

GrowGeneration (GRWG), our hydroponic supplier, continues to grow fast by acquisition; it now has 36 retail and distribution centers in 10 states. 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 $0.39 in 2021. Technically, the stock has been a huge winner this year, up an amazing 880% since the start of January (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 sold a third of our position in September and a fourth in November and it’s still our largest holding. HOLD.

Innovative Industrial Properties (IIPR), our marijuana REIT, owns 66 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 5.4 million rentable square feet which are 99.3% leased. And the list continues to grow, as marijuana companies have found it attractive to convert their buildings to cash. Analysts are estimating FFO (Funds from Operations) of $5.15 this year and $8.04 next year, for a growth rate of 56%, which is pretty hot for a dividend-paying company. 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 this year, up 139% from the start of January until hitting its record high last week. A drop to the 50-day moving average would cost 15%, while a drop to the 200-day moving average (quite possible) would cost 60%. We’ve taken partial profits earlier and are now underweight the stock, so holding is fairly easy here, but if you’re overweight, you could take partial profits now (or in January). Also, there are a couple of smaller REITS becoming visible that might (or might not) eat into the company’s business and/or the flood of investor money that has buoyed the stock so far. HOLD.

Jushi Holdings (JUSHF)
Little Jushi is small but growing fast. Revenues (from 13 dispensaries in four states) were just $24 million in the latest quarter, but that was up 594% from the year before! And the stock has been red-hot lately, hitting a record high last Friday after shooting up 150% in just two months. In fact, it shot up so fast I never found a pullback where I could average up the portfolio’s underweight position! Momentum investors could buy here (with the usual caveats), but note that the stock’s 50-day moving average is down at 3.70, while its 200-day moving average is down at 2.10. HOLD.

TerrAscend (TRSSF)
TerrAscend is the first producer with scale operations in both the U.S. and Canada, and the good news for us is that the stock has been behaving like a U.S. marijuana stock (rather than the weaker Canadians), hitting a record high earlier this month, correcting moderately, and then finding new strength that has brought the stock right up near its old high. I think it can be bought here—noting that a drop to the 50-day moving average would bring a loss of 19%. BUY.

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 aren’t growing quite as fast as at the sector leaders (Q3 saw $136 million, up 93% from the year before), but that record of profitability is impressive. And so is the chart, which has been trending strongly higher for three months, hitting a record high as recently as last Wednesday. 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 (up 8% in the latest quarter), management is experienced, the small dividend is safe, and everything is legal nationwide. But the stock has been acting like a hot-shot lately, gaining 85% from its early October low to a new high this Monday. As I write, it’s corrected for three days and I think it needs more cooling-off time; the 50-day moving average is down at 40. HOLD.

Village Farms (VFF)
VFF is the biggest question mark in the portfolio for me today. It’s our newest addition, bought a month ago, but we still don’t have a profit—even while the sector has been hot. And that’s a bad sign, at least short-term. Then there’s the stock, which enjoyed big gains in the middle of last week on relatively heavy volume (an unusually large buying campaign)—but then gave up those gains this week. All told, it’s characteristic of a young unsteady stock (like my toddler granddaughter) which is less regular in its movements than the more mature leaders of the sector. What this grower of vegetables and CBD does promise, however, is diversification, which may provide some downside protection when pure marijuana stocks begin their next downleg. It’s not an easy choice, but I’m going to hold a bit longer, looking for the stock to find support at this level. HOLD.

Watch List
With the portfolio currently full, I have no need to buy anything else, but if I did, these four would be contenders. Note that they tend to be smaller and lower-priced and thus are likely to be more volatile.
Harvest Health & Recreation (HRVSF)
4Front Ventures (FFNTF)
Planet 13 Holdings (PLNHF)
Columbia Care (CCHWF)

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

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