Cabot Marijuana Investor 320

On Monday, the market completed the quickest 30% pullback in history.

Since then, it’s completed one of the quickest rebounds!

Interesting times.

Equally interesting for investors in the young and fast-growing marijuana sector is that marijuana stocks actually bottomed a week ago, and they’ve been advancing every day since, which is a very good sign.

Because of that, I’m recommending a little averaging up in the portfolio today, taking our cash level down to 50%.

Full details in the issue.

Cabot Marijuana Investor 320

Uncharted Territory—But We Have A Compass
As of Monday, we’d experienced the market’s quickest 30% drop ever. Just 22 days from top to bottom.
Yesterday, the Dow had its best up day in 87 years—up 11%!

And tomorrow?

Well, as the headline says, we’re in uncharted territory. No one can say what will happen from day to day. But we do have a compass, built from experience, so what we do know is this:

First, the market will gradually become less volatile.

Second, the market will build a base, although it won’t be flat; it will be full of false bounces and reversals—tricky to invest in.

Third, after a number of months (two to six months looks likely based on history) the market will embark on a renewed uptrend that will take it to its old high and beyond.

But that recovery will take time, and in the meantime we will be contending with ever-evolving information about the coronavirus as well as the onset of a very sharp intentional recession, in which numerous industries, particularly dining and tourism and entertainment, are hit hard.

However, investors who are prepared, and who have the courage to invest when the trend starts up—even though the news remains bad—will do very well in that new uptrend.

Marijuana in Particular
On Monday of this week, the governor of Massachusetts ordered all non-essential businesses in the state to close. Among the essential businesses allowed to stay open were medical marijuana stores—but not recreational marijuana stores. The argument is that those stores attract buyers from neighboring states—who might bring coronavirus with them.

As for other states that have ordered the closure of unessential business, California, Oregon, Washington and Illinois have deemed both medical and recreational marijuana stores essential, and New York and Ohio have deemed medical marijuana stores essential (recreational marijuana is legal in neither state yet).

Note: All those states also declared that alcohol stores are essential (only Pennsylvania has deemed alcohol stores unessential—though that is likely to be reversed.)

The situation, of course, is still evolving, but generally, most marijuana stores remain open. In fact, at many stores, business is booming as users stock up on marijuana just as they stock up on tuna fish and pasta and beans at the grocery store.

Still, marijuana stocks have suffered because all stocks have suffered, as the world looks forward to a global recession.

Yet there is good news, most recently in Curaleaf’s quarterly report, released just yesterday (see below).

And here in Massachusetts, stores have had a problem that’s the inverse of the problem Canada had last year. In Canada, there was too much legal marijuana and not enough legal stores. Here in Massachusetts, which has 60 medical marijuana dispensaries and 38 recreational marijuana stores, there’s a shortage of legal marijuana flower, with the result that wholesale flower prices in the state have been some of the highest in the country; average-quality indoor-grown flower has been selling for $3,800 a pound, up from $2,800 in 2019.

Now the forced closure of those 38 recreational stores will help “solve” that problem.

Moving to the stocks, the good news—and it’s very good— is that the Marijuana Index actually bottomed three days before the broad market; the best have been climbing steadily for a week now! Granted, that’s a short time, but it’s a great positive sign that tells us there’s money that wants to come into these stocks, and because of it, I think it’s time to put some money back to work.

Of course, short-term, there’s a very good chance that this bounce will be followed by a pullback in the marijuana sector—but there’s also a chance (if selling power is truly exhausted) that these stocks will keep climbing!

Marijuana Index

What to Do Now
Coming into this week, the portfolio was more than 60% in cash, though that’s been reduced as the stocks have bounced. And today I’m going to take the cash level down to 50% by averaging up (using equal amounts) in both Canopy Growth (CGC) and Innovative Industrial Properties (IIPR). Note, I’d like to buy more of CURLF and GRWG, but I learned long ago that averaging down is a bad idea, so I’ll just wait until our position is profitable in them.

CURRENT RECOMMENDATIONS

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

Stock Updates
Canopy Growth (CGC) to BUY
GrowGeneration (GRWG) to BUY
Innovative Industrial Properties (IIPR) to BUY

Canopy Growth (CGC)
Canopy is both the most visible cannabis company in Canada and the most corporate, thanks to the presence of major investor Constellation Brands (STZ), which has increased its presence in the executive suite over the past year. But like all the Canadian producers, it’s struggled with an oversupply problem. So back on March 5, the company announced the closing of its facilities in Aldergrove and Delta, British Columbia, laying off around 500 employees, as part of a strategy to adjust cultivation capacity to expected demand. I have no doubt they will achieve that goal. Additionally, looking forward, Canopy has a deal in place that gives Canopy the option to acquire Acreage Holdings (ACRGF) if and when federal cannabis prohibition in the United States in abolished. Depending on the timing, such a deal would likely result in the creation of the world’s largest cannabis company. And remember, Constellation Brands is a major force in the company, so they know how to build brands and how to get shelf space! As for the stock, after five consecutive up days, CGC is up 54% from its low of last week, though still below its down-trending 25-day moving average, but I’m going to put it back on Buy today because there’s far more upside potential than downside. HOLD.

Cronos Group (CRON)
Cronos is one of the smaller Canadian marijuana providers—though tobacco giant Altria owns 45% of the stock, so long-term prospects are good. The bad news here is that the company continues to delay its 2019 fourth-quarter earnings release, due to a continuing review by its audit committee. The good news is that CRON, possibly because of its lower profile, didn’t suffer as much when investors were dumping stocks (and even with that delayed report hanging over its head), so now, after bouncing 45% since last week’s low (which was two days before the rest of the group) the stock is now at its 25-day moving average, which of course is declining. Note: The company’s previous two quarters saw positive earnings and the current P/E ratio is a lowly 4, in part because analysts expect a loss in 2020. HOLD.

Curaleaf Holdings (CURLF)
Massachusetts-based Curaleaf, which has 54 dispensaries, 15 cultivation sites and 24 processing sites in 17 states, is the biggest legal seller of marijuana in the U.S. And Tuesday morning the company delivered an excellent, estimate-beating fourth-quarter report that, in conjunction with the broad market’s rebound, sent the stock up 25%! For the year ended December 31, Curaleaf recorded record annual revenues of $251 million, up 185% from the year before and record fourth-quarter revenues of $82 million, up 12% from the immediately preceding quarter. Also, the company recorded its third consecutive quarter of positive adjusted EBITDA. Discussing the results, management noted that while some forced closures have affected it, the company is actually hiring across its retail, cultivation and processing facilities, and to serve its customers better, the company is setting aside the first hour of operations each day for customers who are 60 or older. It also has created an app, available in Maryland, New Jersey and Nevada, that lets customers wait in their cars for their turn to shop, rather than stand in line outside the store. CURLF is up 40% from last week’s low, but still below its 25-day moving average. HOLD.

GrowGeneration (GRWG)
GrowGeneration operates the largest and fastest-growing chain of hydroponic and organic garden centers in North America (26 locations in nine states), all catering to commercial growers of cannabis. Management is top-notch and prospects for growth are excellent as the company works to consolidate a very fragmented industry by acquiring operators across the country wherever marijuana is legal. In fact, since last month, analysts’ earnings estimates for 2020 have been upped from $0.22 per share to $0.28—which makes today’s forward P/E ratio a very reasonable 14. The stock has rallied nicely off last week’s low, and if you don’t own it, and you want some diversification in your marijuana portfolio, you could buy here. I’m upgrading it to Buy. BUY.

Innovative Industrial Properties (IIPR)
IIPR is another diversification play—which again is in a totally legal industry. Structured as a REIT, the company currently owns 49 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia, totaling approximately 3.2 million rentable square feet, which were 98.9% leased to cannabis companies. And as far as I know, business continues to grow as expected. In fact, 2019 final numbers saw EPS of $3.17 per share while analysts were expecting $2.95. And for 2020, analysts are expecting $5.37 per share, making a forward PE ratio of just 11. I’m upgrading it to Buy today and the portfolio (which took out large profits many times in recent years) will now average up. BUY.

Trulieve (TCNNF)
Trulieve is the market leader in Florida, with 45 medical dispensaries, as well as nascent operations in California, Massachusetts and Connecticut. But earnings estimates for the company have been slipping (analysts now expect $1.31 in 2019 and $0.62 in 2020), and that’s put pressure on the stock. Like everything, TCNNF was oversold last week, so the bounce—which boosted the stock 37% to today’s level—was overdue. But I can’t say we’re out of the woods yet—even though the stock did manage to creep above its 25-day moving average today. HOLD.

Turning Point Brands (TPB)
TPB is the most thinly traded stock in the portfolio but also the oldest—with the most seasoned management. Based in Kentucky, the old part of the business is smokeless tobacco (which is slowly shrinking), while the new part is vaping products and CBD (both of which are growing, though anything but steadily). With today’s bounce, the stock is up 57% from last week’s low, and above its 25-day moving average—and quite ripe for a rest. But long-term prospects are great, and the stock’s current P/E ratio is just 9. HOLD.

The next Cabot Marijuana Investor issue will be published on April 29, 2020.

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