Since the market bottomed five weeks ago, the charts have been impressive, not only for the broad market but for the marijuana sector as well, which has finally shaken loose from its bear market’s two-year grip.
Of course, some companies didn’t survive the hard times, but those that did are battle-hardened, so now, more than ever, it’s easier to identify the future winners of the industry—and the stocks that can bring you big profits in the years ahead.
So today I’m doing a bit of buying for the Cabot Marijuana Investor portfolio, adding four stocks (three of which we’ve owned before).
Additionally, you’ll find a Special Report with this issue, profiling all the publicly traded, vertically integrated multistate operators (MSOs) in the U.S. The report can be found in the Special Reports section of the website.
Full details in the issue.
Cabot Marijuana Investor 420
The Trend Turns Up
First, I want to welcome our many new readers, who joined following our 4/20 promotion. My goal is to help you develop long-term winning investments in the leaders of this mass-market growth industry.
But it won’t be easy. Sometimes these stocks are red-hot; other times they’re stone cold. Volatility is high, as is typical of low-priced stocks with minimal institutional support. And the fundamental challenges of the industry remain substantial, from high taxes in California to oversupply in Canada to continued political resistance at the highest levels in this country.
Nevertheless, the trend is clear; business is booming. Of the current stocks in our portfolio, the average revenue growth rate in the latest quarter from the prior year’s quarter was 120%! And socially, the country continues its shift toward acceptance; the latest convert is the NFL, which will no longer suspend players for marijuana use.
So my advice is to aim long-term, and remember that the best way to complete a long trip is to make a smart start. Try to buy on dips. Diversify, spreading your investments both geographically and among business models. And diversify over time as well; when you spread your buying over time, you’re not subject to any one day’s action.
A very aggressive investor might have 25% of a portfolio in marijuana stocks, but for most investors, 10% is probably plenty.
As to timing, the marijuana sector spent two years trending down, completing its journey days before the broad market bottomed last month. At that point, the market was deeply oversold, and a bounce was natural. But what has impressed us since that bounce is the power of the buying (both in the broad market and the marijuana sector), as investors anticipate better days ahead.
Marijuana Index
Not only is the trend now up, but stocks are far cheaper than they were two years ago, so buying here makes far more sense, especially if your goal is long-term profits.
Special Report
Accompanying this issue is a Special Report that profiles every one of the vertically-integrated multi-state operators in the U.S. As you read this report, note the very low prices of some of these stocks—a sign of risk. And note the overlapping presence across various states, where competition will stimulate innovation—and sometimes acquisitions. Above all, focus on the leaders, which have the best chance of leading this industry five years from now—and beyond.
What to Do Now
As both the marijuana sector bear market and the flash coronavirus bear market recede into history, and investors again look forward to economic progress, it’s appropriate to put some of our cash to work. The portfolio will now use a third of its cash to buy equal dollar amounts of Aphria (APHA), Cresco Labs (CRLBF), Green Thumb Industries (GTBIF) and Tilray (TLRY). This will take our cash position down to roughly 30%. Details below.
CURRENT RECOMMENDATIONS
Stock | Shares | Current Value | Portfolio Weighting | Price Bought | Date Bought | Price 4/29/20 | % Change |
Canopy Growth (CGC) | 1,131 | $19,303 | 11.8% | $6.95 | 08/22/17 | $17.07 | 145.6% |
Cronos Group (CRON) | 1,739 | $10,868 | 6.6% | $3.14 | 11/17/17 | $6.25 | 99.0% |
Curaleaf (CURLF) | 3,288 | $15,717 | 9.6% | $4.76 | 12/20/18 | $4.78 | 0.4% |
GrowGeneration (GRWG) | 1,888 | $9,060 | 5.5% | $4.33 | 12/20/19 | $4.80 | 10.9% |
Innovative Ind. Prop. (IIPR) | 142 | $11,504 | 7.0% | $18.81 | 11/17/17 | $80.90 | 330.1% |
Trulieve (TCNNF) | 1,014 | $10,655 | 6.5% | $10.29 | 10/17/19 | $10.51 | 2.1% |
Turning Point Brands (TPB) | 536 | $12,094 | 7.4% | $16.36 | 08/22/17 | $22.56 | 37.9% |
Cash | $74,615 | 45.5% | |||||
Total | $163,816 | ||||||
YTD CHANGE | -25.5% | ||||||
INDEX YTD CHANGE | -43.6% |
Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.
Stock Updates
Canopy Growth (CGC) to BUY
Curaleaf (CURLF) to BUY
GrowGeneration (GRWG) to BUY
Trulieve (TCNNF) to BUY
Turning Point Brands (TPB) to BUY
Aphria (APHA)
Aphria is the leading marijuana seller in Canada, with revenues of $237 million last year, up 542% from the year before. This year, $350 million is likely. One key advantage the company has is its location in Learnington, Ontario, which is farther south than Detroit and enables the company to grow all its marijuana in greenhouses, saving the expense of electricity in grow-rooms. The portfolio has done very well with APHA in the past, but sold its last bit in March before the market bottom. The chart shows a healthy new uptrend developing, with normal pullbacks, so now we’ll get back in. BUY.
Canopy Growth (CGC)
While Canopy ran a close second to Aphria in Canada last year by revenues, it still occupies first place in mind-share, thanks in part to the fact that a major investor is alcohol giant Constellation Brands (STZ). Revenues were $179 million in 2019, up 206% from the year before, and for 2020 analysts are expecting $355 million. I think of Canopy as the most corporate of the Canadian crowd, and there’s good evidence of that in the firm’s recent efforts to “balance supply and demand and enhance overall efficiencies.” Beyond the euphemisms, this means the company fired 85 employees, left South Africa and Lesotho, closed its Yorkton, Saskatchewan facility, halted operations in Colombia and stopped farming activities in Springfield, New York.
There’s still no prospect of earnings, but the stock looks good. After bottoming at 8, the stock blasted up to 16 (a double), and then spent a month building a base in the 15 region before breaking out of that base on Monday. It’s a great setup for buying, but the stock is already our largest holding, so we’ll hold. BUY.
Cresco Labs (CRLBF)
Cresco is one of the leading vertically integrated multi-state cannabis companies in the U.S., with operations in 11 states, including 18 production facilities, 31 retail licenses, and 21 operational dispensaries. All new this year are five locations in Illinois and, coming soon, the first adult-use dispensary in high-profile downtown Chicago. Analysts are expecting EPS of $0.05 this year and $0.28 next year. We owned the stock previously, taking partial profits of 113% in May 2019, but the last bit was sold last November for a profit of just 8%. Now, however, the stock looks healthy again, and the sharp pullback yesterday, courtesy of a slightly disappointing earnings report, presents a decent entry opportunity. BUY.
Cronos Group (CRON)
Cronos is one of the smaller Canadian marijuana providers—but tobacco giant Altria owns 45% of the stock, so long-term prospects are good, though there are no earnings in sight.
As for the stock, it’s been building a base in the 6 region over the past month, and tried to break out Monday with some of its peers—but failed. HOLD.
Curaleaf Holdings (CURLF)
Massachusetts-based Curaleaf, which has 57 dispensaries, 15 cultivation sites and 24 processing sites in 17 states, is a leading contender to be the Philip Morris of the industry as it continues to grow by acquisition. The stock bounced well off the bottom, built a base centered on 4, and broke out of that base on Monday. It’s another fine setup for readers who don’t own the stock yet. BUY.
Green Thumb Industries (GTBIF)
Headquartered in Chicago, Green Thumb has 13 manufacturing facilities, licenses for 96 retail locations and operations across 12 U.S. markets (California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and Pennsylvania), so it’s also a contender for national leadership going forward.
Revenues in 2019 were $216 million and analysts are looking for $440 million in 2020, as well as EPS of a penny in 2020 and then $0.22 in 2021.
We previously bought in September of last year, but that was bad timing, as the sector’s bear market soon had us in the red and we sold at a loss. Now, however, the sellers are done and the buyers are back in control. In fact, GTBIF is notable for breaking out of its base last week a couple of days before CGC and CURLF. BUY.
GrowGeneration (GRWG)
GrowGeneration operates the largest and fastest-growing chain of hydroponic and organic garden centers in North America, all catering to commercial growers of cannabis—and its business is totally legal nationwide. Of its 27 locations in 10 states, 10 were built or acquired in 2019. Revenues last year were $80 million, up 175% from the year before, while EPS was $0.05. For 2020, analysts are expecting EPS of $0.15 and in 2021, $0.32.
As for the stock, it never suffered as badly as the “true” marijuana stocks (though it did bottom with them), and now it’s right back on track, above all its moving averages. If you’re looking for a low-risk entry into the industry, you could buy on the next pullback. BUY.
Innovative Industrial Properties (IIPR)
IIPR is the only publicly traded REIT in the U.S. that caters to the cannabis industry. Like GrowGeneration, this is a totally legal business nationwide, which means lenders are happy to deal with it, and that means the company has been a great source of cash for marijuana companies, who value cash more than buildings. In fact, just last week, the firm signed a deal with Cresco Labs (its fourth with that company) to buy its Marshall, Michigan property for roughly $16 million and then lease it back.
Revenues in 2019 were $45 million, up 202% from the year before, and EPS were $3.17. This year, analysts are looking for EPS of $5.37 and next year, $7.24.
As for the stock, it had a superb run, exceeding all expectations up to its peak in June, 2019 (far later than the rest of the marijuana stocks), and then it joined the crowd on the downside. The rebound since March has been good, but given its prior outperformance, I tend to have lower expectations for IIPR in the months ahead. HOLD.
Tilray (TRLY)
Based in British Columbia, Tilray was one of the earliest marijuana companies to expand globally; the company now has customers in 15 countries on five continents. 2019 revenues were $167 million, up 287% from the year before, and $243 million is likely this year. But there were no earnings last year and there are none expected in the near future. Still, I think Tilray is a good buy here.
The stock was notorious for peaking at 300 in late 2018 as marijuana mania swept the sector, but gravity prevailed, and eventually the stock bottomed under 2.5 last month. Since then it’s rallied to 10, and it’s now building a base between 6 and 10. This is our first foray into TLRY. BUY.
Trulieve (TCNNF)
Trulieve is the market leader in Florida, with 45 medical dispensaries and over 50% market share, as well as nascent operations in California, Massachusetts and Connecticut. Ideally, when Florida legalizes recreational marijuana, Trulieve will get a big chunk of that, too, though much depends on how the politicians write the rules.
2019 revenues were $253 million, up 146% from the year before, and EPS was $1.54. Going forward, analysts are expecting EPS of $0.53 in 2020 and $0.72 in 2021, which translates to a forward P/E ratio of 19—pretty good for a company growing this fast.
As for the stock, after rallying off the bottom like all its peers, it found resistance at 10, pulled back to 8.5, and then yesterday began what may become a successful breakout. BUY.
Turning Point Brands (TPB)
TPB is the oldest company in the portfolio (by far), having built a solid business in the smokeless tobacco industry before diversifying into the vaping and CBD markets. It’s legal nationwide, and it even pays a dividend!
After bottoming with the broad market, TPB rocketed from 14 to 22, and then built a solid base for a month before breaking out on big volume on Monday—a good sign. BUY.
The next Cabot Marijuana Investor issue will be published on May 27, 2020.
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