Still Optimistic
As I write this morning, the market is selling off broadly, raising the question of whether this downtrend will gain real momentum. The truth is no one knows. What we do know is that the Dow is just seven trading days off its all-time high, while the Nasdaq, where growth stocks have been hit harder, has been losing momentum since mid-February. Thus, technically, these indices have been diverging for three months and now the odds are growing that the broad market will follow the Nasdaq’s lead on the downside.
Note: the reason for this action doesn’t matter. You can read elsewhere about inflation, earnings, debt, tariffs, the pandemic, the price of oil, the global supply chain, chip shortages and more. To me, it’s the action of the stocks themselves that matters, because they’ll never steer you wrong.
One of Cabot’s primary market timing indicators is the Cabot Tides, which looks at five major indices and is now telling us the market’s intermediate trend is on the verge of turning negative. Such a signal could augur a few more months of declines, so this is not to be taken lightly.
Yet I still harbor an optimism that marijuana stocks in particular, because the Marijuana Index has already pulled back 55% from its February high to last week’s low, have seen enough damage. The greatest damage has been in the Canadian stocks, where we have minimal exposure, while the U.S. stocks were down “just” 40%. Looking at the charts of the individual stocks, my key yardstick in assessing health today is the relationship of the stocks to their late-March low. And I’m happy to report that of the seven “real” U.S. plant-touching marijuana stocks in our portfolio, five are still above that low. In short, selling pressures peaked six weeks ago.
The five “real” plant-touching stocks that look healthy here are Columbia Care (CCHWF), Cresco Labs (CRLBF), Green Thumb (GTBIF), Jushi (JUSHF) and TerrAscend (TRSSF). TerrAscend looks strongest of all, as it is above both its 25- and 50-day moving averages.
Going forward, if more stocks fall below that low, I may recommend more selling. But right now, I’m standing pat, with the portfolio 29% in cash, and optimistic that the stage is being set for the next advance.
Note: As I write, our portfolio is up 27.4% YTD, while the Marijuana Index is up 1.6%, and market timing has been a key factor in creating that differential.
Turning to the news:
This week, Alabama became the 37th state to legalize medical marijuana. The trend continues!
Columbia Care (CCHWF) announced its first quarter results Monday morning. Revenue was $86.1 million, up 227% from the prior year, and the company achieved positive adjusted EBITDA as well. Selected highlights from the company’s various states: Arizona saw same store sales up 70%; California saw nearly 3x growth thanks to acquisitions; Colorado saw revenue up 27% over the prior year; Florida saw revenue up 58% from the prior quarter (!) and 3x over the prior year, thanks to dispensary-level supply chain improvements and a 61% increase in cultivation yields; Illinois saw revenue up 2x over the prior year; Massachusetts saw earlier than expected contributions from wholesale revenue—partially offset by supply constraints; New Jersey (also just ramping up) saw retail sales outperform expectations and double sequentially; New York saw revenue up 60% from the prior year; Ohio saw robust performance in both retail and wholesale markets, with same store sales up more than 3x YoY and wholesale relationships with more than 85% of dispensaries in the state; Pennsylvania saw revenue up 80% from the prior year, and Virginia was the company’s first market to be EBITDA positive in the first quarter of revenue generation, as sales increased more than 50% in each month of operations and average dispensary sales were $165 per basket.
Also on Monday, Curaleaf (CRLBF) announced that it would acquire the Los Sueños Farms, the largest outdoor marijuana grower operation in Colorado. The transaction includes three Pueblo, Colorado outdoor marijuana grow facilities covering 66 acres of cultivation capacity, an 1,800-plant indoor grow and two retail cannabis dispensary locations serving adult use customers. Ultimately, the goal is to cultivate marijuana at less than $100 per pound, which will help the company maintain—and quite possibly grow—its position as the leading marijuana wholesaler in the U.S.
And just this morning, TerrAscend (TRSSF) announced that its first quarter sales increased 106% to $53.4 million, while cash flow from operations was $13.3 million compared to a loss of $0.8 million the year before. This is the second consecutive quarter in which the company generated positive free cash flow. Growth was driven by cultivation capacity expansions in Pennsylvania, New Jersey, and California as well as five new dispensary openings during 2020. Going forward, management projected 2021 revenues exceeding $300 million versus previous guidance of $290 million. Finally, the company remains on track to become a U.S. filer with the SEC by the end of 2021 and is preparing to meet the requirements necessary for trading on a national U.S. exchange should such an event become permissible by U.S. law.
Turning to the non-plant-touching stocks, hydroponic supply chain GrowGeneration (GRWG) reported first quarter revenues of $90 million, up 173% from the prior year, and EPS of $0.10, up 267% from the prior year. The company completed seven acquisitions in the quarter! Private-label sales were 6.2% of revenue compared to less than 1% for the same period in the prior year, as the company becomes more vertically integrated, and e-commerce revenue was $4.4 million compared to $1.9 million for the same period in 2020, an increase of 126%. Management now expects 2021 revenues to be between $450 million and $470 million, more than double revenues in 2020.