May 26, 2021

It’s been fifteen weeks since the marijuana sector topped, sending the Marijuana Index down 55%. But as the picture of this correction gets clearer, every day I get a little more bullish about the possibility that the sector is ready to turn up again. Most of our stocks are exhibiting typical base-building behavior, though there’s no sign of real buying power yet.

But the fundamentals of the industry remain excellent, so there’s no question that eventually these stocks will get going again.

In the portfolio today there are only two small changes. IIPR moves to Hold, and TPB moves to Sell.

Full details in the issue.

Cabot Marijuana Investor 521

Ready to Rise
The good news is that quarterly reports from our marijuana companies continue to reveal an industry that’s booming. The figures below, reflecting the latest report from each company, show an average revenue growth rate, year-over-year, of 158%! And if you take out the three non-plant-touching companies, which are there to provide a bit of stability and diversification, as well as the lone remaining Canadian company, you get an average of 204%. That’s fast!

More good news is that the trend toward legalization in the U.S. continues. No one knows exactly when we’ll achieve total federal legalization—right now we’re still going state by state—but eventually we’ll get there. Which means that eventually, the vertically integrated multistate operators that are accumulating assets across the country will not only be able to use banks as efficiently as any other business, they’ll be able to ship product across state lines (to the extent that it’s allowed by individual state laws) and become more efficient.

The bad news is that growing revenues and the clear trend toward legalization don’t guarantee rising stocks. Yes, they make it highly likely that in the long run, these stocks will be higher. But in the short run, we still need to contend with the zigs and zags of a market that is alternately buffeted by fears of inflation, elevated by optimism about legalization, and depressed by worries about competition—to name just a few of today’s externalities.

Happily, we can use these short-term market fluctuations to enhance our returns—if we pay close attention to the charts. Because the charts know all. They reflect everything known, hoped and feared by everyone who has an interest in our stocks. So if we focus on owning the strongest stocks when they are going up, and avoid owning the weakest stocks when they are going down, we can actually beat the averages—and that’s what we’ve been doing with this portfolio since 2017.

PORTFOLIO

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

Marijuana Index

Moving to the sector as a whole, the chart above shows the parabolic blowoff top of February 10, when most stocks in the sector peaked. (We sold then and moved the portfolio to a 40% cash position.) And it shows a jagged decline since then, with the latest low hit less than two weeks ago, with the index down a full 55% from its high.

U.S. Stocks Only
But if we look at only the U.S. component of the index, we see a slightly different story.

Since bottoming on March 30, the U.S. stocks in the sector have rallied and returned to that low twice. (On April 15, when our cash level had reached 64%, we put half our cash back in.) And they’re now on their third rally, telling us investors are clearly favoring U.S. cannabis stocks over Canadian cannabis stocks today. (The reasons include oversupply in Canada, fast growth in the U.S. and the prospect of federal legalization—but you don’t need to know that to be a successful investor.)

However, we can’t truly say that even the U.S. stocks in the sector are currently going up. In fact, since our issue a month ago, our portfolio is down a few percent, while the index is down substantially more. And I’m a little concerned that trading volume has been drying up recently—though it’s certainly possible that’s simply the calm before a new wave of buying. In any case, we’re not doing any new buying for the portfolio today; in fact, we’re selling just a little. If we see the stocks weaken—particularly if they fall through prior lows—we’ll sell more. It’s possible that this correction won’t end until they reunite with their 200-day moving averages. But if we see them strengthen, particularly if they break out above prior highs, we’ll buy more, always focusing on the leaders.

Final note: One of my readers recently asked how I determine the weightings of the stocks in my Marijuana Portfolio. He explained that he was trying to develop a formula for his own use.

My answer: “I hold core positions of those stocks with the likelihood of being leaders, while scaling up or down according to shorter-term conditions and sometimes eliminating a stock entirely and adding a new stock. For example, I’m still holding a little CGC because it should be a Canadian leader. My latest complete sell was VFF (April 1) for a profit of 30% (it’s far lower now) and my latest buy was CCHWF (April 15).”

But what I could have said was simply, “I accentuate the positive, and eliminate the negative.” Or, “If something works, I do more of it, and if something doesn’t work, I don’t do it again.” The fact that the CCHWF buy hasn’t brought a profit yet means there’s no logic in buying more now.

Additionally, a lot depends on your own risk tolerance. Not long ago, I let GrowGeneration (GRWG) grow to be 20% of the portfolio, but that was the maximum I was comfortable with, given the likelihood that it would give some of that back, so I sold to reduce risk. My father (who founded this company), on the other hand, was much more risk tolerant; he could let a strong stock account for 40% of a portfolio. Sometimes that brought spectacular gains—and sometimes painful losses. Most professional money managers think a 10% concentration is high. You’ve got to find the level that’s right for you, in part by weighing the potential for upside vs. downside movement.

What to Do Now
Overall, I remain cautiously optimistic that the sector’s correction is over, but until we see real strength, ideally in the rest of the market as well, I’m in no hurry to buy. Today the portfolio will downgrade Innovative Industrial Properties (IIPR) to Hold and sell Turning Point Brands (TPB). Details below.

CURRENT RECOMMENDATIONS

Canopy Growth (CGC)
Canopy has lost more than half its value since the February top, but it’s still valued at $9 billion, thanks to heavy institutional sponsorship. It won’t be the fastest grower, but it will be a powerhouse, and that’s why we still own a little. Constellation Brands (STZ) is a major shareholder, and Martha Stewart, who originally put her name on the company’s CBD gummies, has now signed on as the company’s official strategic advisor, “leveraging her vast knowledge of product development and branding expertise to provide the company with dedicated counsel ranging from product innovation to format development and strategic partnerships.” The stock has been the weakest in the portfolio, trading below its 200-day moving average since May 4, but it gapped up yesterday as an analyst upgraded it to buy, writing, “we believe sentiment is so low as to render risk/reward very favorable.” That’s encouraging. More important will be the results of the company’s first quarter, due June 1. HOLD

Columbia Care (CCHWF)
Columbia Care is a New York-based vertically integrated multistate operator, with 87 dispensaries and 27 cultivation and manufacturing facilities in 10 states (Arizona, California, Colorado, Florida, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania and Virginia). But it’s still substantially smaller than the big four, and thus growing faster. Chartwise, I like the low at the end of March and the slightly higher lows since, as well as the basing action at 6, so if you’re underinvested in the sector, this is one that can still be bought. Just note that the low price means volatility will be higher—and there’s a chance the stock will fall to its 200-day moving average, now at 5.2. BUY

Cresco Labs (CRLBF)
Cresco is one of the four leading marijuana companies in the U.S., with 32 operational dispensaries, 44 retail licenses and 18 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. In fact, the company is at the forefront of preparation for eventual federal legalization. It recently finalized a shelf prospectus and registration statement that will help the company to up-list onto a major U.S. exchange as soon as permitted. And because it’s switching to GAAP accounting in preparation for that event, the company’s first-quarter report has been delayed a bit; it will be released tomorrow, May 27. As for the chart, it looks rather neutral now, with the low of March 30 being tested twice since then. The 200-day moving average is down at 10.4, and that would be a tempting buy area. BUY

Curaleaf (CURLF)
Based in Massachusetts, Curaleaf remains the revenue king of the industry, though Trulieve’s latest acquisition may end that. Curaleaf now counts 106 dispensaries in 23 states supplied by 23 cultivation sites and over 30 processing sites, as well as seven consecutive quarters of positive adjusted EBITDA. And last week it announced that it would acquire the Los Sueños Farms, the largest outdoor marijuana grower operation in Colorado, with the ultimate goal of cultivating marijuana at less than $100 per pound. Liquidity-wise, CURLF is the best of the bunch in the U.S.; it’s the one Mike Cintolo likes to watch. Turning to the chart, CURLF is only 20% off its all-time highs, bested in the portfolio only by IIPR. But the chart has been a bit of an outlier in recent months. It didn’t hit new lows at the end of March (good), but it did in mid-April (bad). As I write, trading volume has been drying up. The stock’s 200-day moving average is down at 12.2. HOLD

Green Thumb (GTBIF)
Headquartered in Chicago, Green Thumb is one of the four U.S. industry leaders, with 31 stores in nine states but licenses for 97 retail locations in 12 states—so the path to growth is clear. And the chart looks fine for this sector. Since bottoming at 25 at the end of March, it has seen higher lows at 26 and then last week at 27.5. Technically, we could see a pullback to the 200-day moving average at 24, but overall, I feel optimistic about GTBIF. BUY

GrowGeneration (GRWG)
Based in Denver, our hydroponic retailer focused on serving the commercial marijuana grower currently has 55 stores, which include eight locations in Colorado, 20 locations in California, two locations in Nevada, one location in Arizona, two locations in Washington, seven locations in Michigan, one location in Rhode Island, five locations in Oklahoma, two locations in Oregon, five locations in Maine, one location in Florida and one location in Massachusetts. Looking forward, it’s targeting new markets in Missouri, Illinois, Arizona, Pennsylvania, New York and New Jersey, mainly through acquisitions in this fragmented industry. (Just yesterday it announced the acquisition of The Harvest Company of California, adding two stores in Redding and Trinity County.) An impressive 60% of GrowGeneration’s revenue comes from consumables like nutrients and growing media, some of which the company now produces itself (increasing margins through vertical integration). As for the stock, it was an absolute rocket in late 2020 (being one of the totally legal companies in the marijuana industry and thus easy for institutions to buy), but this year it needed to cool off, and so it has, underperforming the sector and touching its 200-day moving average two weeks ago. If you like the story, you could buy some here. BUY

Innovative Industrial Properties (IIPR)
Our marijuana REIT, Innovative Industrial Properties, owns 71 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington, totaling approximately 6.5 million rentable square feet which are 100% leased. Like GrowGeneration, this company’s business is totally legal in the U.S., so the stock has been a popular investment for institutions who have avoided the plant-touching stocks so far. Plus, business has been helped by the fact that marijuana companies who can’t get bank loans have found the lease-back arrangements of Innovative a great source of cash. But some day, as the legalization trend advances, both of those factors will disappear. I’ve already reduced the position in our portfolio (it’s our second-smallest holding), and today I’m going to downgrade IIPR to hold, both because of those fundamental factors that are looming and because the stock has weakened. The stock bottomed at 161 in early March, and returned to that level last week, bouncing off its 200-day moving average. But there’s no real buying power evident. Still, I like having the stock in the portfolio for diversification and the 2.9% yield. HOLD

Jushi Holdings (JUSHF)
With 32 retail locations in five states, little Florida-based Jushi is the smallest company in our portfolio as measured by revenues, but it’s growing like the wind! Management is still working to complete the financial statements for the end of 2020, but there is no sign of any trouble. As for the stock, it bottomed at 5.75 at the end of March and is now working on a base at 6, so for aggressive investors, this looks like a decent entry point. Lastly, it’s not part of my investing system, but I think there’s potential for Jushi to be acquired by one of the industry leaders. BUY

TerrAscend (TRSSF)
TerrAscend is another smaller producer, but it’s not a takeover target, 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. The company operates a number of 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. And the stock looks great today (relative to the rest of the sector). Since bottoming at 8.9 at the end of March, it’s been working its way higher, though as with the other stocks, volume is missing. BUY

Trulieve (TCNNF)
The biggest seller of marijuana in Florida, with 83 stores and a 51% market share, Trulieve is now expanding into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia). In fact, the company just announced that its first store in Massachusetts will open in Northampton (near the University of Massachusetts) on June 3. But the big news of recent weeks was the acquisition of Harvest Health and Recreation, based in Phoenix, which had $89 million in revenue in the first quarter and will add a powerful west coast presence to the company’s business. As for the stock, I had previously downgraded it to hold because of the stock’s weakness in mid-April, and while it’s rebounded since then, there is still no real buying power, and there’s the possibility that the stock will return to its low of 35 and touch its 200-day moving average. HOLD

Turning Point Brands (TPB)
Turning Point Brands, with a diversified non-plant-touching business focused on rolling papers, chewing tobacco, vaping supplies and CBD, has long been the portfolio’s low-risk diversification play. Though growth is slow for the sector, management is experienced, the small dividend is safe, and everything is legal nationwide. In the early years of this portfolio, when many of our stocks were low-priced and volatile, TPB added an “adult” touch of stability. But the stock has become increasingly weaker; 15 weeks since its peak, it’s still heading lower. Thirteen weeks (a quarter) is one of the yardsticks we use to evaluate charts, and this combined with the fact that the marijuana sector has matured substantially in recent years, means the stock is no longer as valuable to the portfolio as previously. So today we’ll bid adieu, and I’ll likely never write about chewing tobacco again. SELL

Final note: Somewhere down the road, the U.S. government will legalize marijuana—though there’s still no clear idea of when. Amateurs may wait to invest until that day, but experience tells me the sector is likely to peak at that event just as it has at previous major legalization events (namely Colorado, California and Canada), so odds are I’ll be advising selling then, whenever it is. As all experienced investors know, good news brings tops; bad news brings bottoms.

The next Cabot Marijuana Investor issue will be published on June 23, 2021.

Cabot Wealth Network
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