Cabot Marijuana Investor 1120

The past month has been the best of the year for our marijuana stocks, and while there’s a chance the sector could top out now (there’s so much good news out there), I learned long ago that it doesn’t pay to fight the trend.

The fact is, this sector strength could easily run to the end of the year as investors rush into this high-growth sector. So, we’ll now become fully invested, adding one new stock at the same time.

Full details in the issue.

Cabot Marijuana Investor 1120

The Future is Full of Surprises
One of the oft-told tales of the California Gold Rush is that while most miners failed to strike it rich, the real money-makers were the people selling shovels—and of course that immigrant from Bavaria, Levi Strauss, who sold heavy denim pants with rivets on the pocket corners.

And what does this have to do with the marijuana industry?

Simply that at this point in time, while our marijuana portfolio in general has done very well, particularly over the past month, our two biggest money-makers (by far) are the two companies that are not selling marijuana!

The first, GrowGeneration (GRWG), sells growing supplies to marijuana growers, targeting states where the industry is legal (a group that is obviously expanding). And the second, Innovative Industrial Properties (IIPR), acts as a landlord to medical marijuana companies.

When I first recommended each of these stocks (GRWG last November and IIPR three years ago), I had no idea they would become such big winners. No one did. But that’s not unusual in investing. The future is full of surprises.

In this case, one surprise was that there were other public companies providing exactly the same services. The other surprise was that institutional money, leery (deservedly or not) of investing in marijuana companies while the industry was still illegal under federal law, flowed into these totally legal entities instead.

Which raises the question: will the money flow out when marijuana becomes legal nationwide and institutions can invest in any marijuana company? I don’t know. Time will tell.

But I’m not worried, because I have a system. Part of the system, which has allowed our gains to mushroom in these stocks, was the time-tested growth investor’s rule that says, “Let Your Profits Run.” That’s what we’ve been doing (mainly). And part of the system is the flip side of that, which says, “When the Trend Turns Down, Sell.” Right now the trend is still up.

Good News Abounds
And good news abounds. First came the election, in which voters in all five states that voiced their opinions on the issue voted for legalization. Then came the quarterly reports, which revealed that business is booming in the marijuana industry. And now we have news of vaccines, which will speed economic reopening.

Thus it seems totally logical that marijuana stocks should be strong!

But as experienced investors know, the market can be a contrary animal. It’s just when news is the worst (think back to March) that you should buying, and it’s just when the news is the best (maybe today) that you should be selling.

So yes, I’m selling a little now (but only to pare our largest holding). I can’t really argue with the trends. And there’s a good chance at this point that marijuana stocks will stay strong right to the end of the year (because it’s better to book those taxable profits next year than this year).

But I am aware that we’ve come a long way since that March bottom and that the news for the marijuana sector in particular has been very good lately, and that the leading stocks have been acting very strong indeed. So I am keeping an eye on the exit door, because I intend to help you keep your 2020 profits, and not let them fade away in the next big correction/bear market.

An Update on Bigger, Faster and Strongest
Last week I ranked our portfolio holdings by size, speed and strength, and now, with all third quarter reports out and the charts a week older, it’s time for an update.

The biggest have not changed. It’s still Curaleaf (CURLF), Green Thumb (GTBIF), and Cresco Labs (CRLBF).

The fastest, according to revenue growth, are now Jushi Holdings (JUSHI), Cresco and Innovative Industrial Properties (IIPR).

And the strongest, according to the charts, are now GrowGeneration (GRWG), Canopy Growth (CGC), and Cresco.

A Word on Strategy
I recently talked with a friend who bought a handful of the marijuana stocks I recommended a few years ago—and just held on. She says some of her holdings are now profitable, but others aren’t, and she’s going to keep on holding. I suppose she’ll come out ahead in the end; the sector is strong enough to reward even such inattention. But you can do much better (as we have) by being active. Not too active; there’s no need to be buying and selling every week. But active enough to raise some cash when the sector’s trend turns down, active enough to get out of stocks that truly fail (look at our old holdings MMNFF, ITHUF, HEXO, MEDIF, MRMD, and OGI) and active enough to put your cash back to work when the sector trend turns up.

Marijuana Index

What to Do Now
As we enter the final month of what has been a very good year (overall) for marijuana stocks, I am both optimistic that the trend can continue for one more month and fearful that all the recent good news is signaling a top. But I’m not going to argue with the charts. I will sell a fourth of our GrowGeneration (GRWG) position, because that position has become so large, but I will also do some buying, to become fully invested! Specifically, after selling the partial position of GRWG, I will take our available cash, use one third of it to buy a new position in Village Farms (VFF), and then split the remainder equally among current holdings CURLF, GTBIF, IIPR, TRSSF and TCNNF. Details below.

CURRENT RECOMMENDATIONS

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

Stock Updates
GrowGeneration (GRWG) to Hold.
Innovative Industrial Properties (IIPR) to Buy.
Village Farms International (VFF) New Buy.

Canopy Growth (CGC)
Canopy’s third quarter revenues of $101.5 million, reported way back on November 9, beat analysts’ estimate of $91 million handily, and the stock has been strong since, driven by the buying of investors who want a piece of the Canadian leader. Interestingly, the company is still not profitable, and analysts are still projecting losses into 2021 and 2022, but a key shareholder here is beverage giant Constellation Brands (STZ), and those guys are in it for the long haul. Interestingly, the stock gapped up to a new 2020 high yesterday, but there was no big news. What there was was an announcement that research on the long-term toxicity and lifespan effects of CBD on C. elegans (otherwise known as earthworms—which have a 2-3 week lifespan) revealed no toxicity effects at all but did reveal that CBD increased mean lifespan up to 18%. I don’t think that’s as big a force on the stock as the sector’s general strength, but it is good news! HOLD.

Cresco Labs (CRLBF)
Chicago-based Cresco is in third place in the U.S. as measured by revenues, but it definitely leads in the wholesale end of the business. The third quarter saw revenues of $153 million, up 63% from the quarter before and up a massive 323% from the year before, and record adjusted EBITDA of $46.4 million, up 182% from the previous quarter. EPS was $0.02 per share, and expected to grow from here! In fact, in the past month, analysts’ expectations for 2021 earnings have jumped from $0.08 to $0.23! And the P/E ratio on those estimates is just 39. Technically, the stock looks great—strong but not overextended. BUY.

Curaleaf (CURLF)
Curaleaf, headquartered in Massachusetts and operating in 23 states, is not only the king of retail but also the current industry leader in the U.S.; third quarter revenues were $182 million, up 55% from the prior quarter and up 195% from the year before. But analysts had been expecting $193 million, so the stock has been a bit soft since the announcement. Still, the future is bright; over the past month, analysts have raised their estimates of 2021 EPS from $0.11 to $0.15. That translates to a current P/E ratio of 65, not as cheap as Cresco. But valuations are no big deal in my analysis; growth is key. The current pullback provides a decent entry point. The portfolio will average up. BUY.

Green Thumb Industries (GTBIF)
Currently number two by revenues, Chicago-based Green Thumb has 13 manufacturing facilities, licenses for 96 retail locations and operations across 12 U.S. markets. Third quarter revenues were $157 million, up 131% from the prior year and way above analysts’ estimate of $134.5 million. Like many of its peers, the company is on the cusp of profitability; while the loss per share may total four cents this year, analysts are looking for a profit of $0.15 in 2021. Technically, the stock is two weeks off its recent high so at a decent entry point. The portfolio will average up. BUY.

GrowGeneration (GRWG)
As explained in the introduction, GrowGeneration has been a huge success for us (in less than a year), in part because of a lack of competition (it’s the country’s leading seller of hydroponic and organic nutrients), in part because the business is totally legal and thus attractive to institutional investors, and in part because of the pandemic. While the company targets the legal marijuana industry, they’ll sell to anyone, including all those Americans putting more money into growing a variety of things at home. Third quarter revenues were $55 million, up 152% from the prior year, and analysts are looking for EPS of $0.16 for the full year and then $0.39 in 2021, which translates to a forward PE ratio of 84. So long-term, the future is bright; I see no obstacle to continued growth by acquisition. But this stock now accounts for nearly 20% of our portfolio, and that, combined with the fact that the stock is now 62% above its 50-day moving average, means risk feels a bit excessive to me. That will not be true for everyone of course. My father, who founded this company, was notorious for embracing risk. I knew him to hold 50% of a portfolio in a stock this strong—sometimes it paid off and sometimes it hurt. So, we’ll now sell a fourth of the position, and downgrade the stock to Hold. (Note: after our original buy last December, we averaged up in May 15 at $5.01 and sold a third in September at $15.94.) HOLD.

Innovative Industrial Properties (IIPR)
This cannabis-centric REIT (which is also recommended by Tom Hutchinson in Cabot Dividend Investor), is a great source of diversification—and yield. The company currently has 64 properties in 16 states (Illinois and Pennsylvania are where it has its biggest presence), and it’s been growing quickly, with revenues and funds from operations (FFO) booming in recent quarters. Third quarter revenues were $34.3 million, up 197% from the year before (analysts had expected $29.6 million), and FFO was $1.28, up 49% from the year before. The stock vaulted to new highs on big volume when those results were announced in early November and has been building a very solid base at the 155 level since. If this fits your needs (be aware of the tax consequences of a REIT), you can buy here. The portfolio will average up. BUY.

Jushi Holdings (JUSHF). Florida-based Jushi is the smallest multistate marijuana company in our portfolio and also the lowest priced—and thus it’s the riskiest by some measures. But its stock has been on a steady upward track for the past few months, and third quarter results, released just yesterday, revealed one reason why. Revenue was $24.9 million, up 594% from the year before, and adjusted EBITDA was $1.9 million, a $3.1 million improvement from the second quarter of 2020. Additionally, founder and CEO Jim Cacioppo increased guidance for the remainder of 2020 (to a range of $28 to $30 million) and maintained guidance for all of 2021 (a range of $205 to $255 million). Jushi has operations (3 cultivation sites, 4 manufacturing sites and 30 retail sites) in California, Nevada, Illinois, Ohio, Pennsylvania, New York, and Virginia. In a recent update I said we’d average up on our original small investment if the stock could break out above 3.4, but it hasn’t been able to close above that level yet—and ideally a breakout should be achieved on heavy volume. So for now, this remains our smallest investment. BUY.

TerrAscend (TRSSF)
Our second-smallest vertically integrated multistate operator, TerrAscend’s main growing facilities are in Mississauga, Canada, but the company also has growing operations in New Jersey, Pennsylvania, and California, doing business under the StateFlower, Ilera, Valhalla, and Apothecarium brands. Third quarter results, reported last week, saw revenues of $51 million (analysts were expecting $40.5!), with guidance for total 2020 revenues of at least $196 million and then total 2021 revenues of at least $360-$380 million! In short, this company won’t be small for long. Technically, the stock has a good uptrend in place, and while a correction is certainly possible, I’m going to average up here, betting that momentum will continue. BUY.

Trulieve (TCNNF)
The biggest seller of marijuana in Florida (with roughly 51% market share), Trulieve now has 67 dispensaries in the state as well as a few others in California, Connecticut, and Massachusetts. Based on revenue, the company has fallen to fourth in our ranks, as it hasn’t really got growth rolling in those other states yet. But Trulieve does boast eleven consecutive quarters of profitability (impressive in this crowd!), and its stock is the only one of the multistate operators that has actually exceeded its 2018 high, a sign (in my opinion) of how much Wall Street likes profitable companies. Third quarter revenues were $136 million, up 93% from the prior year (that’s slow in this crowd) and EPS was $0.04, down from $0.55 the year before. Looking ahead, analysts are looking for full-year EPS of $0.47 and then $1.24 in 2021, which translates to a PE ratio of “just” 22. Technically, the stock has a healthy uptrend going, and while a pullback would not be unusual, I’m going to average up here, betting on momentum. BUY.

Turning Point Brands (TPB)
A month ago, TPB was the hottest stock in our portfolio, thanks to a high-volume spike following the news that the company had made a $15 million strategic investment in dosist^TM, a private company with well-respected controlled-dose cannabis inhalation products that are already sold in more than 700 stores in California, Colorado, Nevada, and Canada. And since then it’s tacked on a few points, which is fine for what is the slowest-growing company in the portfolio. Third quarter revenues were $104.2 million, up 7.6% from the year before, while EPS was $0.75 per share, up 23% from the year before. The Smokeless Products Segment (mainly chewing tobacco) accounted for 29% of sales, the Smoking Products Segment (mainly rolling papers and cigar wrappers) accounted for 34% of sales, and NewGen (CBD and vaping products) accounted for 37% of sales. Also, the company repurchased 82,097 shares at an average price of $28.95 (with most companies in the industry still cranking out more shares, Turning Point is clearly an anomaly). TPB pays a modest dividend, and if you haven’t bought yet, you could buy a little here. BUY.

Village Farms, International (VFF)
The only publicly traded greenhouse produce company in Canada, Village Farms is fast diversifying from cucumbers and peppers and tomatoes into marijuana (in Canada) and CBD (in Texas). Third quarter revenues were $53 million, up 12% from the year before, while EPS was a penny—though trends have been squirrelly there. Analysts are looking for $0.10 per share for the full year and $0.40 in 2021! And just today the company announced a deal in which Shoppers Drug Mart (the largest Canadian pharmacy chain) will sell its medical marijuana. We previously owned the stock and sold for a loss in the middle of the sector’s long 2019 downtrend, but I like the diversification the company offers, and the stock is once again very strong, so we’ll try again. BUY.

Watch List
Harvest Health & Recreation (HRVSF)
Based in Arizona, where it has 15 retail outlets, Harvest Health also operates in California, Florida, Maryland, North Dakota, and Pennsylvania. Third quarter revenues were $61.6 million, up 86% from the prior year, while EPS showed a loss of a penny, with analysts looking for a profit of a penny next year. The stock is now on a normal pullback and this looks like a decent entry point. But note the risk of buying such a low-priced stock.

The next Cabot Marijuana Investor issue will be published on December 30, 2020.

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