The latest issue of Cabot Marijuana Investor is now available, with my current advice on the fifteen stocks in the portfolio.
While coronavirus fears infect the broad market, the good news is that marijuana stocks seem to have an immunity, mainly because they already had their correction last year. Many stocks in the sector are looking better, and I’m now recommending averaging up in three stocks already in the portfolio.
These changes will reduce the portfolio’s cash level to roughly 12%, so we will be well positioned to benefit from the sector’s resumption of its big uptrend.
Full details in the issue.
Cabot Marijuana Investor 120
Coronavirus Takes Center Stage—and Marijuana Stocks Don’t Care!
I’m in no way a medical professional, so I have nothing useful to say about coronavirus that you haven’t heard elsewhere. But I do have a few thoughts on how the market has reacted to this crisis.
Less than two weeks ago, the broad market was hitting record highs, with broad participation by most sectors, uncowed by impeachment, tariffs, Iran or any of the other headline news items. But the market sorely needed a correction, as virtually every Cabot analyst has mentioned in the past month.
And now we have it, with the scapegoat being the coronavirus. And I wish this correction well as it takes the market down for a while, cooling enthusiasm and letting rationality take hold for a while. The broad market needs it.
But look at the marijuana sector!
The marijuana sector had its correction last year. This year it doesn’t need a correction, and so it’s not being affected by the coronavirus scare. Also, marijuana is largely a domestic industry in both the U.S. and Canada, so global issues have little effect at the moment. What the marijuana sector needs, and what it is slowly getting, is the return of buyers.
Since its bottom last December, the Marijuana Index is up 5%, with the leading stocks doing even better.
Marijuana Index
Digging deeper, we see that the U.S. part of the index is up 5% while the Canadian component is up 7% from its low, which actually came in November. Bottom line, marijuana stocks in both countries are on the rebound.
Strategy
The strategy, as always, is to develop a portfolio of the leading stocks in this fast-growing industry, aiming to develop long-term profits in the industry leaders. Five years from now, I expect we’ll have significant profits in the industry leaders of both the U.S. and Canada. But I don’t recommend that anyone own only marijuana stocks; that’s a high-risk strategy. What I do recommend is that you incorporate a number of these stocks into your own portfolio, taking care to diversify among countries and among business models. And along the way, following the precepts of growth investing, you should take care to cut losses short and let winners run—occasionally taking partial profits.
What to Do Now
While most growth-oriented Cabot analysts are now advising an increasing dose of caution as the coronavirus correction develops, I’m actually going to take some more of the cash that we’ve had on the sideline, and put it back in the market by averaging up in three of our best stocks. We’ll increase our investment in Canopy Brands (CGC) by 3%, increase our investment in Cronos (CRON) by 3%, and increase our investment in Curaleaf (CURLF) by 2%. This will reduce our cash position to roughly 12%. Also, Turning Point Brands (TPB) downgraded to Hold.
CURRENT RECOMMENDATIONS
Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.
Stock Updates
Curaleaf Holdings (CURLF) to Buy.
Cronos Group (CRON) to Buy.
Trulieve (TCNNF) to Buy.
Turning Point Brands (TPB) to Hold.
Akerna (KERN)
Based in Denver, Akerna is focused on providing software that serves both the companies in the U.S. cannabis industry and the government entities regulating them, with products that track cannabis from seed to sale. The company is still small, but growing fast and moving into the Canadian market via acquisition. The portfolio made an initial acquisition last week and the stock is pretty much unchanged since then, sitting right at its uptrending 50-day moving average. BUY.
Aphria (APHA)
Aphria remains the largest holding in the portfolio, as it’s the biggest seller in Canada, its stock is not as overvalued/overexposed as Canopy, and its chart has bottomed. Q2 results, for the quarter ended November 30, were released two weeks ago and the market reacted well, pushing the stock up to 6 on high volume. But then Friday, the company announced that it had entered into an agreement to receive $100 million from an unnamed institutional investor, and the market panicked, interpreting that as a sign that the company needed cash—so now the stock is back at its base in the 5 region, where it should find strong support. If you haven’t bought yet, you can buy now. BUY.
Aurora (ACB)
Our position in Aurora remains very small, as the stock remains in a downtrend—in part because of concerns about cash. Yet there are signs of hope, visible in two waves of high-volume buying in both November and January. If you have a big loss here, you should sell and move on, but the portfolio has taken profits four times already, so we can afford to hold longer. HOLD.
Canopy Growth (CGC)
CGC is looking increasingly positive and it’s not difficult to guess why. As the most high-profile Canadian cannabis company, with the “suits” from Constellation Brands (STZ) taking an increasingly large role in the company, Canopy is the most obvious choice for institutional investment. And down the road it’s a given that the company will be a major force in the THC beverage market, even though it recently admitted having to push back its beverage launch timeline a bit. The portfolio, which had been very underweight in the big correction, averaged up in December after the sector had bottomed and the stock’s 25-day moving average had turned up. And now, with the stock on a normal pullback, and both its 25- and 50-day moving averages trending up, we will average up some more, adding 3% of the portfolio’s value. BUY.
Cresco Labs (CRLBF)
Chicago-based Cresco has great prospects going forward, particularly with regard to its initiatives in Illinois and California. Analysts are expecting EPS of $0.10 in 2020. The portfolio averaged up in December, and the stock is still at a good entry point here as it continues to build a long base centered on 6. 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. The stock saw a wave of buying volume in early January, which was enough to turn the 25-day moving average up, and now the 50-day line is just starting to turn up as well, so I think it’s earned a renewed buy rating. We will now add 3% of the portfolio’s value to its position. BUY.
Curaleaf Holdings (CURLF)
Massachusetts-based Curaleaf, which has licenses to sell in 13 states, was the biggest legal seller of marijuana in the U.S. in the third quarter—and its stock continues to have one of the healthiest charts in the portfolio, in part because management continues to signal that it is serious about holding onto its stock. Last week the company announced a revised lockup agreement, reducing the schedule by which shares could be sold following the impending Select acquisition, and the market liked it, though the stock has corrected lower since. Last week I suggested that if you didn’t own any, you could buy or wait for a deeper pullback to the 6.5 area, and the stock did dip as low as 6.15 Monday before rebounding, so it looks safer to buy now. In fact, I’ll officially upgrade it to Buy. And we will average up by adding 2% of the portfolio’s value. BUY.
Green Thumb Industries (GTBIF)
This Chicago-based MSO’s stock had a great run in early January, climbing from 8.8 to 10.5 as investors grew bullish on newly-legal Illinois cannabis sales. Last week I suggested that if you hadn’t bought yet, you should wait for a pullback, and we’ve now had a small one, which has taken the stock down to its 25-day moving average. Downside volume on the pullback has been small compared to the previous upside volume—so stepping in right here is not a bad idea. On the other hand, the stock could pull back a bit further, to perhaps 9, so more risk-averse investors could wait (and hope) for that. (Note: I don’t like to use the word “hope.” Wise investors know that hope is not a strategy. Nevertheless, it seems appropriate in this case if you’re looking to buy.) BUY.
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. By the end of 2020, the goal is to be in 15 states, by adding Missouri, Illinois, Florida, Arizona, New Jersey and Pennsylvania. Everything GrowGeneration does is legal nationally, so financing and banking are not an issue. Plus, the stock provides the portfolio with nice diversification. However, this is one of the most thinly traded stocks in the portfolio, and that does add risk. Additionally, I’m wondering if growth will slow (somewhere in the future) as the investment phase of growers transitions into the operation stage; will there be enough recurring income? In the meantime, the stock continues to trend slowly and steadily higher, leading all its moving averages. 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 48 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia, totaling approximately 3.1 million rentable square feet—all of which it leases to cannabis companies. Last Thursday the company announced a public offering of 2,000,000 shares, all being sold by the company, and that may have depressed the stock a bit, though it’s hard to tell given the weakness of the broad market on that day. And then this week the company announced an acquisition and lease deal with Cresco Labs, for a 50,000 sq. ft. property in Ohio. This is the REIT’s third deal with Cresco, with the prior two being in Illinois, and the market loved the news, shooting the stock up on big volume. If you haven’t bought, try to wait for the next pullback. BUY.
MediPharm Labs (MEDIF)
MediPharm is Canada’s leading cannabis extractor, producing purified, pharma-grade cannabis oil and concentrates that can be used for a wide variety of derivative products—all of which should see growth ramp up now that cannabis beverages and edibles are legal in Canada. But the bad news now is that last Friday MediPharm filed a $9.8 million lawsuit against HEXO, alleging that HEXO failed to make payments relating to the private label cannabis oil deal the two companies agreed to in February 2019. Complicating the situation is that the deal was actually with a company (Newstrike) that HEXO subsequently acquired—and HEXO says they have “serious concerns” about the agreement. To me, and apparently to the market as well, that means MediPharm can’t expect the money anytime soon, if ever. So the question here, with the stock sitting right down at its lows of October—and with a loss of nearly 30%, which is my limit—is whether to hold or bail. And I’m going to hold, in part because the stock is sitting right at the level that supported it last October. HOLD.
Organigram (OGI)
It’s been two weeks since the stock of New Brunswick-based Organigram jumped more than 50% on huge volume after the company reported excellent results for its fiscal first quarter of 2020 (ended November 30)—and the action of the stock since then has been encouraging, as the stock pulled back right to its 25- and 50-day moving averages (touching them both on Monday) and then moved higher yesterday, though on modest volume. OrganiGram had been tarred with the same brush as all Canadian marijuana companies, but the report revealed prudent management that has resulted in both good growth and ample cash to fund both the company’s operations and its expansion plans. If I can see a developing uptrend, I will restore its buy rating. HOLD.
Planet 13 (PLNHF)
Planet 13 is a vertically integrated company that operates the world’s biggest cannabis store, located in Las Vegas, Nevada, and it has big plans to expand into California and eventually other tier-one markets nationwide. The stock saw a couple waves of high-volume buying in December and then a deep pullback to below its 50-day moving average, which has been trending up. If you don’t own yet, you can buy here. BUY.
Trulieve (TCNNF)
It’s been six weeks since short-sellers attacked TCNNF in mid-December (when it was the strongest of all cannabis stocks), and the good news is that the stock has stabilized very nicely since then, building a base around 11. This tells us (especially given the broad market’s weakness lately) that investors are not afraid, and that they believe the company will continue to be the largest seller of medical marijuana in Florida. Going forward, there’s still a risk the stock will pull back once more to 10, but if it does, I recommend you treat it as a buying opportunity. I’m upgrading the stock to Buy. BUY.
Turning Point Brands (TPB)
TPB is starting to worry me, as the stock has now declined for eight consecutive days, falling through its 50-day moving average in the process. Fundamentally, I don’t see any real trouble here, as the Kentucky company has a stable, profitable business in smokeless tobacco (snuff and chewing tobacco) that supports a dividend of 0.7%. But the uptrend that I mentioned just last week is now suspect, and unless the stock finds support soon (which is logical because 23 was the low of its trading range from early November), I’ll probably sell it. For now, I’ll downgrade it to Hold. HOLD.
The next Cabot Marijuana Investor issue will be published on February 26, 2020.
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