Cabot Marijuana Investor 520

Since the COVID-19 crash ended just over weeks ago, the market has been impressively strong, with marijuana stocks some of the strongest, as they left behind a two-year bear market.

So even though some of these stocks seem a bit over-extended today, short-term, they still have enormous upside potential in the long-term.

Full details in the issue.

Cabot Marijuana Investor 520

The Trend Strengthens!
Canada was first, but the U.S. will dominate. That’s not exactly a surprise, but the evidence is now piling up, most recently in the form of some terrific first quarter reports by U.S. marijuana companies while the Canadians continue to cut costs and mark down inventory. Of course, part of the problem in Canada was the slow pace of store licensing in Ontario, a reality that means the majority of marijuana used in Canada still comes from the illicit market. (Meanwhile, beer sales in Canada were down 3% in 2019, the worst drop in years.)

Here in the U.S., triple-digit revenue growth (year-over-year) remains the norm for the leading marijuana companies, though it’s still a state-by-state story. Regionally, COVID-19 has crippled sales in Las Vegas, while the Illinois market is booming and Florida has had great success serving the medical market. Operating margins are improving among the market leaders as well.

As for the stocks, it’s now been more than two months since the March bottom and trends are strong! Technically, we could have a big correction any day, so I recommend keeping some cash that you would target to buy after such a correction—but overall, given that the sector recently completed a two-year bear market, it’s good to be invested in the industry leaders today.

Marijuana Index

Strategy From Here
Own the leaders. Sell the losers. And remember that someday, when marijuana is declared legal across the U.S., the institutions will come running. You who are here now, are early. The portfolio averaged up in four of our stocks two weeks ago and is now down to 13% in cash, and that’s where I’ll keep it, waiting for a fresh buying opportunity.

CURRENT RECOMMENDATIONS

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

Stock Updates

Aphria (APHA)
Aphria is the leading marijuana seller in Canada, with revenues of $237 million last year, up 542% from the year before, and the future is bright, though profits aren’t exactly reality yet. Analysts are looking for a loss of a penny per share this year and two cents next year. We got back into the stock a month ago, sat through the little early-May correction, and now the stock’s broken out to new recovery highs (at its highest price since before the March bottom). The only real news of late is that the company’s stock will move from the NYSE to the NASDAQ on June 8, a move made mainly to reduce costs. One analyst estimates the move will save in the “low-hundreds of thousands of dollars” annually. BUY.

Canopy Growth (CGC)
Canopy is now second to Aphria in Canada by revenues, but it’s still the most highly valued marijuana seller in the country thanks in part to the fact that alcohol giant Constellation Brands (STZ) is a major shareholder. Our portfolio bought both APHA and CGC back in 2017 and has been able to hold onto CGC since then because it’s been less volatile, and that’s a reflection of its institutional sponsorship. Quarterly results are expected Friday, so buying now risks a surprise. Chart-wise, it would be good to enter on a pullback toward 16, though the stock’s volume clues recently suggest any pullback will be minor. BUY.

Cresco Labs (CRLBF)
Chicago-based Cresco is one of the top five marijuana companies in the U.S., with $41 million in revenue in the first quarter. Today it announced the opening of its sixth Illinois dispensary in Danville—the first cannabis retail store to open in eastern Illinois, near the Indiana border. As for the stock, it looks fine, and would be attractive on a pullback to 4. BUY.

Cronos Group (CRON)
With $8.4 million in revenues in the first quarter. Cronos is the smallest company in the portfolio by that measure, so if economies of scale matter (and they do) the company will have a harder time competing. We sold half our position last week, mainly because the stock had been the weakest performer of ours during the rebound, so CRON is now our smallest position. Note, however, that the stock has hit new recovery highs on big volume in recent days so the picture is not bad, just not as good as others. 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. In last week’s quarterly report, the company reported record revenue of $105 million, up 158% from the year before, and proforma revenue of $147 million. (Note: the company completed its acquisition of Select, which brought major West Coast assets, in early February; completed its acquisition of Arrow, which brought three dispensaries in Connecticut, soon after the quarter ended; and expects to complete its acquisition of Grassroots, which will bring entry into the competitive Illinois market, by the end of the second quarter.) Very soon, the company expects to be the clear world leader in the marijuana industry—and a major reason is the company’s profitable operations! Gross profit on cannabis sales was $33.0 million in the first quarter, resulting in a 43% margin, compared to $10.6 million a year ago; adjusted EBITDA was a record $20.0 million, up 45% from the fourth quarter of 2019 and improved from a small loss a year ago. The stock surged as high as 6.75 early last week after the report but has been consolidating that gain since. The portfolio averaged up two weeks ago and CURLF is now our largest position. If you haven’t bought yet, look for a pullback to below 5.5. 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, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada and Pennsylvania), so it’s also a contender for national leadership going forward. In fact, first quarter results, reported two weeks ago, saw the company break the $100 million barrier; revenues were $102.6 million, up 268% from the year before, while EBITDA was $25.5 million and gross margin in the quarter was 51.6%, up from 45.8% for the first quarter of 2019. During the quarter, Green Thumb opened two new stores in Illinois (Joliet and Quincy) and one in Pennsylvania, and since the quarter end, the company has opened one new store in Ohio (Lakewood) and another in Nevada (Las Vegas). Going forward, the company plans on expanding capacity in Illinois, New Jersey, Ohio, and Pennsylvania.

The stock looks much like rival CURLF, surging in recent weeks, topping near 10 last week, and consolidating since—though the very tight pattern is a bit more positive. The portfolio averaged up two weeks ago. If you don’t own yet, you could wait for a pullback to 7.5, but you may not get it. 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 business is great, as illustrated by its quarterly report released two weeks ago. Revenue grew 152% from the year before to $33 million, while adjusted EBITDA hit a record $2.7 million, up from $0.6 million a year ago. Looking ahead, management is projecting revenue of $36-$37 million for the second quarter, and $135-$140 million for the year. Growth is coming organically, via acquisitions and thanks to an expansion of online sales. The company currently has 27 stores, which include 5 locations in Colorado, 5 locations in California, 2 locations in Nevada, 1 location in Washington, 4 locations in Michigan, 1 location in Rhode Island, 4 locations in Oklahoma, 1 location in Oregon, 3 locations in Maine and 1 location in Florida. The stock has been climbing strongly since the March bottom and briefly broke out above its February high yesterday! If you don’t own it, look for a pullback. The portfolio averaged up two weeks ago.

(Note: A major competitor of GrowGeneration is Scotts Miracle-Gro (SMG), which is well-known as a lawn care company but also has a division, named Hawthorne, targeting the same market as GrowGeneration. That division, which accounted for 17% of sales in the first quarter, grew at a 60% rate that quarter, while Scotts’ main business (more than $1 billion in revenues) grew at an 11% rate. Bottom line, while SMG is a decent investment, GRWG is capable of far faster growth.) BUY.

Innovative Industrial Properties (IIPR)
Sticking with the theme of competitors—IIPR is no longer the only publicly traded REIT in the U.S. that caters to the cannabis industry; it’s simply the only one on the NYSE. There’s now a little competitor, Power REIT (PW), which trades on the AMEX. PW used to be focused on energy and is now switching its focus to cannabis, but it’s smaller and lower quality than IIPR, which is doing just fine. In last week’s issue of Cabot Dividend Investor, which has recommended IIPR for readers looking for income, Tom Hutchinson wrote, “Marijuana may go in and out of style as an investment, but earnings growth is always popular. The company is on track to more than double earnings this year. That’s huge growth for a REIT. It’s also worth noting that marijuana use doesn’t suffer in a bad economy. As well, more states are likely to legalize the stuff as they deal with budget shortfalls resulting from the lockdown. IIPR should handsomely reward you for any near-term volatility over the longer term.” The stock hit a new recovery high just yesterday (maybe money leaving retail REITs is finding its way to IIPR) and should eventually return to its February high of 107. BUY.

Tilray (TLRY)
Based in British Columbia, Tilray is a mid-size Canadian marijuana company that also has a wide international presence; the company now has customers in 15 countries on five continents. First quarter results, released two weeks ago, saw revenues of $52.1 million, up 126% from the year before. Today, continuing the trend of Canadian producers cutting costs, the company announced that it will close High Park Gardens, a greenhouse located in Leamington, Ontario that it acquired as part of an acquisition last year. This will not only save $7.5 million in costs per year, it also enables the firm to target positive adjusted EBITDA by the end of 2020. The market liked the news. If you like it, you could buy on any pullback. BUY.

Trulieve (TCNNF)
Trulieve is not only the market leader in Florida, with 19% of the stores and more than 50% of the revenue, it’s also a contender for biggest seller of marijuana in the entire U.S. Plus, the company is profitable! First quarter results, reported last week, saw revenue of $96.1 million, up 116% from the year before, and EPS of $0.12, for an after-tax margin of 14.6%. Also, the company had $101 million in cash at quarter-end, which will no doubt be used to fuel the company’s out-of-state growth initiatives. Finally, TCNNF is trading above 10 a share, a fact that is appreciated by institutional investors—though admittedly, because of the federal legal issues, few U.S. institutions have been brave enough to venture into the sector yet. The chart is one of the best, breaking out to its highest price of the year after the report (though it’s still below previous highs). If you haven’t bought yet, you could wait for a pullback, but you might not get one as the stock is basing pretty tightly at 13. The portfolio averaged up two weeks ago. 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—and it’s also the slowest-growing company. So its main role in the portfolio is adding stability. Interestingly, TPB is the only stock in the portfolio that has not hit a new recovery high in the past week (though it’s come close). And today, with most of these stocks falling (for the first time in many days), TPB was up. If you don’t own it, you can buy here. BUY.

The next Cabot Marijuana Investor issue will be published on June 24, 2020.

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