The latest issue of Cabot Marijuana Investor is now available, with my current advice on the twelve stocks in the portfolio, as well as one new addition and profit-taking advice on one of our early investments.
As the fastest-growing industry in America, marijuana presents many exciting investment opportunities.
But I do want to caution you, especially if you’re one of my newer readers; for all the potential, there is also substantial short-term risk in all these stocks, as they tend to be lower-priced and more volatile than our typical recommendations. So take care to understand the risks before you act.
My goal is to make you a successful long-term investor in the sector, and the best way to do that is to get off on the right foot.
Cabot Marijuana Investor 918
October 17 Approaches!
First, I want to welcome all my new readers to the first issue of Cabot Marijuana Investor, the successor to the quarterly report that was Cabot’s Ten Best Marijuana stocks. When I started that report back in August 2017, I was uncertain about how many good investment opportunities I could find, not least because marijuana was illegal under U.S. federal law (and still is). But in the year-plus since then, the industry has blossomed rapidly, both in many U.S. states and in Canada, where nationwide recreational sales will begin October 17. (Note: Contrary Opinion Theory suggests that might be a short-term top for the stocks, so beware of buying stocks that are elevated.)
Additionally, the flood of money coming into these stocks has been impressive, lifting many of them out of the low single digits—risky territory that we traditionally avoid—and into solid double-digit territory. Institutional investors—as well as Constellation Brands, Molson Coors and maybe even Coca-Cola—are getting into the industry as well, driving expectations and valuations higher and higher. With so much going on, increasing the publication’s frequency to monthly is the best way to keep you up to date.
But this doesn’t mean I’ll be trading more! From the beginning, I’ve stressed that this is a marathon, not a sprint; my goal is to get you invested in the marijuana stocks that will be the leaders of the industry years from now, even decades, and then to guide you to maximizing your gains while minimizing your risk in the years to come.
The first step toward achieving these goals is identifying the leading players in the industry—as well as the potential new leaders—and that’s relatively simple, especially if you just focus on the top 10 or 20 stocks. (I’m tracking 126 of them, to be thorough). The second step—finding good entry points into those stocks—can be more difficult, and that’s where the skills of a lifetime of chart reading come in.
Last but not least comes an understanding of the trend of the sector itself. It’s a lot easier to make money if you invest when the sector is trending up (as it has been since mid-August) than when it’s going the other way. So in every issue, I’ll provide a summary of the sector’s trend, as well as an overview of ongoing developments.
Today, the Marijuana Index has paused in its effort to exceed its old high of January, but I believe the trend is still up. Yet the closer we get to October 17, the greater the odds that we’ll need a serious correction before the uptrend resumes.
Additionally, it’s worth noting that back in January, when that high was set, it was the big Canadian growers that were leading the way—and some of them have yet to exceed their old highs. Conversely, the U.S. companies that are more diversified were lagging in January, but have been leading in this latest advance. Given a choice, I believe it’s better to favor these companies today.
Last but not least, a note about diversification. I believe the most successful and tolerable way to invest in this fast-growing industry is to develop a diversified portfolio of both Canadian and U.S. companies, both growers and ancillary players. As time goes by, I expect the growers in particular to rise and fall as sentiment toward the industry changes and I think insulating yourself from some of these swings with some peripheral players (non-growers) will help reduce your portfolio’s volatility.
WHAT TO DO NOW
Marijuana stocks have been relatively calm since my last update exactly two weeks ago, and this is good, particularly if you can find a good setup. My choice for the portfolio today is MedMen Enterprises (MMNFF), which I profiled in my August 22 report. In the portfolio, we will now take half our cash and invest it in MMNFF. Additionally, we will now take partial profits in Aurora (ACBFF), selling a third of our position, because it’s grown to an oversize share of the portfolio and the stock is extended.
CURRENT RECOMMENDATIONS
Aphria (APHQF)
With a market capitalization of $3 billion, Aphria is one of the biggest Canadian growers, and it’s distinguished by the fact that it has now reported 11 consecutive quarters of positive EBITDA.
The biggest reason for that is that most of the company’s marijuana is grown in greenhouses, in natural sunlight, thus avoiding the substantial costs of lamps and electricity incurred by its competitors. Its location in Learnington, Ontario, which is farther south than Detroit and close to the most southerly point in Canada, is key.
Also key to its profitability is the fact that Aphria has not been acquiring at the speed of some of its larger competitors (notably Aurora) though it has certainly done smaller acquisitions. But the company has been spending on greenhouses. When current projects are complete, the company anticipates that annual production capacity in Canada will be 255,000 kilograms.
Looking internationally, Aurora has interests in Israel, Germany, Italy, Malta and Colombia. And in the U.S., the company has an interest in Aphria USA, which dispenses low-THC medical cannabis to patients in need in the state of Florida.
When adult-use sales begin October 17, Aphria will have 59 SKUs in the Ontario market. Its portfolio of brands will include Solei Sungrown for eco-conscious users , the RIFF brand (high-potency) for experienced users, the Goodfields brand for novice users interested in high-quality cannabis from a trusted source and the Good Supply brand, positioned as a no-frills, value-priced brand for everyday cannabis use.
In the fiscal fourth quarter, ended May 31, revenues grew 110% to $12.0 million. All-in cost per gram sold was $1.60. First-quarter results will be released October 12, before the market opens.
The chart shows the stock more than doubling from its August low to its September top (though failing to top its January high), and now cooling off. If it can stabilize and build a base around 11, where its 200-day moving average is now located, that would offer a decent entry point.
Aurora Cannabis (ACBFF)
Aurora is the Canadian king of acquisitions, recently swallowing up both MedReleaf and CanniMed, companies that I would have been happy to invest in on their own. Leading this massive acquisition effort is Andre Jerome, SVP Business Integrations, who formerly implemented global business integrations for Vodafone.
Altogether, the company now has operations in 18 countries, and expects to be producing at a rate of 150,000 kilograms/year by the end of 2018 and eventually over 500,000 kilograms of cannabis per year. With a goal of being the biggest producer of marijuana in Europe, each of Aurora’s facilities is built to meet European Union GMP standards.
Also boosting perceptions of the company are rumors that Coca-Cola is interested (though just this week Pepsi said it’s not interested in the marijuana industry) and an announcement that the company will list on a major U.S. exchange (Nasdaq or NYSE) by year end.
In the fiscal fourth quarter, revenues were $19.1 million, up 223% from the previous year. The cash cost to produce a gram of marijuana was $1.71, down from $1.91 the year before, while the average selling price of a gram of dried cannabis was $8.02, up from $6.79 the year before.
As to the stock, it more than doubled from the August bottom to the September top (though like Aphria, it has not yet topped its January high) and it’s held most of those gains so far, thanks to hopes that Coca-Cola is serious. If you own it, and you have a good profit, you should consider taking a partial profit. The stock is extended and the market capitalization of $9 billion could easily be trimmed. In fact, I’m going to trim our position—the largest in the portfolio—by selling a third. If you’re looking to buy, wait a while longer; the stock could easily be at 8.0 tomorrow, or even 7.0 if the sector gets soft.
Note: Aurora shareholders received shares and warrants for spin-off Australis Capital (trading in Canada as AUSA.CN), which will conduct operations in the U.S., most likely by acquiring smaller operators. I will not be following this spin-off security until it is more mature, but if you’re among the recipients, here’s my suggestion. Hold if the amount of the investment is meaningful, and/or you don’t mind a little more paperwork. Sell if the amount is less meaningful and/or you value simplifying.
Canopy Growth (CGC)
Canopy remains the undisputed leader in the cannabis industry, with a market capitalization of roughly $11 billion, bolstered by the $4 billion contribution of Constellation Brands (STZ), whose investment kicked off the August blastoff of all stocks in the industry.
Additionally, it has the most recognized marijuana production brand in the world—Tweed—as well as the brands DNA, Leafs by Snoop, CraftGrow and Foria. All these brands will be available across Canada this month, as Canopy has supply arrangements in every province in the country. In Ontario alone, Canopy will sell 100 SKUs, including pre-rolled joints, dried flower, oils, and softgel capsules.
All told, Canopy has 13 facilities across Canada for cultivation, harvesting and processing. Outside Canada, Canopy already is active in Australia, Brazil, Chile, Columbia, Czech Republic, Denmark, Jamaica, Lesotho, Spain and South Africa.
In the fiscal first quarter ended June 30, revenues were $25.9 million, up 63% from the year before. Average selling price per gram was $8.94, up from $8.43 the year before.
As to the stock, it more than doubled from its August low to its September high (blasting easily past its January high), and it’s been consolidating that gain tidily since, as every pullback has been interpreted as a buying opportunity by investors looking to get a piece of the leader. Technically, the stock is still vulnerable to a pullback to 40, or even 33, but my impression is that its leadership status is likely to give it unusual buoyancy in the sector.
Note: We sold half our position at the end of August for a profit of 552%, mainly to reduce our overweight position and increase diversification, but CGC still represents 12% of the portfolio.
Cronos Group (CRON)
Cronos is the fifth largest (by market capitalization) of the Canadian marijuana growers, and like the others, it’s been busy making deals so it can scale up rapidly as the industry prepares for a particularly explosive phase of growth after October 17.
When the adult-use market opens, Cronos will be selling COVE, a premium brand that was born in the Okanagan Valley in British Columbia, which is known for producing some of the world’s finest cannabis; Original BC (a lower-priced brand), basically rebranding the cannabis that it’s been selling to its medical marijuana brand; and Spinach, a mainstream brand.
Cronos has also invested in and made loans to Whistler Medical Marijuana Company, Evergreen Medicinal Supply Inc., AbCann Global Corporation, Canopy Growth Corp. and HEXO. And on the international side, Cronos has operations in Israel, Australia, Germany, Poland and Columbia, as well as a 50/50 joint venture with MedMen Enterprises USA, to create a Canadian branded retail chain named MedMen Canada.
In the second quarter ended June 30, revenues grew 428% from the year before to $3.4 million, and the company posted a profit of a penny a share, unchanged from the year before.
The stock more than doubled from August to September, eclipsing its January high in the process, and has been consolidating those gains since. Interestingly, selling volume in recent weeks has been quite low as the stock has drifted lower, and this is encouraging. If you don’t own it, you could aim for an entry point at 9, though it would be more prudent to wait until a bottom is better defined.
CV Sciences (CVSI)
CV Sciences is not in the marijuana business; instead it’s the number one seller of cannabidiol (CBD) oil, which is sold across the U.S. in health food stores, marijuana dispensaries and online. At the end of June, the company’s wares (under the brand Plus +CBD) were available in 1,968 stores, an 11% sequential increase over the retail store count for the first quarter of 2018.
Eventually, I expect the market for CBD to exceed the market for marijuana, and that’s simply because the various symptoms of pain and discomfort that CBD is recommended for, which include anxiety, insomnia, nausea, arthritis, pre-menstrual syndrome and post-traumatic stress disorder, are so comprehensive as to be almost universal.
CV Sciences also has a drug development division focused on developing and commercializing novel therapeutics utilizing synthetic CBD. CV Sciences is not the only company targeting this market; others are focusing on the epilepsy market. But CV Sciences is working to target smokeless tobacco users and “addicts” with a chewing gum that contains both nicotine and synthetic CBD. It’s still in the preclinical phase.
In the second quarter ended June 30, revenues grew 203% from the year before to $12.3 million.
The stock, meanwhile, has earned recognition—good and bad—for volatility! It broke out to new highs in April, well before any marijuana stock, crossed the 1.0 line in May, and peaked at 9.20 in mid-August—definitely elevated out of trend, and almost certainly fueled by the buying of short sellers covering their losses. Then a noted short-seller put in his two cents and the stock cooled off fast, falling to a low of 2.76 in just seven trading days. And then it bounced, and I recommended buying.
But the stock didn’t immediately accommodate me. In fact, just two days later I received this from a reader:
“I invested the same time you recommended & invested in CVSI. What happened to the stock?
In many years of investing this is setting a record for a plunge. Was there any news?
Given the amount of the plunge believe explanation/ recommendation on what to do next is warranted”
So then the stock turned around, jumping up like a frog out of a hot frying pan. And another reader sent me this:
“I just started subscribing to your Marijuana Investor two days ago. Yesterday CVSI jumped 35%.
This morning it is up 15% already. It’s making me dizzy. Shall I buy some now or wait for a little down?”
I answered both of these by reminding the readers that low-priced stocks are typically more volatile than higher-priced stocks, and that there are two weapons you can use to deal with it. The first is to be very tactical in your buying, watching the stock almost like a day trader and using tight stop losses. The second is to adopt a long-term view and work to slowly build your position in a stock by averaging up over time. (That’s my style.) And I want you to remember these strategies, because even though CVSI has since calmed down, I guarantee that volatility will be a factor in this sector in other stocks, especially the lower-priced ones.
As I write, CVSI has been tracing out a beautiful narrowing triangle, in the company of both its 25-day and 50-day moving averages, but yesterday it fell out of the pattern, so if you haven’t bought yet, the prudent course is to wait for a bottom, ideally at 4, but perhaps as low as 3.
HEXO Corp. (HYYDF)
Previously known as Hydropothecary, HEXO is the Canadian marijuana grower that has partnered with Molson Coors to put cannabis drinks on shelves in Canada as soon as they’re legal—hopefully in 2019. (Molson Coors has control of the partnership with 57.5% ownership.)
In the meantime, HEXO remains the market leader in Quebec for medical marijuana, with 35% share. And its cost per gram of dried marijuana is low at $0.88, while its revenue per gram is impressively high at $9.24.
By year end HEXO will be capable of producing 108,000 kilograms of cannabis per year, which should put it in fourth place for production, behind Canopy, Aurora and Aphria. But what I really like about the company is its work in product development, package design and branding.
For example, Time of Day, its signature product line, is a series of mixes of dried marijuana buds, designed for different times of the day.
H2 is a line of Classical Medical Marijuana products, identified by strain including Pink OG Kush, Papaya Grove, Dragon Fruit, Juniper Berry, Passion Fruit, Honeydew and Bitter Melon.
Decarb is fine milled medical marijuana, designed for oral consumption. Decarb comes in six different products, ranging from high THC to high CBD.
Elixir is a sublingual spray that delivers cannabis oil (either high-THC or high-CBD) mixed in a peppermint spray. Discreet and convenient, it costs more.
Fleur de Lune, launched in July, is intimate medical cannabis oil that is both odorless and tasteless and is designed to enhance sex—though the company won’t exactly can’t say that.
Also, Hydropothecary invested $10 million in cannabis retailer Fire & Flower, which has submitted 37 retail store licenses in the province of Alberta, and has been awarded one retail store license in the province of Saskatchewan. This gets Hydropothecary into the retail business.
In the quarter ended April 30, revenues were $1.2 million, up 5% from the year before. Average revenue per gram was $9.24, up from $8.62 the year before.
The stock more than doubled from its August low to its September high (easily topping its January high) and it’s corrected very little since—which is interesting, even auspicious. Aggressive investors could try to buy on pullbacks, especially if it falls below 6. At the same time, if you’ve got an oversized profit, taking some of the table here might make sense.
iAnthus Capital (ITHUF)
iAnthus owns and operates growers, processors and dispensaries in six U.S. states—with a strong focus on the East Coast. In fact, the company takes pains to point out that the population of Florida, New York and Massachusetts (the three states where it’s most active) have a greater combined population than the entire country of Canada.
With eight cultivation facilities, 46 dispensaries and the expertise of being one of the first movers on a national scale, it’s off to a good start in the U.S. In particular, I like the fact that its flagship dispensary in New York (expected to open this quarter) will be located across from Barclay’s Center in Brooklyn.
The stock peaked with the group back in January, broke out to additional new highs in June, and then hit more new highs in September as the sector surged. Since then, the stock has pulled back normally, and if it can find support around 5.5, where the stock topped in June, that would be a good spot to start nibbling. Logically, the stock shouldn’t be affected by what happens in Canada after October 17.
Innovative Industrial Properties (IIPR)
From the beginning, my strategy with this portfolio has been to soften the blow from the volatility of the stocks of fast-growing producers by mixing in some slower-growing peripheral players with calmer stocks, and IIPR is one of them. (Though it’s hard to claim that doubling our money in less than a year was “calm.” It’s all relative.)
Innovative Industrial Properties is a real estate investment trust (REIT) dedicated to the cannabis industry—and one of the few companies in the portfolio with actual earnings. The company acts like any REIT; it develops properties, collects money from tenants, passes on quarterly dividends to shareholders and grows by developing new properties. The current dividend rate amounts to 3.0% annually. (Ours get reinvested.)
As with all REITs, interest rates will be a factor of the company’s profitability, but in the long run, I believe the strength of this industry will outweigh any negatives that might come from rising rates.
The company currently has nine properties in seven states, all 100% leased to state-licensed medical use cannabis growers. In the second quarter, revenues were $3.3 million, up from $1.3 million the year before.
As to the chart, it surged 50% from the start of August to the top in September—which is astounding for a REIT—so it definitely deserves a cooling off phase; in fact, that phase could be quite long. If you don’t own it yet, wait. The stock sold off rather sharply yesterday.
Note: We sold a third of our position at the end of August for a profit of 127%, both to lock in some of that unusual profit and to raise funds for further diversification.
KushCo Holdings (KSHB)
Kushco is another component of the portfolio that’s here for diversification away from growers as much as anything.
Originally known as Kush Bottles, and focused on providing containers for the industry, Kush has branched out substantially over the past year.
It now targets the veterinary medicine industry with its containers. It offers design and branding services to complement its containers (many of them child-proof). It offers a wide of industrial gasses to cannabis processors, so they can turn harvested product into oils and more. And it recently established an office in China to gain better control of its manufacturing relationships there.
The long-term goal, according to CEO Nick Kovacevich, is to position KushCo as a one-stop shop for any business looking to operate responsibly within the legal cannabis market.
Notably, everything Kush does is perfectly legal in every state and province; the company doesn’t touch cannabis itself or CBD.
In the fiscal third quarter ended May 31, revenues grew 173% from the year before to $12.9 million.
The stock peaked in January with the crowd, and then set a lower peak in June and a lower one still in September, so KSHB is definitely losing ground relative to the growers. Still, the growth prospects are attractive. If you don’t own it, look for a pullback, perhaps to 5.20 or below.
Note: We sold half of our position at the end of August for a profit of 177% both to lock in some profit and to raise funds for further diversification.
MedMen (MMNFF)
MedMen is the biggest cannabis retailer in the U.S., with 19 licensed facilities (from cultivation to retail) in four states (California, Nevada, New York and Florida) and more on the way. Eventually, it will compete directly with iAnthus.
But while iAnthus has different brands for every market, MedMen has one brand for all markets—MedMen. In fact, its goal is to run the “Apple Store” of the industry, with premium products and premium prices, advertised by customers who carry the firm’s iconic red bags that signal, “I can afford to buy the best.”
Also, MedMen’s partnership with Cronos should allow easy entry into the Canadian market when it’s legal.
Preliminary results for the fiscal fourth quarter (ended June 30) saw revenues of $19.2 million. Average retail markup over wholesale was 90%. Average spend per transaction was $77.76.
Annualized revenue per square foot in the stores was $6,541. By comparison, the average revenue per square foot for an Apple store is approximately $5,546 and approximately $2,951 for Tiffany & Co stores.
After an IPO at the end of May, MMNFF peaked in September and has pulled back normally since, bouncing gently off its 50-day moving average last week, and I think this provides the entry point I’ve been waiting for. The portfolio will use half its cash to buy a position at tomorrow’s average price.
Organigram (OGRMF)
Based in the province of New Brunswick, OrganiGram is a mid-size Canadian grower, still valued at less than $1 billion, but it’s making fine progress, especially in growing cannabis cost-effectively. In fact, with an “all-in” cost of $0.80 per gram for its latest harvest, OrganiGram may be the lowest cost producer in the country.
Partly this is due to the company’s low cost of electricity, but partly it’s due to high yields that come from a very efficient production system, with fully automated irrigation, automated potting, fully automated waste destruction and automated packaging.
The company claims to have the largest indoor growing capacity in Canada today and is aiming to have 480,000 sq. ft. of production at full buildout. Additionally, it’s working with Hyacinth to make synthetic THC and CBD and minor cannabinoids, and it has interests in Australia, Germany and Serbia.
As to brands, Organigram has some of my favorites (judging solely by names).
There’s Edison (which I suppose makes you feel bright), ANKR Organics (to make you feel healthy and virtuous), Trailer Park Buds (for penny-pinchers with a sense of humor) and Trailblazer, whose Prohibition blend celebrates the end of Prohibition (October 17, assuming all goes according to plan).
In the quarter ended May 31, revenues were $3.7 million, up 94% from the year before.
The stock peaked in January with the crowd, equaled that peak in June, and then zoomed out to new highs in September. Since then, it’s been consolidating those gains in normal fashion, and it could be a decent buy between 5.0 and 5.5 if the sector holds up. Alternatively, if there’s more softness ahead, buying around 4.50 would be attractive. Lastly, if you’ve got a fat profit and you’re overweighted, you could take some profit off the table here.
Turning Point Brands (TPB)
Turning Point is an old-school smokeless tobacco company that has been expanding into the marijuana and vaping markets, primarily through acquisitions of the Zig-Zag brand and several vaping brands, including Vapor Shark, Vapor Beast and International Vapor Group.
These are not so much as product lines as marketing platform lines, with online platforms selling under brand names such as VaporFi, South Beach Smoke, and DirectVapor.
In the latest quarter, revenues at Turning Point grew 12% to $81.1 million, while earnings soared 43% to $0.50 per share.
Looking at the company’s sectors, Smokeless Products saw revenues grow 10.8%; Smoking Products saw revenues grow 8.5%; and NewGen products (mainly vaping) saw revenues grow 18.7%.
Turning Point is not only the most established company in portfolio, it also pays a small dividend, currently yielding 0.4%.
The stock does not march to the drummer that the marijuana stocks march to, nor should it. Thus it provides fine diversification. After hitting a high in January, it pulled back slightly into March, but broke out to new highs in May and has hit new highs in most months since then, with a big blastoff in early September very notable. If you don’t own it you could buy here, but I recommend waiting to see if it bottoms lower; the 50-day moving average is down at 36. Lastly, if you’ve got a fat profit, you could take some here; I doubt that the stock can duplicate its recent performance.
Note: We sold a third of our position at the end of August—just before that blastoff—for a profit of 107% both to lock in some profit and to raise funds for further diversification.
STOCKS ON WATCH
Tilray (TLRY)
Tilray was the hottest marijuana stock on the planet in September—and then the coldest; in the space of just four weeks, it soared from 40 to 300 and then plummeted back to 100. Now it’s working on consolidating that advance, but with a valuation of roughly $13 billion, it could be a very long consolidation.
Namaste Technologies (NXTTF)
Based in Toronto, Namaste sells vaporizers and smoking accessories via more than 30 websites in more than 20-plus countries. Aiming to be the Amazon of cannabis, it relies heavily on technology. But the stock is still volatile and immature; it soared from 1.0 to 3.0 from August to September and on Tuesday just fell back to 1.5, where it met its 200-day moving average and bounced.
THE NEXT CABOT MARIJUANA INVESTOR WILL BE PUBLISHED October 25, 2018
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