Cabot Marijuana Investor 1020

The past month has brought great performances from many of our marijuana stocks, but right now, there’s a risk that the market is turning down, preparing to take some of our profits.

Long-term, however, trends toward increased legalization mean prospects for the marijuana sector are brighter than ever; next week’s election will tell us a lot about what the next few years might bring.

How do we balance this short-term risk with this long-term opportunity? By remaining invested in the best-performing stocks, of course.

Cabot Marijuana Investor 1020

Investing in a World of Uncertainty
“You can only see as far as your headlights … but you can make the whole trip that way.” E.L. Doctorow

Short-term, the world is full of uncertainty today, with a major election around the corner and a pandemic continuing to upend many normal practices. This you already know.

Long-term, however, the future is clear. Progress will continue—though of course not in a straight line—and one of the realms of progress will be founded on the increased legalization of marijuana. Most people understand that this is happening, but only a small minority can actually imagine what that future will look like.

Already we have 11 states where adult-use marijuana is legal and another 24 where medical marijuana is legal. In next week’s election, voters in five states will have their voices heard on the issue—Arizona, Mississippi, Montana, New Jersey and South Dakota—and if New Jersey votes to legalize, odds are that neighbors New York, Connecticut and Pennsylvania won’t be far behind.

According to Fortune, the global cannabis market was valued at $10.6 billion in 2018 and is projected to reach $97.4 billion by the end of 2020—achieving a compound annual growth rate of 33% in the process.

That’s why we’re investing in marijuana stocks.

Already, the growth of the legal marijuana market has taken a bite out of the pharmaceutical and alcohol industries (a bite so small they hardly feel it), but as the trend to legalization grows, and marijuana becomes more integrated into our society, it will disrupt more traditional business—and eventually we’ll see some of our little marijuana companies acquired by giants looking to diversify into this “new” industry.

But that’s in the future. Today, institutional investors are still not on board. I’ve detailed the number of institutional holders of each of our stocks in the write-ups below and there’s a clear gap between those that are legal nationwide and those that are not. You’ll see it. And this gap is because most institutions either can’t or don’t want to take the risk of buying these stocks!

But someday—as the process of legalization progresses—these institutions will climb on board, and there’s no question that when the big money starts rolling in, the stocks will soar. The only question is timing—but if you hold the leading stocks long enough, you’ll surely benefit.

And that brings me back to the short-term, where we do have some major uncertainty.

Fundamentally, there’s a risk that the results of the election, particularly as they apply to marijuana stocks, have already been discounted by the stocks.

And technically, Cabot’s short-term timing indicators are on the verge of giving a sell signal—though the long-term trend is still positive.

But history says we’re not at a major peak for marijuana stocks yet. Historically, the sector’s previous big peaks coincided with the opening of major legal markets (Colorado in early 2014, California in early 2018, and Canada in October 2018). And we’re not there yet. Even if New Jersey votes to approve, it could still be years before the politicians figure out how to enact the will of the people (while satisfying the will of the lobbyists as well).

So right now, I’m sitting pat, with the portfolio roughly 19% in cash. If the market decline continues, we’ll listen to the charts and raise cash, while keeping core positions of our long-term winners. But if this correction finds a bottom soon, I’ll happily buy more!

Marijuana Index

What to Do Now
Remain heavily invested in a diversified group of the stocks recommended here, but keep an eye on the stocks in case trends change. And remember the importance of position sizing; a major reason that our portfolio has outperformed the index this year is that we’ve overweighted the strongest stocks, while underweighting the weakest. The only substantial change in the portfolio today is a downgrade of Innovative Industrial Properties (IIPR) to Hold. Details below.

CURRENT RECOMMENDATIONS

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

Stock Updates
Innovative Industrial Properties (IIPR) to Hold.

Canopy Growth (CGC)
Canopy was the original leader of the Canadian marijuana market, but when the company received a $5 billion investment from liquor giant Constellation Brands (STZ) management “blew it” on expansion efforts that didn’t pay off, and now the company is focused on “right-sizing” costs while revenues catch up. And they are catching up. Third-quarter estimates are for revenues of $91 million, up 57% from the year before—but losses will continue, for the time being. As for the stock, we’re long-term holders of a core position in the stock and recently averaged up as the trend turned positive. But I wouldn’t overweight CGC; it’s still recovering from being too popular a couple of years ago, as evidenced by the massive (for this sector) 362 institutional holders. HOLD.

Cresco Labs (CRLBF)
Chicago-based Cresco is one of the U.S. market leaders, and the fastest growing as measured by second-quarter revenues. The company currently has 19 dispensaries and 15 production facilities in nine states. But perhaps its unique selling point as a stock is management’s focus on pursuing a Consumer Packaged Goods (CPG) approach to the business; this entails establishing major brands (Good News, High Supply, Floracal Farms, Reserve, Remedi, Mindy’s Edibles) and selling wholesale. Third-quarter results will be released November 18, before the market opens. Analysts expect revenues of $113.5 million, up 213% from the year before—and continued losses. But for 2021, analysts are looking for EPS of $0.08. Like all the U.S. marijuana companies, institutional support is light; there are just 16 institutional holders. But technically, the stock looks good, with a nice uptrend in place since March, featuring a new recovery high just last week. BUY.

Curaleaf (CURLF)
Curaleaf, headquartered in Massachusetts and operating in 23 states, owns 95 dispensaries, with a focus on highly populated, limited license states including Arizona, Florida, Illinois, Massachusetts, New Jersey, New York and Pennsylvania (the most recent openings have been in Pensacola and Panama City, Trulieve’s home territory). Thus, it has more than four times the dispensaries as Cresco, but revenues were only 25% higher than Cresco’s last quarter (showing Cresco’s wholesale power). Still, the chart has been strong, advancing on big volume throughout October and hitting new recovery highs just last week. Analysts expect third-quarter revenues of $193 million, up 213% from the year before, and continued losses, though a profit of $0.11 is expected in 2021. CURLF has only 25 institutional holders. BUY.

Green Thumb Industries (GTBIF)
Chicago-based Green Thumb has 13 manufacturing facilities, licenses for 96 retail locations and operations across 12 U.S. markets and is thus one of the leaders of the U.S. marijuana market. Its 49^th retail operation (the 13^th under the Rise label) opened in Monroeville, Illinois on October 21. The second quarter saw revenues grow to $119.6 million, up 168% from the year before, and third-quarter results, which will be released on November 11 after the market close, are expected to show revenues of $134.5 million, up 98% from the year before. Like many of its peers, the company is on the cusp of profitability, and (again, like many of its peers) it has thin institutional support, with only 18 institutional holders. Like CRLBF and CURLF, the stock hit recovery highs last week and has pulled back normally since. BUY.

GrowGeneration (GRWG)
GrowGeneration is one of the outliers in the portfolio, in that its business is totally “non-plant-touching”—the word plant being code for marijuana. Thus, it’s legal in every state in the U.S.—though it’s operating in only 10 today. As the country’s leading seller of hydroponic and organic nutrients, GrowGeneration is also benefitting from the pandemic as Americans put more money into growing a variety of things at home, but the company’s main target market is marijuana growers, and thus the company is focused on states where it’s legal. The latest acquisition, completed October 20, saw GrowGeneration pick up Big Green Tomato, a two-store chain in Battle Creek and Taylor, Michigan with strong commercial operations and annual revenues approaching $16 million. GrowGeneration’s third-quarter results, scheduled to be released November 11 after the market close (the same time as GTBIF’s results) are expected to show revenues of $47.4 million, up 118% from the year before, and EPS of $0.07. GRWG, being totally legal nationwide, has 134 institutional holders. As for the stock, GRWG remains the largest position in our portfolio—a position it has earned.

And just last week the stock was recommended by Mike Cintolo in Cabot Growth Investor! Here’s what Mike wrote: “We haven’t set foot in the marijuana sector over the past couple of years, but a few are beginning to perk up and grow up (i.e., become more liquid), and one of the more interesting ones is GrowGeneration, which has a classic bullets/army story; whereas many firms are battling with each other to sell more and more weed, GrowGeneration benefits no matter who wins that war. Encouragingly, 60% of sales are consumables, leading to an expanding stream of recurring revenue from current customers, while the firm is building a line of private label products (under the Sunleaves brand) to deliver lower prices and gain leverage on third-party sellers. And because GrowGeneration is a retail play, there’s a cookie-cutter aspect to this as well; the firm had 16 stores at the end of 2018, 25 at the end of last year, currently has 28 and has a goal of boosting that to 50 by the end of next year. As for the stock, it’s lower priced and volatile, but the next big move is likely up.” BUY.

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 63 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 booming in recent quarters. Like GrowGeneration, its business is legal in every state. For the third quarter, analysts expect revenues of $29.6 million, up 156% from the year before, and FFO of $1.19 per share, up 38% from the year before. Technically, the stock has been a surprisingly strong performer since March; it’s more than tripled since the bottom and hit an all-time high two weeks ago. However, the stock has just dipped below its 50-day moving average for the first time since May, and thus it’s possible this stock is in for a well-deserved rest period. In fact, with the industry noting how well the company has done, and how popular the stock is among investors (there are 370 institutional holders), there are now a couple of new cannabis REITs coming to market—looking for a piece of the pie. I’ll downgrade it to hold now and watch the chart. HOLD.

Jushi Holdings (JUSHF)
The latest addition to the portfolio, Florida-based Jushi is the smallest multistate marijuana company in our portfolio and also the lowest priced—which means it’s higher risk. Preliminary third-quarter results, released October 1, showed revenue of $24 million, up 61% sequentially, and fourth-quarter revenue is projected to bring $25 to $30 million, as well as positive adjusted EBITDA. For 2021, revenue is expected to be $205 - $255 million, with Pennsylvania accounting for $95-$110 million, Illinois for $70 - $80 million, and Virginia for $17 - $25 million, followed by California, Nevada and Ohio. However, we’re currently underwater in the stock because soon after we bought, the company announced a 10,000 share offering at $3.55 Canadian (roughly $2.65 U.S.) that raised about $26.5 million U.S. This is not unusual; a lot of marijuana companies have been taking advantage of the strong climate to raise money. And with the offering now complete, the chart is still very healthy, trading above its 50-day moving average. So, if you haven’t bought yet, this is a fine opportunity—remembering my caution that because this is a small stock it is likely to be more volatile than the others. If you already own, however, it’s best to sit tight. Temping as it is to average down, I can’t recommend it. One of the rules of growth stock investing says never average down; only average up. So we’ll sit with our small position. BUY.

TerrAscend (TRSSF)
Our second-smallest marijuana 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. Thus, TerrAscend has achieved something most competitors have not—selling in both countries! Analysts expect revenues of $40.5 million in the third quarter, up 100% from the year before, and a loss of a penny a share; profitability is right around the corner. As for the stock, it hit a new high last week (though it’s still below its high of 2018, which is typical of the group). Lastly, there are only four institutional holders. Volatility is to be expected, but right now, this stock is strong! BUY.

Trulieve (TCNNF)
The biggest seller of marijuana in Florida (with roughly 50% market share), Trulieve now has 66 dispensaries in the state as well as a few others in California, Connecticut and Massachusetts. It had the greatest revenues of the U.S. multi-state operators in the second quarter, but the slowest growth (if you can call 109% growth YoY slow). And the company has been profitable since 2017, revealing both capable management and the wisdom of focusing on one state (which is still just a medical market). Also, it’s one of the few marijuana stocks that’s actually exceeded its 2018 high, a sign (in my opinion) of how much Wall Street likes profitable companies. Analysts expect third-quarter revenues of $131.4 million, up 85% from the year before, and EPS of $0.20. There are 15 institutional holders. BUY.

Turning Point Brands (TPB)
The hottest stock in the portfolio this week is Turning Point Brands, which is actually the slowest-growing company of them all! But the stock’s 13% pop yesterday was due to the announcement 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. Going forward, Turning Point will help develop and distribute THC-free products from dosist, extending its current operations in the CBD field. However, Turning Point is clearly working to stay legal in all 50 states, as the agreement stipulates, “The proceeds of TPB’s investment are being used by dosist’s thc-free and Canadian business units and cannot be used in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States.” (Turning Point’s products are sold in more than 210,000 retail outlets in the U.S. and the stock has 208 institutional holders, and that’s not something they want to jeopardize.) Also yesterday, the company announced solid third-quarter results that blew away analysts’ estimates and raised guidance for the remainder of the year. Revenues were $104.2 million, up 7.6% from the year before, while Adjusted Diluted 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. Additionally, during the quarter, 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). If you haven’t bought yet, you could buy a little here. BUY.

The next Cabot Marijuana Investor issue will be published on November 25, 2020.

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