The latest issue of Cabot Marijuana Investor is now available, with my current advice on the fourteen stocks in the portfolio.
The cannabis sector remains in a correction, but the new year brings the promise of a great rebound, and I want you to be in the stocks that will benefit most, so, while there hasn’t been much news over the past week, I do include full updates on each stock in the portfolio so you can best decide which stocks fit your own portfolio.
Also, the portfolio remains 25% in cash, waiting for the sector’s main trend to turn up.
Full details in the issue.
Cabot Marijuana Investor 1219
Ready For The Big Rebound
The end of the year always brings opportunities for investors who want to speculate on which stocks will rebound best, and this year, there’s no question that cannabis stocks, which are down 46% since the start of the year, are near the top of the list. But which ones should you own?
One school of thought says that the stocks that are the most oversold will bounce the most in the short term, and that is true in some cases—but absolutely not true in the case of stocks that are in serious trouble for fundamental reasons. Some oversold stocks in this young industry are in that position because their companies are going bankrupt!
The other school of thought says it’s best to own quality companies, because in the long run, that’s what institutional investors will accumulate and those institutions will be the real drivers of the stocks in the future. And that’s my preference. In fact, in this advisory, my attitude from the start has been to focus on the stocks that will be the eventual leaders of the industry—so that eventually, we’ll own the Budweiser and the Marlboro of the industry—and not the also-rans that fade into oblivion.
So, though I’m still tracking more than 150 stocks that have the potential to be added to our portfolio, the truth is I’ll never write about most of them, because they’re not worth it. Most are priced below a dollar and their light trading volume just makes owning them too risky. Plus, most of the companies will never be profitable.
So, as we head into the New Year, leaving behind a year that was difficult for investors but saw real progress in the industry, with increasing numbers of companies achieving real earnings, I want to reassure you that we remain on the right course, and that by continuing to focus on holding the leading stocks in the industry, we will absolutely benefit when the sector’s trend turns up again.
Marijuana Index
What to Do Now
Generally, pruning losers and weak stocks and replacing them with strong stocks is the recipe for success. I added two new stocks to the portfolio last week, and if you feel underinvested in cannabis stocks, you can add any of the stocks that look attractive. But the portfolio still has 25% in cash, waiting until the sector strengthens, and I expect that to be soon!
CURRENT RECOMMENDATIONS
Note: The table reflects the state of the portfolio holdings before acting on any new recommendations.
Aphria (APHA)
Aphria remains the largest holding in the portfolio, and for good reason. It’s the biggest seller in Canada. Its stock is not as overvalued/overexposed as Canopy. And its chart is looking constructive, having bottomed below 4 in mid-November. Additionally, its 25-day moving average has now turned up and its 50-day moving average is close to doing the same! I think this is a fine time to buy. Analysts are expecting EPS of $0.04 in 2010. BUY
Aurora (ACB)
Aurora is a reminder of the importance of momentum, both technical and fundamental. On the technical side, ACB peaked in March like most of its peers and then began a decline like the rest of the sector. But while the best stocks in the sector bottomed in November and have been at least basing over the past month, ACB’s decline has actually accelerated in recent weeks—and one reason for that acceleration is fundamental, as investors have become increasingly concerned that the company is running out of cash! The trouble first became visible in late November, when the company retired $227 million of the $230 million 5% unsecured convertible debentures that were due in March 2020 by issuing more shares, thereby preserving cash. Two weeks ago the picture worsened when an analyst opined that the company could run out of cash in 2020. And then last Saturday (it’s rare for news releases to be made on Saturday), the company announced that its Chief Corporate Officer Cam Battley (who had been the “face” of the company for investors) had resigned. And Monday the company announced that it “has taken steps to proactively rationalize capital expenditures, reduce near-term debt and bolster liquidity in an effort to position the Company for the long-term success. The previously announced deferral of construction and commissioning activities is expected to conserve approximately $200 million of cash in the near term. Aurora believes that its existing assets are sufficient to meet current demand at a low cost per gram. The company expects to have the flexibility to ramp up projects as global demand dictates.” All that said, it’s highly unlikely Aurora will run out of cash; the company has a lot of high-quality assets that have real value (and which probably were underutilized given the slower-than-expected rollout of Canadian marijuana retail). And now that Cannabis 2.0 has begun, Aurora has begun shipping a variety of CBD and THC vape and edible products, such as gummies, chocolates, baked goods and mints. So, somewhere ahead, this stock is going to be a great buy. But it’s a well-known investor maxim that you shouldn’t try to catch a falling knife. The portfolio holds a minimal 1% position in the stock—having taken profits numerous times on the way down—and will stand pat for now. HOLD
Canopy Growth (CGC)
Canopy is still the most high-profile Canadian cannabis company, thanks to the presence of major investor Constellation Brands (STZ). And it’s hit the ground running for Cannabis 2.0, with a full menu of vapes, edibles and beverages for the Canadian market. The only real fundamental negative is that the stock is expensive relative to most of its peers. Still, it looks to me like the mid-December selling (on big volume) marked a bottom and since then the stock has traced out an inverse head-and-shoulders pattern, which implies that the next move is up. And with true growth stocks, chart patterns trump valuation. The portfolio averaged up last week. BUY
Cresco Labs (CRLBF)
Chicago-based Cresco Labs ranks fourth among U.S. multistate operators (MSOs) and has great prospects going forward as adult-use marijuana becomes legal in Illinois on January 1. Cresco already has properties in Nevada, Arizona, New York, Michigan and Massachusetts, and once the acquisition of Origin House goes through, it will be a major presence in California. Analysts are expecting EPS of $0.13 in 2020. I averaged up for the portfolio last week and the stock is still at a good entry point today. BUY
Cronos Group (CRON)
Canadian Cronos remains above its November low and above its 25-day moving average, so there’s a good chance that it will begin a renewed uptrend as 2020 dawns. However, the stock still looks expensive to me, and the company, which is the smallest Canadian producer in the portfolio, has been less communicative about its progress than its peers, so the portfolio remains underweight. HOLD
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. In early 2020, it will open the first adult-use retail dispensary in Provincetown on Cape Cod. And last week the company finalized new non-dilutive financing of $275 million that will mature in 48 months, so expansion can continue. Analysts are expecting EPS of $0.24 in 2020. The stock bottomed on November 1, saw some very strong buying power in mid-November, and has pulled back normally since. If you don’t own any, you could buy on this pullback, but the portfolio already has decent-sized position, so I’ll keep it rated hold because technically, the stock could still return to 4.5. HOLD
Green Thumb Industries (GTBIF)
This Chicago-based MSO’s stock has been basing since late August, and it looks like it won’t get going until 2020. But the valuation is reasonable and the fundamentals are good. Analysts expect EPS of $0.08 in 2020. This week the company opened a store in Westport, Connecticut (its second in the state and its 38th in the country), and on Jan. 1, when adult-use marijuana becomes legal in Illinois, the company will open five retail stores in the state (in Mundelein, Canton, Quincy, and two in Joliet). BUY
GrowGeneration (GRWG)
Added to the portfolio last week, GrowGeneration operates the largest and fastest-growing chain of hydroponic garden centers in North America (26 locations in eight states) all catering to commercial growers of cannabis. Top customers include Curaleaf, Harvest, MedMen and CannaRoyalty, though of course they’ll sell to anybody—even growers of tomatoes, for example. Thus, while the company should benefit from the growth of the industry, its business is totally legal nationwide and unhampered from the financing and banking hurdles that many cannabis companies contend with. Plus, its strategy of growing both organically and via acquisition has been proven to work. The stock bottomed at 3.45 in mid-October and has been trending slowly higher since, and all its moving averages are trending up. BUY
Innovative Industrial Properties (IIPR)
IIPR is the REIT that currently owns 42 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, Ohio and Pennsylvania, totaling approximately 2.9 million rentable square feet—all of which it leases to cannabis companies. And it just finalized two more sale-leaseback transactions with GR Companies (Grassroots) for properties in Pennsylvania and North Dakota. The two properties combined cover around 105,000 sq. feet of industrial space, and the purchase price was around $24.1 million in total. Analysts are looking for funds from operations (the earnings equivalent of a REIT) of $2.87 in 2019 and $5.46 in 2020. As a REIT, this stock is subject to some forces that don’t impact most cannabis companies—and that can be both good and bad. In any event, the stock performed spectacularly until July—and then it corrected 52%, bottoming in late October. The portfolio took profits in the stock four times earlier this year, and started buying back in recently. Also, Tom Hutchinson, chief analyst of Cabot Dividend Investor, just added it to his portfolio. If you want relatively low risk exposure to the cannabis industry, consider this. (But be aware of the tax consequences of owning a REIT.) 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 beverages and edibles are legal in Canada. Being in the middle of the value chain, the company competes with neither growers nor retailers. Cronos and Canopy are both customers. The stock has been building a base between 2.5 and 2.7 in recent weeks and ideally, this is the prelude to a move higher, but there’s no sign of buying power yet. HOLD
Organigram (OGI)
New Brunswick-based Organigram remains above its low of November—which is good—but below its 25-day moving average—which is bad. Still, I’m optimistic for a rebound in 2020, as the company hasn’t done anything wrong recently. Revenues in the third quarter grew 621% from the year before to $24.8 million, and this week the company announced the release of its first wave of Cannabis 2.0 products, which included the launch of the company’s new line of vape products. Following the vapes, Organigram expects to launch an infused chocolates line as well as a dissolvable powdered beverage product (created using nanotechnology for faster onset compared to traditional edibles) during the first and second quarters of 2020. HOLD
Planet 13 (PLNHF)
Added to the portfolio last week, Planet 13 operates the world’s biggest cannabis store, located in Las Vegas, Nevada, which currently serves an average of roughly 2,000 paying customers per day. But Planet 13 is not just a retailer; the company is vertically integrated, and plans to expand into California. In the long run, the goal is to operate ultra-high-end dispensaries in tier-one markets nationwide and to sell the company’s brands (Medizin, Trendi and Leaf & Vine) in both their own stores and nationwide. Analysts are looking for EPS of $0.09 in 2020. The stock peaked at 2.7 in April, bottomed at 1.3 in October, and has shown some impressive strength since then. As a smaller company with a relatively thinly traded and lower-priced stock, risk is higher here, but so is the potential! If you don’t own yet, you might wait for a pullback to the 1.55 area. BUY
Trulieve (TCNNF)
Trulieve is the largest seller of medical marijuana in Florida (with roughly 55% of the market), it’s profitable, and it has plans to move into other states (particularly Connecticut, Massachusetts and California). And until last Tuesday, it was the strongest stock in the marijuana universe, notably out of trend from its peers. So short-sellers produced a report that triggered heavy selling by shareholders who sold first and thought second. And now the stock looks a bit more like its peers; in short, it’s ripe to move up again. And what of the allegations in the short-sellers’ report? Well, CEO Kim Rivers has just been announced as the keynote speaker at the Benzinga Cannabis Capital Conference in Miami in February, and I trust Benzinga far more than those short-sellers. Also, as I noted last week, management quickly acted to extend their own lock-up restrictions and added two high-quality advisors to its Board of Directors. Analysts expect EPS of $1.33 in 2019 and $0.76 in 2020. If you’re not invested yet, this is a good time to start. The portfolio averaged up last week. BUY
Turning Point Brands (TPB)
Every year I’m asked to choose a Top Pick from this publication for Wall Street’s Best Investments and other investment aggregators, and for 2020 my choice is Turning Point Brands. Here’s what readers of those publications will be reading soon: “Turning Point Brands is a conservative way to invest in the 2020 rebound of the most battered market sector of 2019—marijuana stocks. Obviously, this is a very aggressive and high-risk sector; many institutions won’t even touch marijuana stocks because of continuing federal illegality and most investors won’t touch them because volatility is high and liquidity is low. But with the sector off nearly 50% from its 2019 high, there’s great potential for a rebound, and Turning Point is a low-risk way to play it. This well-managed company, headquartered in Kentucky, has a stable, profitable business in smokeless tobacco (snuff and chewing tobacco) that supports a dividend of 0.7%. But in recent years Turning Point has been diversifying into the fast-growing cannabis industry, first by marketing vaping supplies and then by peddling CBD, activities that are totally legal across the U.S. In 2019, the vaping crisis (mainly attributable to black market THC devices) hit the stock hard, but it rebounded strongly in late October and since then it’s been building a base that looks like a great entry point as we wait for a resumption of the stock’s uptrend.” BUY
Last but not least, I can’t resist sharing a photo of my first grandchild, a perfect little girl born just a few weeks ago.
The next Cabot Marijuana Investor issue will be published on January 22, 2020.
Cabot Wealth Network
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