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Cannabis Investor
Profit from the Best Cannabis Stocks

Cabot Marijuana Investor 619

The latest issue of Cabot Marijuana Investor is now available, with my current advice on the fourteen stocks in the portfolio.

The cannabis sector is currently in a correction, with both marijuana and CBD stocks trending lower, giving up some of their early-year gains—and perhaps building a bottom here.

In fact some of the biggest stocks, those supported best by institutional investors, are already looking stronger, though it will take time to know if they are in real uptrends. In the meantime, I continue to build cash, which will come in handy when it’s time to buy again.

Last week we sold a portion of three stocks and this week we’re selling portions of two more, raising the portfolio’s cash level to about 33%.

Cabot Marijuana Investor 619

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Cooling Off

They say a picture is worth a thousand words. This picture of the Marijuana Index tells a story that be summed up in fourteen.

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From January through March, marijuana stocks were hot.
Since then, they’ve been cooling off.

The reasons for the strength were simple. From the broad market’s bottom in late December, all stocks rocketed ahead, and cannabis stocks, representing the fastest-growing industry in America, were the leaders of the pack, fueled by perceptions that the Canadian legal cannabis industry was healthy, that more and more states in the U.S. would legalize, and that booming CBD use, thanks to the Farm Bill, would translate into widespread profits.

The reasons for the weakness are a bit more complex, but basically boil down to this—expectations were unrealistic and now investors are reducing their projections. In Canada, booming sales in the fourth quarter were followed by supply shortages in the first quarter, as inventory was used up and not enough marijuana was grown to replace it. In the U.S., while Illinois went legal, both New Jersey and New York didn’t. As for CBD, the FDA’s first hearing brought to light the paucity of hard data about its effects and raised fears that regulation will crimp growth going forward—and benefit traditional Big Pharma instead.

Additionally, after that big December-March run, which saw the Marijuana Index rocket up 49% (!!), the whole sector was due for a cooling-off period. Now we’re in it. But the index is still up 12% for the year, and maybe—just maybe—it’s building a bottom here.

Long term, of course, the future remains very bright, as the leading companies in the industry are growing very fast as the industry transitions from black market to legal market. Owners of the industry’s future leaders today are poised for big profits.

But if you only began investing in the sector in February or March, that’s little comfort. What you want is advice on how to stem the losses and get back in the black.

I can help.

The first rule of growth stock investing (all cannabis stocks today are growth stocks) is to cut losses short, especially if a stock is in a downtrend—and today many of the sector’s stocks definitely are. So if your loss is over 20% or 30%, and your stock is hitting new lows, I recommend selling.

However, maybe you shouldn’t sell all of your position.

You see, the cannabis sector is relatively small, and the odds are good that some of today’s leaders will become the industry giants five and 10 years from now. So if you own one of these potential giants, instead of selling all of your position, consider selling a portion.

In my Marijuana Portfolio, for example, over the past two years, I have sold 12 stocks outright, but many others I have bought and sold repeatedly to overweight and underweight my position to stay in synch with the stocks’ movements.

As a result, the portfolio is beating the index handily. Having cash has helped, too.

Sector Overview

I’m currently tracking 144 cannabis sector stocks.

16 have a market capitalization above $1 billion
48 have a market capitalization above $100 million
80 have a market capitalization under $100 million

16 are priced above $10 a share
44 are priced between $1 and $10 a share
84 are priced below $1 a share

Traditionally, Cabot’s growth methodology tells us to stick to stocks trading above $12 a share, simply because lower price correlates with higher risk.

But in Cabot Marijuana Investor, I’ve bought stocks priced in the low single digits numerous times, and will continue to do so, because that’s where the stocks are—though I haven’t bought anything for less than a dollar.

In short, this is still a very young sector. The majority of these stocks are thinly traded and volatile and lacking the institutional support of stocks in bigger, older industries.

Furthermore, this week’s review of all the stocks in the sector reveals a clear pattern—the lower you go down the scales of market capitalization and price, the worse the charts look. And this is not surprising in a sector that is cooling off. Money comes out of the lower-quality stocks fastest.

Additionally, this correction could go further than expected, possibly even reaching a climax selling low (as I mentioned in my webinar last week) when some bad news about marijuana makes national news. It might be a high-profile marijuana-related death or a mass murder by a marijuana user or even a batch of contaminated brownies.

If it happens, remember, bad news creates bottoms. And you want to buy soon after the bottom.

Investing Strategy
The goal is to keep your eye on the long term, by holding core positions of the companies most likely to be the industry leaders five and 10 years from now, but to be nimble enough with the remainder of your portfolio that you can reduce risk when the environment is difficult—like now. And above all, as in all growth investments, sell losers that are trending down, because you never know how low they’ll go; they often fall farther than you expect.

If you’re just beginning, start slow; build a diversified portfolio over time, starting with some of the stocks I’ve singled out as buys today.
WHAT TO DO NOW

Last week the portfolio sold partial positions in three stocks, taking the portfolio to 24% cash. And today we will sell partial positions of two more, HEXO (HEXO) and OrganiGram (OGI), taking the portfolio’s cash to about 33%. Note: The table below shows the status of the portfolio as of today, but does not reflect the actions recommended today, as those actions will be executed after publication at the average price available to all readers.


CURRENT RECOMMENDATIONS

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Aphria (APHA)
Apria is a major Canadian marijuana producer, with good long-term prospects. In the first quarter, revenues were $73.6 million, up 617% from the year before. Yet the stock is unusually cheap for a Canadian major, selling at six times revenues, and one reason for that is the attack by short-sellers last December that damaged confidence in management—who have worked hard to repair the damage. The stock has been building a base centered on 7 for nearly two months now, so if you’re underinvested, it’s worth considering—though more prudent investors will wait for a real uptrend to be established. The portfolio averaged up on June 11 at 7.28.

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Aurora Cannabis (ACB)
Aurora is another Canadian major; first-quarter revenues were $65 million, up 305% from the year before. But the stock is expensive, selling at 29 times revenues. And it’s been trending down since the March peak, hitting a new low just last Thursday. Long-term investors with profits can hold, but if you’ve got a loss, you should probably sell. The portfolio remains underweight in the stock.

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Canopy Growth (CGC)
Canopy Growth is the biggest of the Canadian producers and also a favorite of investors; it trades at 37 times revenues, in part because majority owner Constellation Brands is viewed as a major asset. Results for the company’s fiscal fourth quarter, released last Thursday, showed revenues of $94.1 million, up 313% from the year before, but the loss per share was bigger than analysts expected. Furthermore, net revenue from marijuana sales was down 7.9% from the previous quarter, the result of insufficient supply. Management says that fast-expanding production will end the bottleneck, and new openings of its Tweed and Tokyo Smoke retail stores will increase visibility, but Wall Street was unimpressed, dropping the stock 8% after the report and thus leaving the stock below all its moving averages. The portfolio is holding long term, but currently has an underweight position.

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Cresco Labs (CRLBF)
This Chicago-based U.S. multi-state operator (MSO) has 22 dispensaries, 23 production facilities and 56 retail licenses in 11 states. First quarter revenues were $21.1 million, up 313% (the same growth rate as CGC) from the year before. And Cresco aims to get even bigger with the purchase of Origin House, the leading distributor/retailer of cannabis in California. The deal cleared a major legal hurdle two weeks ago, which sparked a wave of new buying, but the stock rolled over after that, so we can’t say the long-term uptrend has resumed yet.

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Cronos Group (CRON)
Canadian major CRON presents one of our more interesting cases today. On one hand, the stock remains expensive, selling at 232 times revenues, in part because Altria is a major investor, owning 45% of the company. On the other hand, the stock’s chart is one of the better looking among the big stocks, having bounced off its 200-day moving average on big volume three weeks ago after Bank of America Merrill Lynch upgraded the stock from Underperform to Buy with price target of $20—and when valuation and chart send different messages, growth investors should listen to the chart. I previously wrote that we couldn’t call this surge a new uptrend until we saw some follow-through buying, and the truth is we haven’t; trading volume has been calm. But odds are growing that we have seen the end of the selling, as the stock has held onto the gains from that spike up, has lately been building a nice base at 16, and is now (just) above all its moving averages. If you’re underinvested, you could consider buying here. The portfolio bought more on June 11 at 17.22 so we will sit tight.

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Curaleaf Holdings (CURLF)
Massachusetts-based Curaleaf currently operates in 12 states with 45 dispensaries, 12 cultivation sites and 11 processing sites. First-quarter revenues were $35.3 million, up 288% from the year before—and should more than double when the company’s acquisition of Select goes through. But the stock remains under pressure, well below both its 25- and 50-day moving averages. The portfolio sold half its position on May 30 at 9 and remains underweight.

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Elixinol (ELLXF)
Colorado-based Elixinol is the portfolio’s only pure CBD stock, and it’s not looking so hot, dipping to another low yesterday. I believe the biggest reason for this weakness is size; ELLXF is the lowest-priced stock in the portfolio and it has the second-lowest market capitalization, so the institutional support that holds up some of the bigger stocks is lacking here. But the stock is now very close to its 200-day moving average (now at 2.3) so that should offer some support—and if it doesn’t, I may cut it loose.

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Green Thumb Industries (GTBIF)
Chicago-based Green Thumb is a major MSO, with 13 manufacturing facilities, licenses for 89 retail locations and operations in 12 U.S. states—and due to open its sixth Pennsylvania retail store (under the name Rise) in Mechanicsburg on June 27. First quarter revenues were $27.9 million, up 155% from the year before. But the stock has been under pressure, falling steadily since late April, and last week the portfolio sold half its position at a loss—on a bounce—and is now underweight. This week, however, the bounce continued, and the stock is now above its 25-day moving average, which is encouraging.

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HEXO Corp. (HEXO)
Quebec-based HEXO (previously known as Hydropothecary) released its fiscal third-quarter results on June 12. Revenues were $15.9 million, up more than 1,000% from last year, and the company says it is on track to double net revenue in the current quarter of fiscal 2019 and then to hit $400 million revenue in fiscal 2020. Key to that is the acquisition of Newstrike Brands, which closed on May 24, and which will increase annual production capacity to 150,000 kg of dried cannabis, once fully operational. That all sounds good—but the fact is that revenue in the quarter was a tad lower than the immediately preceding quarter (again, supply shortages) and missed analysts’ revenue estimates by about 12%. So, the stock gapped lower in response and is now below all its moving averages. The portfolio, sadly, has been overweight in the stock and will now sell half.

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Innovative Industrial Properties (IIPR)
Cannabis REIT Innovative Industrial Properties has been hot as a pistol this year, climbing rapidly in January, February and March, building a base in April and May, and then rocketing out to multiple new highs in June, after the company announced a second-quarter 2019 dividend of $0.60 per share, representing an approximately 33% increase over its first-quarter 2019 dividend of $0.45 per share, and a 140% increase over its second-quarter 2018 dividend of $0.25 per share. However, looking at the chart last week, I concluded that the stock’s rise was parabolic and unsustainable, so in last week’s update on June 20, I sold a third of our position—and that was the top so far. Then on June 21, the company announced that it had closed on the acquisition of a property in Harrison, Michigan for approximately $10 million that will be leased long term by an affiliate of Emerald Growth Partners; this brings the company’s list of properties to 22 in 11 states. If you own the stock, you could consider selling some here proactively as I did; the stock’s 50-day moving average, which a normal correction could see the stock fall to, is now at 93 and climbing. Alternatively, you could just watch the stock and/or use a mental stop. The stock is holding up pretty well this week and long-term prospects for this, the first and still only cannabis REIT, are great.

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KushCo Holdings (KSHB)
KSHB is a diversification play above all; the company’s main revenue source is packaging products for the cannabis industry, but it’s also diversified into marketing and industrial gases, striving to serve the industry through multiple channels. And just today the company announced the development of a new 40,000 square foot distribution facility in Taylor, Michigan to support the company’s operations across the Midwest, particularly Illinois and Michigan. In the first quarter, revenues were $35.2 million, up 240% from the year before. That’s good growth. However, the stock has done nothing all year; in fact, it’s below where it started the year—though it’s above its end-of-May low. The portfolio sold half its position last week and will hold the rest for now.

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Organigram (OGI)
OrganiGram is a solid Canadian producer; in the first quarter revenues were $33.5 million, up more than 1,000% from the year before. And the stock had one of the best charts of the plant-touching marijuana companies until the end of May, partly due to the stock’s move to the Nasdaq on May 21. But since the start of June, it’s been all downhill, and now OGI is approaching its 200-day moving average, currently at 5.7. Technically, we can hope the slide stops there—or before—but I’m thinking that one of the fundamental risks here is that OrganiGram may be weak on the branding side, and thus vulnerable to pressure on the margins when marijuana supply in Canada is more than ample. The portfolio has been overweight the stock and will now sell half its position.

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Turning Point Brands (TPB)
TPB is the old-school smokeless tobacco company diversifying quite capably into the faster-growing cannabis industry—though not plant-touching. It owns Zig-Zag rolling papers; it runs the distribution and sales platforms for Vapor Beast and Direct Vapor; and it recently launched Nu-X Ventures to capitalize on emerging alternatives like CBD. In fact, it just received conditional approval from the Kentucky Department of Agriculture to participate in a new industrial hemp research pilot program. By my measurements, TPB is the cheapest stock in the portfolio, selling at just two times revenues, while growth of revenues was 28% in the latest quarter. The portfolio bought more on May 30 at 50, and since then the stock is off a bit, though less than most of the stocks in the portfolio. If you don’t own it, and you want a lower-risk entry into the cannabis industry, you can consider buying here.

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Village Farms International (VFF)
VFF is the big successful grower of greenhouse tomatoes/peppers/cucumbers that’s diversifying into the high-growth cannabis industry—marijuana in Canada and hemp in the U.S. On one hand the stock looks cheap, selling at four times revenues and growing revenues at a 26% in the latest quarter. On the other hand, the stock has weakened a bit and now risks falling through support at 11—again perhaps due to fears of oversupply by growers. I do believe it’s a lower risk today than the pure cannabis stocks, so I will hold, but it’s not an attractive buy here.

Stocks to Watch

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Akerna (KERN), which had revenues of $10 million in 2018, is not a cannabis company; it’s a technology company serving the cannabis industry. The centerpiece of Akerna is MJ Freeway, the industry’s original seed-to-sale tracking software, which allows regulators and government agencies to track cannabis products from their cultivation to their final sale. MJ Freeway has perhaps 30% of global market, with clients in 29 states, Washington D.C., Canada, Australia, New Zealand, South America, Africa and Europe. The other part of the business, which is still developing, aims to leverage the data accumulated by MJ Freeway and sell it to cannabis producers and cannabis-store operators, so they can run their businesses better. In short, Akerna hopes to become the technology backbone of the entire cannabis industry—which could be a very profitable position—and it boasts Roger McNamee as Senior Strategic Advisor to the Board. MJ Freeway was founded by Jessica Billingsley in 2010 (she remains CEO), and last week the company joined with MTech Acquisition Corp (easier than an IPO) to create Akerna, which immediately began trading on the Nasdaq. The stock zoomed from 10 to 72 in four days and is now coming back to earth, and while it’s tempting to jump in here with a pilot position, I’m going to wait and let this bottoming process run its course.

THE NEXT CABOT MARIJUANA INVESTOR WILL BE PUBLISHED July 25, 2019
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