Cabot Marijuana Investor 620

After eleven weeks up, the broad market has been correctingfor the past fethreew weeks, and the marijuana stocks are also in gear, totally synchronized—which is good. Bottom line, this correction provides a fine buying opportunity.

I’m taking advantage of this opportunity to average up in Canada’s leading producer, Aphria (APHA). And I’m sticking with all the other portfolio stocks because I truly think we have a portfolio that will thrive as this industry matures.

Full details in the issue.

Cabot Marijuana Investor 620

Buying Opportunities
The last few weeks have brought a much-needed market correction—much-needed because after advancing for eleven weeks from the COVID-19 bottom, the market was extended, and some segments of the investing world were positively giddy. But now that the correction has done its work, capped perhaps by today’s big drop, I’m seeing lots of charts at attractive entry points. And all Cabot’s market timing indicators remain positive!

As for the marijuana industry, business continues to boom, despite the pandemic. In the latest quarter, the average growth rate of revenues for the companies in our portfolio, relative to the previous year, was 139%! I can’t think of any other industry growing that fast!

But where to invest?

Internationally, Canada remains a model (to some degree) for legalization in the U.S., though the slow pace of licensing legal stores in Canada hurt virtually all the major producers. Beyond Canada, there are no big success stories yet, though several of our companies have been making headway with international operations.

In the U.S., the West Coast states, in general, still suffer from too many small competitors, too much supply (meaning much goes to the black market) and, in the case of California, excess taxes. In time, at least the first two will change. On the East Coast, Curaleaf and Trulieve are the biggest success stories, and both have big expansion plans. And in the Midwest, Illinois (legal just this year) and Michigan (legal since 2018) are seeing great growth; in fact, Chicago is home to two of our portfolio’s stocks, Cresco Labs and Green Thumb Industries.

Long-term, the U.S. companies are going to blow the Canadian companies out of the water, simply because of their scale, so over time I expect to be leaning more toward the U.S. companies.

But I also intend to remain diversified, and to continue investing in companies peripheral to the industry that are not “plant-touching.” While they tend to be slower growing than the pure marijuana companies, their stocks tend to be less volatile; some even pay dividends. Today, four of the portfolio’s twelve stocks are in this category.

Marijuana Index

Finally, the Marijuana Index looks a lot like the general market. After the March bottom, the Index surged upward for eleven weeks, and since then it’s been digesting that gain, slowly pulling back in a totally normal fashion. Overall, it’s a bullish pattern.

Strategy From Here
Our long-term goal is to own the leading stocks in the marijuana industry, so that five and ten years from now, our profits will be spectacular. The stocks in our portfolio today are absolutely your best bet to achieve that goal. But this is a volatile sector, so buying at the right time is key—and I think today presents a good buying opportunity, but I might be wrong. Luckily, the solution to that is diversification, not only by geography and company but also by time. So buy some now, but don’t put it all in today. Time is your ally and we are still early in this race. The portfolio holds a cash position of 14% and I’m now going to use one-third of that cash to average up in Aphria (APHA).

CURRENT RECOMMENDATIONS

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

Stock Updates
Aphria (APHA) Buying more

AKERNA (KERN)
Our buy of KERN two weeks ago was a case of spectacularly bad timing in the short run, but the pullback has actually been normal, and the stock’s main trend remains up—so if you haven’t bought yet, here’s your chance. Just recognize, as I said before, that this is the smallest stock in the portfolio by market capitalization and therefore bound to be more volatile—in both directions. But I’m optimistic long term because the company is a leading provider of software solutions (seed-to-sale tracking among them) for the cannabis industry, and thus has potentially the greatest profit margins in the industry. The stock will join the small cap Russell 2000 Index and the broad-market Russell 3000 Index after the U.S. stock market opens on Monday, June 29, 2020, and that’s likely to trigger some buying. BUY.

Aphria (APHA)
Headquartered in Learnington, Ontario, which is farther south than Detroit, Aphria is the leading marijuana seller in Canada, thanks in part to the cost savings of growing in greenhouses, while other Canadians are forced to use electric lamps. In the Canadian market, where supply has outweighed legal demand, that’s been a big advantage. Two weeks ago I wrote, “The portfolio is a bit light in the stock, and I’d like to average up, but I’ll wait for a better entry point.” Well, it looks like that point is here, as the stock has pulled back to support at 4.5, where we also find its 25-day moving average. The portfolio will use one-third of our cash to average up. BUY.

Canopy Growth (CGC)
A year ago, Canopy was the odds-on favorite to dominate the Canadian market, as the huge investment from Constellation Brands (STZ), which brought it 38% of the company, promised plenty of cash and expertise. But sometimes too much cash is a problem, and at Canopy that cash led to spending on bad investments as the Canadian legal market developed slower than expected. And then a month ago, the company’s fiscal fourth quarter results were disappointing, with revenues up only 15% from the year before—and down from the previous quarter! Long term, I still believe Canopy will survive and perhaps even thrive (and our big long-term profit means holding some is sensible), but right now, investors are unimpressed. Plus, the stock’s market capitalization, at $6.3 billion, is still out of whack with its peers. As for fundamentals, the only recent news is that the company recently launched Deep Space, a “full-flavoured cannabis beverage with 10 mg THC in a 222 ml aluminum vessel.” For the record, 10 mg is the maximum allowed and 222 ml is roughly 7.5 oz, a bit smaller than a small can of Red Bull. Two weeks ago I sold half the portfolio’s position and I’m holding the rest. HOLD.

Cresco Labs (CRLBF)
Chicago-based Cresco is one of the top five marijuana companies in the U.S., with 5 production facilities, 29 retail licenses and 17 operational dispensaries in 9 states. And it seems to have taken a sensible approach to branding; Remedi is its medicinal brand, Cresco is its everyday brand, and Reserve is its premium brand, grown from “strains with exclusive, proprietary genetics,” nurtured with “masterful cultivation techniques” and hand-harvested from the top 10% of the flower. Importantly, Cresco also sells wholesale, with roughly 350 products and 5,000 SKUs in over 700 dispensaries across the country, so going forward we could see booming volumes—accompanied by shrinking margins. In fact, in the latest quarter, revenues grew 215% from last year! Analysts are looking for a loss of $0.13 per share this year and then a profit of $0.06 per share next year so the company is definitely moving in the right direction. The portfolio averaged up two weeks ago and since then the stock has built a very nice base between 4.0 and 4.5. BUY.

Cronos Group (CRON)
Cronos, which counts Altria as one of its major shareholders, is one of the smaller Canadian operators as well as one of the portfolio’s smallest positions. But management has actually turned a profit for five consecutive quarters (though losses appear to be coming) and the chart is healthy enough, with no visible selling pressures. HOLD.

Curaleaf Holdings (CURLF)
Massachusetts-based Curaleaf, which has 57 dispensaries, 15 cultivation sites and 24 processing sites in 17 states, was the leading seller of marijuana in the U.S. by a nose in the latest quarter (edging out Trulieve) and it’s a leading contender to be the Philip Morris of the industry as it continues to grow by acquisition. And the next acquisition is near, as just last week management announced the signing of an amended agreement to acquire Grassroots, a “market leader throughout the Midwest with an affiliated portfolio of over 50 dispensary licenses, including more than 30 operational dispensaries.” Additionally, the transaction is expected to strategically accelerate Curaleaf’s expansion into Illinois and Pennsylvania, which are among the largest and fastest-growing cannabis markets in the United States. Grassroots also has a leading presence in states where Curaleaf is absent, including Arkansas, North Dakota, and Vermont. When complete, in the “coming weeks,” the combined company will be the biggest seller of marijuana in the world by far, with the new entity having “over 135 dispensary licenses, 88 operational dispensary locations, over 30 processing facilities and 22 cultivation sites with 1.6 million square feet of current cultivation capacity.” Analysts are looking for a loss of $0.05 per share this year and then a profit of $0.10 per share in 2021. As for the stock, since peaking in mid-May, CRLBF has consolidated its gains nicely and is now at a fine entry point, though one more dip toward 5.2 is possible. The portfolio averaged up two weeks ago and CURLF is now the portfolio’s largest position. BUY.

Green Thumb Industries (GTBIF)
Headquartered in Chicago, Green Thumb is actually on track to earn a profit of $0.07 per share this year and then a profit of $0.23 per share in 2021—all driven by 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). The company doesn’t appear to be on track to be the biggest marijuana company in the U.S., but investors do like real earnings, and that’s undoubtedly one reason the stock has been so strong, holding right up at its recent highs near 10.5. The portfolio averaged up two weeks ago, but if you haven’t bought yet, it’s not too late. BUY.

GrowGeneration (GRWG)
GrowGeneration operates the largest and fastest-growing chain of hydroponic and organic garden centers in North America, with 27 locations all catering to commercial growers of cannabis, and last week the company announced another acquisition. This one, in Lansing, Michigan, is for the assets of H2O Hydroponics, which had 2019 sales of $4.0 million. Following the purchase, GrowGeneration will open a new consolidated location in Lansing, with over 15,000 square feet that they expect will generate over $7.0 million in sales. GrowGeneration earned $0.05 per share in 2019, and is expected to earn $0.09 per share this year and $0.31 per share in 2021, so the trends are quite good here—though perhaps the surge of business that came from the COVID-19 home gardening boom will fade a bit. Additionally, GRWG will be added to the Russell 3000 Index after the market opens on June 29, and that is likely to spur a little buying. BUY.

Innovative Industrial Properties (IIPR)
As a REIT that caters to the cannabis industry, IIPR has long provided diversification to the portfolio, not to mention outstanding performance up until July 2019. And the business continues to grow! Just this week the company announced an amendment of its lease with a subsidiary of Green Leaf Medical in Saxton, Pennsylvania that will make available $30 million in funding that will enable the buildout of the company’s remaining 163,000 square feet of industrial space. Green Leaf, known for its brand gLeaf, operates medical cannabis cultivation, extraction and retail operations in four contiguous states in the mid-Atlantic region, including Maryland, Pennsylvania, Ohio and Virginia. As of June 22, IIP owned 57 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia, totaling approximately 4.3 million rentable square feet (including approximately 1.3 million rentable square feet under development/redevelopment), which were 99.2% leased (based on square footage) with a weighted-average remaining lease term of approximately 16.1 years. Two weeks ago I sold half our position in the stock to shift funds to stocks with greater growth potential, but I’m happy holding the rest. This is a very well managed REIT, serving a great growth industry, though at some point, U.S. legalization of marijuana could dim its prospects. HOLD.

Tilray (TLRY)
Based in British Columbia, Tilray is a mid-size Canadian marijuana company that also has a wide international presence. In fact, just last month, the company announced that it had received a Good Manufacturing Practice (GMP) certification in accordance with European Union standards, for its manufacturing facility in Cantanhede, Portugal. This is the third GMP certification for Tilray Portugal, which allows the facility to manufacture medical cannabis extracts in-house and export GMP-produced finished medical cannabis products, both dried flower and oil, from Portugal throughout European Union and other international markets with legal medical cannabis regulations. According to Sascha Mielcarek, Tilray’s Managing Director in Europe, “As demand increases around the world and more legal medical cannabis markets emerge, Tilray’s EU campus is ready to serve more partners and patients across the EU and other international medical markets.” Tilray still has no earnings in sight, but revenue growth remains strong (up 126% in the latest quarter from the year before) and the stock is at a great entry point here. 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.—at least until the Curaleaf deal goes through. And Trulieve has a great record of earnings growth dating back to 2017—which speaks not only to the value of focusing on one state but also to prudent management. Going forward, however, management is working on expansion in Massachusetts, Connecticut and California, and it will be interesting to see how they fare in those efforts. In the meantime, the company has partnered with veterans’ groups Mission Zero and Wounded Warrior Abilities Ranch as part of its TruVets outreach program—which includes in-store discounts on Trulieve products for veterans. Two weeks ago, when the stock was at 13, I wrote, “If you’re not on board yet, you can buy here, though 12.0 would be more attractive.” Well, since then it’s been bumping along at 12, and I think it’s a great buy here, just under its 50-day moving average. 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. But it’s also the slowest-growing company in the portfolio—so it’s here mainly for stability and diversification. Two weeks ago, the company announced a deal with Durfort Holdings and Blunt Wrap USA (for a total consideration of $46 million) that gives Turning Point long-term control of its Zig-Zag Make-Your-Own (MYO) cigar wrap products and eliminates current royalty-related expenses on all Durfort’s and Blunt Wrap’s Homogenized Tobacco Leaf (HTL) cigar wraps and cones. Turning Point doesn’t sell cigarettes or marijuana, but its experienced management team knows how to work in the slow-growth and safe periphery of these markets. As for the stock, it’s been riding its 50-day moving average higher since April and is at a decent buying point here. BUY.

The next Cabot Marijuana Investor issue will be published on July 29, 2020.

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