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Cannabis Investor
Profit from the Best Cannabis Stocks

Cabot Marijuana Investor 719

The cannabis sector remains 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 the meantime, more and more peripheral companies are getting in on the action, and we have been increasing our exposure to these in recent weeks while still holding substantial cash.

This week we’re selling one more of the pure-play marijuana companies, raising the portfolio’s cash level to about 27%.

Full details in the issue.

Cabot Marijuana Investor 719

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Bad News Bears

The stock market in general is quite healthy, with the major indexes at or near their highs, and all Cabot’s market timing indicators positive.

But the cannabis sector is still weak.

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Part of this weakness stems from the fact that cannabis was the hottest sector in the world earlier this year—and it’s a rule in the stock market that what was hot will eventually turn cold. The index gained 50% from the start of the year into late March, and now it’s back where it started.

But part of the reason is a wave of bad news in recent weeks.

The CEO of Canopy Growth (CGC) was fired.

CannTrust (CTST) was caught selling marijuana grown in unlicensed grow rooms.

And Curaleaf (CURLF) was warned by the FDA for “illegally selling” unapproved CBD products online.

Eventually, this bad news will end and the sector will resume its uptrend. After all, cannabis is still the fastest-growing industry in America. And politically, the tide continues to shift in the industry’s favor. The SAFE Banking Act continues to get bipartisan support and now we have the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act), introduced by House Judiciary Committee Chairman Jerry Nadler and Senator Kamala Harris, which would remove marijuana from the Controlled Substances Act, require pot convictions to be expunged or resentenced and establish a 5% cannabis tax to set up grants for minorities and low-income communities.

However, you can’t tell stocks what to do—or when to do it. The best strategy, especially when dealing with fast-moving growth stocks, is to simply watch carefully, to get in synch with what the stocks are doing now, and to be prepared for what they might do in the future.

Investing Strategy

In the long term, I remain very bullish on this sector. There’s no doubt in my mind that the leaders of this sector will be big winners for investors five and ten years down the road, and I expect that some of our current holdings will be among them.

But in the short term, the sector remains challenging, which means that job one is to minimize losses and preserve profits, so that you have cash on hand for when the climate is supportive again.

If you have losses, you should cut them short. Last week we sold Green Thumb Industries (GTBIF) at a 30% loss.

If you have profits, you should protect them, perhaps by taking partial profits.

You should never average down in growth stocks; it’s a good strategy in value stocks, but in growth stocks, it’s simply repeating a mistake. Remember, trends frequently go farther than expected (in both directions).

And you should diversify into some of the more mature, less volatile, better-acting peripheral players in the cannabis industry. While these companies’ stories may not be as exciting as the marijuana pure plays, their stocks are much more reasonably valued and they’re getting increased attention as investors exit the popular stocks that led the way up earlier this year.

Lastly, a note to our newer readers. You’ve arrived at what is probably a great time to invest in the industry—but don’t be in a hurry to jump in. Study the charts, understand what you’re buying, look for the sector to bottom, and take it slow, working to build a diversified portfolio over time.
WHAT TO DO NOW

The portfolio will now sell HEXO to take a small profit, raising our cash level to roughly 27%.


CURRENT RECOMMENDATIONS

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Alcanna (LQSIF)
Added to the portfolio just last week as part of our effort to diversify our cannabis portfolio, Alcanna was previously known as Liquor Stores N.A. Ltd. (thus the symbol), and paid a fat 6% dividend—a classic sign of a company with slow or no growth. But last year that all changed, as the company axed the dividend, sold 25% of its shares to Aurora for $138 million, and plowed the cash into new cannabis stores, just in time to catch the first wave of Canadian legalization.

Alcanna is based in Edmonton, Alberta, so its first stores were in that province; it won five of the first 17 licenses in Alberta, and was prepared to build more. But the company slowed expansion when cannabis supply in the country ran short and the government shut down the licensing process. Today, Alcanna has eight cannabis stores open for business in Alberta and one in Toronto, Ontario, plus an additional 29 stores under construction in Alberta, which are scheduled to open by the end of this year or early next year. Beyond that, it’s working on a management contract with a license lottery winner in the province, and has 75 sites prepared when the Ontario government emerges from this period of conservative licensing.

Long term, Alcanna’s expertise in controlled substance retail should give the company a competitive advantage over the newcomers in the cannabis industry, while its longstanding relationships with regulators and landlords are expected to pave its site development processes.

However, today cannabis is a relatively small part of the business (it has 236 liquor stores)—though management expects that the company’s cannabis and liquor businesses could be equal in size within 10 years. So for this portfolio, Alcanna is designed to be a lower-risk core component, the way KSHB and IIPR and TPB have been in recent years.

One difference, however, and it may be important, is that LQSIF is rather thinly traded, with average trading volume of just 22,000 shares a day. Thus, any big orders can move the stock. So if you choose to buy, tread lightly. Know what price you’re paying.

Revenues in the latest quarter were $150 million, up 16% from the year before. The stock is dirt cheap compared to everything else in this portfolio, with a market capitalization of $171 million, which is just 26% of last year’s revenues (the company has lost money in three of the past four years). And while the stock plummeted last December (due to both the broad market and the change in corporate strategy), since then it’s been trending steadily higher. Buy.

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Aphria (APHA)
Aphria has 1.1 million square feet of cultivation area in Canada, with 115,000 kilograms of annualized production capacity. The company had the second-largest revenues of the Canadian producers in the latest quarter, and the stock looks cheap (relative to its peers). But it’s not going up yet; it’s still trying to build a bottom. I’ve considered selling even more here, given that the sector remains weak, but the stock looks cheap relative to its peers, so I’ll hold, with a slightly underweight position (we sold half on April 18 at 8.15). Fiscal fourth-quarter results will be released August 1 after the market close.

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Aurora Cannabis (ACB)
Aurora’s stock is roughly five times as expensive as Aphria’s looking at price/sales, and the reasons include these: Aurora has been better managed and thus has better institutional credibility; Aurora is focused more heavily on the medical market, where competition is expected to be less cutthroat; Aurora has funded production capacity of 625,000 kilograms per year; and Aurora has 17 wholly owned subsidiary companies: MedReleaf, CanvasRX, Peloton Pharmaceutical, Aurora Deutschland, H2 Biopharma, BC Northern Lights, Larssen Greenhouses, CanniMed Therapeutics, Anandia, HotHouse Consulting, MED Colombia, Agropro, Borela, ICC Labs, Whistler, and Chemi Pharmaceutical. Nevertheless, the stock continues to fall. We sold half on April 18 at 9.01 and are now quite underweight, so will stand pat.

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Canopy Growth (CGC)
Canopy has led the way in Canada in both medical and adult-use marijuana production and remains the most valued company in the industry. And long term, Canopy has the best chance of being the Budweiser (or Molson) of the industry five and 10 years from now, not least because of the power Constellation Brands wields in the company.

However, it’s been only three weeks since CEO Bruce Linton was fired by Canopy’s board of directors (having done nothing in particular wrong, as far as the world knows) and only eight days since the stock bottomed, having given back all its gains since the first week of January. And of course, now the world is waiting to see who the new CEO will be.

The stock is definitely not in an uptrend yet, so I can’t recommend it as a buy. However, the portfolio last took profits last October at 55.35 and remains underweight, so will hold here.

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Cresco Labs (CRLBF)
The portfolio bought U.S. multi-state operators (MSOs) Cresco Labs and Curaleaf on the same day last December (very near the market bottom), and they’ve performed pretty much in lockstep since—until last week, when Curaleaf announced the acquisition of Chicago-based Grassroots, basically stepping into Cresco’s territory. Since then CRLBF has fallen through support at 9, and now, after nine consecutive days of selling, it may have bottomed at 8, which is where the stock bottomed in early March.

Whether or not Cresco can compete with Curaleaf/Grassroots is not the question; Cresco has 23 production facilities, 56 retail licenses and 22 dispensaries in six states. Plus, in addition to its retail brands (Cresco, Reserve, remedi and Mindy’s), it also sells wholesale. Its products are now available in over 700 dispensaries across the country.

The question is whether investors perceive that Cresco can grow fast enough to remain competitive and be an attractive place for investor dollars—and the stock’s chart will tell us the story. It bounced off 8 on Tuesday, and was up yesterday on low volume, and since the portfolio is underweight here as well (we sold half in late May at 11.08) we’ll hold.

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Cronos Group (CRON)
Canadian Cronos, which is 45% owned by Altria, is without a doubt the most expensive of the portfolio’s holdings. But its stock also has one of the longest bases, telling us that institutions are supporting the stock at this level. And the company has a new website, calling itself “An innovative global cannabinoid company.” Those guys at Altria know about branding and positioning! If you’re a new reader, or light in the sector for some other reason, you could buy here, though technically the stock does not have positive momentum yet. The portfolio remains underweight. Second-quarter results will be reported Thursday, August 8 before the market opens.

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Curaleaf Holdings (CURLF)
Massachusetts-based Curaleaf’s announcement last week that it would acquire Chicago-based Grassroots, the largest private vertically-integrated multi-state operator, in a cash and stock deal valued at approximately $875 million, certainly brought in the buyers. The stock gapped up from 6.5 and hit 8.5 two days later, as buyers aimed to get a piece of what management claimed would be the largest medical and adult-use cannabis company as measured by both revenue and operating presence (however they define that).

But then on Tuesday, the FDA, which is trying to get a handle on how much it should regulate the CBD business, sent Curaleaf a letter warning against “illegally selling unapproved products containing cannabidiol (CBD) online with unsubstantiated claims that the products treat cancer, Alzheimer’s disease, opioid withdrawal, pain and pet anxiety, among other conditions or diseases.”

While this is not the first warning that the FDA has sent about selling CBD, it is the first delivered to an MSO, and Curaleaf is the best target because of its partnership with CVS to sell CBD products. To be clear, the warning is about ingested products; topical treatments are not a problem.

So, the FDA warning caused some selling, and the stock has now given back just a little more than half of last week’s gain, which is not bad, especially considering the weak sector.

Long term, the Grassroots deal makes Curaleaf a more formidable player than ever, and one of the favorites to lead the U.S. cannabis industry in the years ahead—so it’s one I’d like to own more of.

The portfolio sold half its position in late May at 9.05 and has been underweight since, and last week I wrote that I would look to increase the portfolio’s position when we see a decent entry point. But is this it? Aggressive investors might dip a toe in the water here and keep close stops. I’m going to wait a little longer to see if both the stock and the sector can firm up.

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Elixinol (ELLXF)
Colorado-based Elixinol is a pure CBD company (though part of a bigger Australian hemp/food company), and thus is also feeling the weight of the FDA’s warning—though, to be clear, it did not receive one. In fact, Elixinol was one of the participants at the first hearing two months ago, and is eager to help the FDA find the best path to regulation.

The stock bottomed in late June at 2.5 and fell through that level (a bit) this morning, touching its 200-day moving average—perhaps due to fear of the FDA. We’ll hold.

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HEXO Corp. (HEXO)
HEXO, based in Quebec, is a smaller Canadian marijuana producer, focused on the adult-use market, with a deal with MolsonCoors to collaborate on cannabis drinks when they become legal. Also, it has a moderate valuation.

But I don’t like the way the stock has been acting. HEXO started the year at 4.33, peaked with the sector in April at 8.40, and has been falling slowly and steadily since, with the downward momentum accelerating this week—and threatening to erase what is now a tiny profit. So, to avoid having a loss, and then the risk that the loss will grow larger, I’m getting out now with a small profit. Sell.

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Innovative Industrial Properties (IIPR)
One of the curious aspects of investing in stocks this year—which I see particularly in my role as editor of Cabot Stock of the Week—is that even though it’s been a great year for growth stocks like Apple and Snap and Zillow, “safe” dividend-paying stocks (especially REITs) have also been racing up the charts—and perhaps none as impressively as IIPR.

As the only cannabis REIT in the world, and a well-managed one at that, IIPR has been a fabulous investment in the 20 months we’ve owned it. But in June I noted that its advance had gotten way out of trend to the upside, so I sold a third of the portfolio’s position at 133. The stock closed higher than that on just one day in July—but the following day the company announced that it had sold stock at $126 per share, raising $188 million, and in the process diluting the value of our current shares.

That brought the stock right down to 126—like a stone—and then this Monday the downtrend accelerated, with the stock crashing through its 25-day moving average on Monday and its 50-day moving average on Tuesday.

Why? One plausible explanation for this weakness is the fact that the SAFE Banking Act is gaining momentum in Congress, and if passed, it would reduce the needs for cannabis companies to deal with intermediaries like IIPR.

Another thought is that the firm’s second quarter report will be released on Wednesday, August 7 after the market close—and there might be surprises.

In any event, this is no time to panic. If you took partial profits with me you can afford to sit on your remaining profit cushion and see what the report brings. If you’re not invested in the stock yet, wait.

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KushCo Holdings (KSHB)
KSHB remains stuck in an 18-month trading range bounded by 4 and 7. But the stock is cheap, and the non-plant-touching business—focused on packaging and industrial gases used by the cannabis industry—provides great diversification to the portfolio. If you like the story, you could buy some on the current pullback.

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MedMen (MMNFF)
MedMen is one of the larger MSOs, with 37 retail locations and operations in 12 states, including big cities Los Angeles, Las Vegas and New York. Valuation appears quite reasonable. We added this to the portfolio two weeks ago, thinking the stock would find support at its 25- and 50-day moving averages, but it didn’t, and we are now underwater, with a modest loss.

On the bright side, while the stock bottomed at 1.9 in June, it bottomed (hopefully) at 2.0 on Monday, Tuesday and Wednesday of this week before advancing yesterday and today, so that looks like a bottoming process. If you too have a small, tolerable loss, hold. If you’re not on board, you could buy a little here.

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Organigram (OGI)
OrganiGram is one of the four public Canadian producers that have supply deals with every Canadian province. It sells both medical and adult-use cannabis (brands Edison, ankr and Trail Blazer). It’s one of the lowest-cost producers, thanks to its three-tiered growing technology. And by my measurements, the stock is cheap.

The company released its third fiscal quarter report last Monday, and the highlight was revenues of $30.4 million, up 873% from the year before! But after three strong up days, the stock has come right back down to its 200-day moving average, which is likely to offer support. If you bought last week, sit tight. If you don’t own it, you could nibble here.

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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.

Preliminary second-quarter results, released yesterday after the market close, held these highlights: Net sales increased 15.1% from the year before to $93.3 million. Net income increased 42% to $13.2 million. And, most importantly, Next-generation (cannabis accessories and vaping) sales were roughly $41.8 million, up 53% from the year before and Nu-X sales (CBD) grew from $800,000 in the first quarter (when the division was launched) to $4.3 million. Additionally, the company announced a proposed private offering of $125 million of Convertible Senior Notes, and it invested $3 million to get a 30% interest in ReCreation, a distribution partnership in Canada focused on the smoking and vaping and alternative products markets. The full release will be on Wednesday, July 31.

As for the stock, it closed at a record high last Thursday, but sold off sharply early this week. If you don’t own it, and you want a lower-risk entry into the cannabis industry (with a dwindling smokeless tobacco business attached), wait for a clearer bottom formation, which could occur here—or down around 42.

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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. The stock bounced off its 200-day moving average early last week, and is now on its seventh consecutive up day, but I can’t say the trend has turned up yet. If you don’t own it, wait.

Stocks to Watch

Akerna (KERN)
Akerna sells 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, and the company hopes to become the technology backbone of the entire cannabis industry. The stock came to the NASDAQ in June, zoomed from 10 to 72 in four days and is now trying to build a base in the 13-14 region. Wait.

Neptune Wellness Solutions (NEPT)
Previously peddling krill oil and omega-3 oils and coconut oils, Quebec-based Neptune is diversifying into oil-centric cannabis products, and its stock has been strong because it just completed a private placement of stock that brought in $41 million—and the cash will really help. A new CEO took over just two weeks ago. Wait.

Valens GroWorks (VGWCF)
Valens, based in Kelowna, British Columbia, specializes in extraction, product development and testing for the cannabis industry, and also has a patented in-house emulsion technology that transforms cannabis oils into water-soluble forms—ideal for edibles—without the taste or smell of cannabis. Since hitting a high in late April, the stock has been consolidating that gain. Wait.

THE NEXT CABOT MARIJUANA INVESTOR WILL BE PUBLISHED August 29, 2019
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