Cabot Marijuana Investor 720

The broad market remains healthy (climbing a wall of worry) and the marijuana sector is even stronger!

Leading the way are the big U.S. producers (we own them all), but there’s more, including the Canadian volume leader’s earnings report of today and a surprisingly strong performance from our (totally legal nationwide) hydroponics growing supply store, whose stock was up more than 10% just this morning!

Full details in the issue.

Cabot Marijuana Investor 720

Back in the Black
The broad market is strong, but the marijuana sector is even stronger, with six of our stocks hitting new recovery highs this week, and another hitting an all-time high last week!

The reasons for this strength are numerous.

First, after a two-year bear market in the sector, there’s still a lot of upside for most stocks, just to get back to their old highs—and the broad bull market provides a healthy environment.

Second, as is becoming clear with second-quarter reports just starting, the COVID-19 shutdown, when most marijuana businesses were designated “essential,” spurred increased spending on marijuana.

Oregon reported retail sales of marijuana products of an estimated $100 million in May, the single-highest monthly ever reported in the state, while Colorado reported May sales of $192 million, also a record. June was down slightly on average, but still above the first three months of the year.

And that’s just the tip of the iceberg, because the illicit market is reported to be still nearly four times the size of the legal market in the U.S., and that’s business that will increasingly turn to the legal market.

And that legal market is going to expand (at an unknown pace) as more states go legal, as federal prohibitions slowly fall, as the cost of marijuana falls, and as the social stigma slowly fades.

Bottom line: The future remains very bright for both the marijuana sector as a whole and investors who cultivate long-term holdings in the industry’s leading players.

Marijuana Index

The marijuana Index continues to regain lost ground (it’s more than doubled since the March bottom), and is now close to exceeding its June peak.

Strategy From Here
The long-term strategy remains unchanged. Own the leaders. Sell the losers. And remember that someday, when marijuana is declared legal across the U.S., the institutions will come running.

Short-term, I have a few pointers on playing hot stocks in hot times like the present. If you’re an aggressive investor keeping a close eye on your stocks, feel free to load up on the strongest ones and ride them as long as they go up—while cutting losses short. A concentrated portfolio in the hottest stocks can make big money fast (but sometimes lose it fast, too). If you’re less aggressive, however, and don’t like the risk, take your time. Wait for lower-risk entry points. Wade in slowly. The game is still in its early innings.

Our portfolio became fully invested last week and remains so today, in the black for the year while the index is still in the red.

CURRENT RECOMMENDATIONS

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

Stock Updates
None.

AKERNA (KERN)
KERN went the wrong way from the moment we bought it, and I recommended selling last week. If you still own it, I suggest you get out on this sector strength—because the stock is still below all its moving averages. SOLD.

Aphria (APHA)
The leading Canadian producer, Aphria reported second-quarter results just this morning. Revenue for the quarter was $152.2 million, up 18% from the prior year quarter, and up 5% from the prior quarter—beating analysts’ estimate of $149 million. However, the net loss was $98.8 million, substantially worse than last year’s net profit of $15.7 million, and that was due to non-cash impairment of $64.0 million in the quarter for “measures taken with respect to certain of the Company’s international businesses in response to the COVID-19 pandemic.” On the bright side, the company had $497.2 million in cash at the end of the quarter, and the cost to produce a gram of dried cannabis fell to $0.88, a decrease of 5% from the prior quarter. In response, the stock sold off sharply this morning, but that simply took it back to where it was last Friday. If you haven’t bought yet, you could nibble here, though I don’t think there’s a rush. Eventually the stock will meet up with its 50-day moving average, which is now at 4.55 and rising. BUY.

Canopy Growth (CGC)
CGC is the old Canadian leader that is now one of our smaller positions, as the company has spent the better part of the past year working to downsize its operations to market-appropriate levels and the stock has been fairly tepid over the past few months. But the stock did join in yesterday’s sector blastoff, breaking out of its basing pattern on triple average volume, and that’s great. Additionally, the company on Monday announced the launch of its new U.S. e-commerce website: ShopCanopy.com, which offers a portfolio of hemp-based CBD products from brands such as First & Free, This Works, and BioSteel, and will eventually sell Martha Stewart CBD. Thus, this Canadian marijuana company will serve U.S. customers—but only CBD products and only in states where it is legal. Canopy, which still boasts alcohol giant Constellation Brands (STZ) as a major investor, will report earnings in late August. HOLD.

Cresco Labs (CRLBF)
CRLBF had already hit recovery highs in early July, and yesterday’s surge pushed the stock higher still, though volume was lower than in early July. Still, it’s a very positive pattern for one of the U.S. market leaders. In fact, just last week I averaged up for our portfolio, making this one of the five stocks in which we are overweight. On the fundamental side, earlier this month the company opened its eighth Illinois dispensary in the city of South Beloit near the Illinois-Wisconsin border, and coming soon will be the ninth, in Schaumburg, a northwestern suburb of Chicago. That’s a strong retail network in the state of Illinois, and it’s supplied by 215,000 square feet of cultivation space – the largest capacity of any operator in the state. Cresco will report earnings in late August. BUY.

Cronos Group (CRON)
CRON is a secondary Canadian producer, and now a small part of our portfolio, but it has traded much like giant Canopy in recent months (the Canadian malaise) and it broke out like Canopy yesterday, though volume was only slightly above normal. Overall this is a positive pattern, and thus worth a buy for investors who want to own more than just the biggest players, so I’ll upgrade it to Buy now. The company’s second-quarter results will be released before the market open on August 6. BUY.

Curaleaf Holdings (CURLF)
With its acquisition of Grassroots (the largest private marijuana company in the U.S.) completed last week, CURLF assumes the mantle of biggest marijuana stock in the world. The transaction expands Curaleaf’s presence from 18 to 23 states, with the combined company boasting 88 operational dispensaries, over 30 processing facilities and 22 cultivation sites with 1.6 million square feet of current cultivation capacity. In particular, the transaction accelerates Curaleaf’s expansion into Illinois (clearly a battleground state) and Pennsylvania, which are among the largest and fastest-growing cannabis markets in the United States. In addition to those two, the company is also serving customers in Arizona, Connecticut, Florida, Maryland, Massachusetts, Nevada, New Jersey, New York, North Dakota, and Vermont. Last but not least, Curaleaf recently announced that it would launch its line of Select brand products into the medical marijuana market in Maine, starting with its best-selling Select Elite Cannabis Oil Cartridges and fast-acting Select Nano Gummies. CURLF is the largest position in our portfolio, and if you haven’t bought yet, you can buy now—because this is where the big money is going. The stock blasted off on big volume earlier in July and repeated the feat this week. Second quarter results will be released August 17. 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. Not only that, it’s expected to post a profit this year, with the average analyst projecting EPS of $0.07 (and $0.24 in 2021). The stock, which is our portfolio’s second largest position, has a very nice uptrend, with less volatility than some of the other big players, but still plenty of growing volume in recent weeks. Second-quarter results will be released August 12. BUY.

GrowGeneration (GRWG)
Turning to a non-plant-touching piece of the portfolio, our hydroponics and organic garden center company (focused on serving the marijuana industry) saw its stock break out to an all-time high last week, and then hit further highs today! If you want some diversification from the plant-touching companies, this is a good choice—in part because it also benefits to an unknown degree from the COVID-generated surge in home gardening. GrowGeneration has been profitable since 2019 and second-quarter results are expected in mid-August. BUY.

GW Pharmaceuticals (GWPH)
Headquartered in the U.K., GW in 2019 received FDA approval to sell its drug Epidiolex, which is derived from marijuana, to treat infant epilepsy. And last week I added the stock to the portfolio, looking for a bit of diversification into the pharmaceutical industry (and less volatility, too). Short-term, that was unfortunate, as the strength in the U.S. mass-market producers this week detracted from GWPH. But long term the prospects are great. Second-quarter results will be released August 6, and while expectations for 2020 are for a loss, analysts are looking for EPS of $0.43 in 2021. If you haven’t bought yet, this pullback resents a fine opportunity. BUY.

Innovative Industrial Properties (IIPR)
This cannabis-centric REIT is also a great source of diversification—and yield. In the past few weeks the company has continued to expand its portfolio by signing deals in New Jersey with both Curaleaf (in Blue Anchor) and Columbia Care (in Vineland). Right now, New Jersey is just a medical marijuana market, but legalization of adult-use marijuana is on the ballot in November—and it may pass. As of July 20, Innovative Industrial Properties owned 61 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia, totaling approximately 4.5 million rentable square feet, which were 99.2% leased. The company has been posting growing funds from operations (equivalent to profits for REITs) since 2016, and second-quarter results will be released August 5. The stock looks great, having hit new recovery highs yesterday and today. If you don’t own it, and it would fit in your portfolio, you could buy it here, but I’m keeping it on hold because the stock has had a great run (over the past three years it’s returned an average of 82% per year), so at some point it’s likely to cool off. (Note: Tom Hutchinson of Cabot Dividend Investor also recommends the stock, but also has it rated hold.) HOLD.

Tilray (TLRY)
Canadian producer Tilray is one of our portfolio’s smallest positions, and that’s good, because in the three months we’ve owned it, it hasn’t done much—although it did participate (a bit) in yesterday’s sector surge. Fundamentally, the Canadian company has great prospects for growing its many international connections—and revenues have been growing nicely (up 126% in the first quarter from the year before), but if the stock can’t get moving soon, I may sell and move on. Second-quarter results are expected August 10—and part of the problem may be that there are no earnings in sight. HOLD.

Trulieve (TCNNF)
The biggest seller of marijuana in Florida (with over 50% market share), Trulieve opened its 53rd dispensary in the state last week, in Tarpon Springs. The company also operates in California, Massachusetts, and Connecticut, but Florida (which is still only medical) is where the money is today. In fact, as a result of careful management, Trulieve has been posting annual profits since 2017—and I expect continued progress when recreational use is legal in the state. This great financial performance is one reason the stock is closer to hitting an all-time high than most of its peers (the old high is under 22). Second-quarter results will be released August 12, and the performance of the stock (a big high-volume blast in early July and a new recovery closing high yesterday) says they will be good. BUY.

Turning Point Brands (TPB)
Old-school Turning Point, which still gets 29% of its revenues from smokeless tobacco products, released an excellent second-quarter report yesterday—and a major reason was the increase in online commerce thanks to the COVID shut-in. Net sales were up 12.5% from the year before to $105 million, while EPS were $0.71, up 37% from the year before. In the words of CEO Larry Wexler, “Our Smokeless segment saw high-teens growth driven by same store sales growth of Stoker’s MST along with accelerated secular consumer trade-down trends across the entire Smokeless category. Smoking segment [26% of sales] grew despite the headwind of a COVID-related plant shutdown in MYO cigar wraps, which was more than offset by the ramp of our growth initiatives. Our NewGen segment [vapes and CBD and marijuana accessories—45% of sales] delivered an extraordinary quarter as our B2C platform saw elevated sales levels from a consumer shift to online purchasing and our B2B platform gained share in the marketplace from internal initiatives and COVID-related marketplace disruptions.” Additionally, management revised guidance for the year upward, projecting 2020 net sales to be $370 to $382 million (up from previous guidance of $338 to $353 million). The stock, which had seen strong buying all month, gapped higher at the open yesterday and climbed higher today so it’s now rather extended. If you don’t own it, you can nibble here, but investors looking for lower risk will wait for a pullback. BUY.

The next Cabot Marijuana Investor issue will be published on August 26, 2020.

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