Cabot Marijuana Investor 820

A lot has happened with our marijuana stocks in recent weeks, with the most important being the release of excellent quarterly reports by all the major U.S. multi-state operators that explained why the sector had been so strong in recent months.

However, growth stocks in general—and marijuana stocks in particular—have now begun a well-deserved correction, so I’m now getting a bit more cautious.

Full details in the issue.

Cabot Marijuana Investor 820

A Little Cautious
The good news is that our portfolio is well in the black for the year, thanks to strong performances by all four of our U.S. multi-state operators, our REIT (IIPR) and our hydroponics retailer (GRWG). (Readers who held GRWG before second-quarter results were released have been on quite a ride over the past two weeks.)

Additionally, the future appears bright for U.S. operators. Second-quarter results have been released for all (see below), and all four companies have great plans for expansion going forward—though the timing, as always, is subject somewhat to the politics that drive legal progress.

In Canada, meanwhile, all the marijuana stocks remain subdued (or worse), because growth remains constrained by the slow pace of store licensing and profits remain impacted by write-downs and cost-cutting.

So it’s good that we’ve been underweight in the Canadian stocks this year—while being overweight the U.S. stocks. Given population sizes, that seems likely to continue into the future.

But I’m not giving up on Canada—in part because the best stocks are still at support levels and in part because the companies have such great prospects internationally

Also, it’s good to note the uniformity of growth trends in each country. This tells us the results are clearly due more to the specifics of each country’s industry than to individual company management decisions.

Lastly, the Marijuana Index remains in the uptrend that began in March.

Marijuana Index

But there is something worrying me.

On Monday of this week, a friend who’s a museum curator asked my opinion about getting in on the IPO of his bank, which is going public soon. Depositors get first crack at the shares.

Then on Tuesday, another friend, who’s a software engineer specializing in security, asked my opinion about getting in on the IPO of his company—and even tapping his 401(K) to do so. (Neither of these friends has much investment experience.)

Add to that the fact that last week at the Cabot Investor Summit, I was rather proud to show a profit of 30% YTD in the Marijuana Portfolio—while the Marijuana Index was still in the red.

And stir in the fact that both Apple and Tesla (are there any two stocks that investors are more emotional about?) will soon be splitting their stocks, and what do you get?

You get a sense that investor sentiment is rather high!

Now this does NOT mean that the market is going to roll over tomorrow. Picking market tops is one of the hardest things in investing.

But it does mean that leaning against the wind at this moment might not be a bad thing.

Strategy From Here
Our 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.

Technically, Cabot’s major market-timing indicators remain bullish, so overall, I am bullish. But two weeks ago, we sold 25% of each of our U.S. operators because the stocks had grown so overbought over the past few months—and all four of those stocks are lower today. In short, buying power in the sector has dried up in recent weeks, even as investor sentiment has heated up, and that’s a dangerous combination.

So short-term, I’m turning a little more cautious today, not by selling anything but simply by downgrading more stocks to hold. Ideally, this soft patch will pass and buyers will return, but for now, the tide is going out slowly so be careful where you dive.

CURRENT RECOMMENDATIONS

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

Stock Updates
None.

Aphria (APHA)
As the leading Canadian producer, Aphria has great long-term prospects—but as the table above revealed, growth has slowed this year. In my issue of a month ago, as the stock sold off from a sharp peak at 6, I wrote, “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.” Well, the stock did fall to its 50-day moving average—and below it—and for the past two weeks it’s been building a tidy base at the 4.5 level. If you haven’t bought yet, you can buy here because this is probably one of the lowest-risk stocks of all the producers (at this point). But officially, I’m downgrading it to Hold. HOLD.

Canopy Growth (CGC)
Canopy is the original Canadian market leader that got too much money too fast (including $5 billion from liquor giant Constellation Brands), and when the retail market didn’t materialize as fast as expected, the stock was hit hard. But business continues to grow here (as the numbers in the table show), and the company’s international efforts in particular are impressive; looking at the “Career Opportunities” section of the company’s website, I saw over 100 job openings at Canopy, with locations in Canada, the U.K., Germany and the U.S. Our position in the stock is currently rather small, because the stock has flattened out since May, but long-term holding should pay off. HOLD.

Cresco Labs (CRLBF)
CRLBF is one the four U.S. market leaders, and the fastest growing as measured by revenues. The company currently has 19 dispensaries and 15 production facilities in nine states. Technically, the stock has participated fully in the rebound of the U.S. multi-state operators this year, running from a low of 2.0 in March to a high of 7.7 just last week. And we’ve participated in that; we first bought on April 30 at 3.99, and averaged up on June 11 at 4.41, and on July 23 at 5.26. But just two weeks ago, on August 13, we sold 25% of our position at 7.15—and the stock is lower now, which says short-term that was smart. We are still overweight in the stock, and if the weakness continues (the stock could easily pull back to its 50-day moving average at 5.5) we’ll sell more. For now, I’ll simply downgrade it to Hold. HOLD.

Cronos Group (CRON)
CRON is the smallest Canadian producer we own, and now the smallest part of our portfolio, but it’s the fastest growing of the Canadians (easier when you’re so small) and the future is bright; the company recently began selling marijuana in Israel. Second-quarter results, however (released on August 6), were disappointing, and the stock sold off on heavy volume in response. On Monday, it found support at 5.25, so I’m not giving up on this little guy yet. For now I’ll downgrade it to Hold. HOLD.

Curaleaf Holdings (CURLF)
Curaleaf is now the biggest marijuana stock in the world, thanks to its recent acquisition of privately-owned Grassroots (a fact that is not reflected in the Q2 numbers in the table above). All told, the company has 88 operational dispensaries in 23 states, as well as 22 cultivation sites. And it’s the largest true marijuana position in our portfolio (the only larger position being the non-plant-touching GrowGeneration). The portfolio has been fairly heavily weighted in the stock all year, but we averaged up on May 14 at 5.15, and then sold 25% of our position two weeks ago (on August 13) at 8.79. As I write, the chart shows last week’s peak at 9.5, a big-volume selloff right off the top, which took the stock down to 8, and a weak bounce since. It looks like there’s more selling ahead as the stock looks for support, so I’ll downgrade it to Hold for now. However, if you don’t own it yet, you might aim to start nibbling if the stock can touch its 50-day moving average, now around 7.5. HOLD.

Green Thumb Industries (GTBIF)
Chicago-based Green Thumb has 13 manufacturing facilities, licenses for 96 retail locations and operations across 12 U.S. markets and is thus one of the four horsemen of the U.S. marijuana market. Like its peers, the stock has had a great five months, climbing from 4 to 16 (at last week’s peak). And we enjoyed that run, buying on April 30 at 7.30, averaging up on May 14 at 7.61, and buying even more on June 11 at 9.40—and then taking profits on 25% of the position on August 13 at 15.12. As I write, the stock has yet to pull back to its 50-day moving average (now at 12.3) but the lack of buying volume in the recent weak rebound says it probably will (or worse) before the advance resumes. I’m downgrading it to Hold. HOLD.

GrowGeneration (GRWG)
Turning to a non-plant-touching piece of the portfolio, our hydroponics and organic garden center company (focused on serving the commercial marijuana industry) has had a very interesting couple of weeks! The action started on August 13, after the company released a dynamite second-quarter report; not only were revenues up 123% from the year before (in part because of acquisitions), same-store sales were up 49% from the year before, and the big reason was the pandemic. In five trading days the stock zoomed from 9 to 22, breaking out to a record high—with volume increasing every day! (That was when our portfolio profit hit 30%; GRWG is our biggest holding!) But then the “bubble” collapsed, and right on cue, a short-selling outfit named Hindenburg Research stepped in with a report attempting to tar the company with allegations of mismanagement (and of course make money as the stock fell). (Hindenburg tried the same thing with APHA back in 2018, and you can check the charts to see how that turned out; short-term, the shorts win, long-term, the investors win.) Anyway, GRWG has pulled back fairly normally over the past week, giving up roughly half its gains (which is pretty much textbook), and selling volume has faded as the stock has found support at 14. From here it’s certainly possible that the stock falls to its 50-day moving average, now at 9.3, but I think it’s unlikely; this company has great fundamentals, it’s legal in every state, and it’s benefitting from the pandemic. Thus it remains the largest position in our portfolio—and I’m keeping it rated buy. BUY.

Innovative Industrial Properties (IIPR)
This cannabis-centric REIT is a great source of diversification—and yield, and it keeps on hitting new highs! In fact, the stock is so attractive that Mike Cintolo included it in Cabot Top Ten Trader last week, writing, “You won’t see many real estate investment trusts in Top Ten, but Innovative Industrial Properties isn’t your normal REIT. It’s the only publicly traded firm playing in the cannabis industry, focusing on companies that are involved in the regulated medical-use sector of the weed business (which helps avoid any legal quicksand), often engaging in sale/leaseback transactions (providing customers with capital), with clients signing long-term triple-net leases (average remaining lease term is 16 years!). All in, Innovative currently has 61 properties in 16 states (Illinois and Pennsylvania are where it has its biggest presence), and it’s been growing quickly, with sales and funds from operation (the relevant earnings metric for REITs) booming in recent quarters.” The current strength means IIPR is attractive for traders skilled at momentum investing, but with its 50-day moving average down at 102, new buyers focused on long-term investing should wait for some kind of pullback. HOLD.

Trulieve (TCNNF)
The biggest seller of marijuana in Florida (with over 50% market share), Trulieve now has 56 dispensaries, and can be expected to open many more when the state legalizes recreational marijuana. Like its peers in the U.S., TCNNF had a great run from the March bottom to the recent August top, climbing from 6 to 26, and as the trend accelerated we piled in, averaging up on May 14 at 10.66 and then selling 25% on August 13 at 22.24. But the sellers came on heavy right after the top on August 14, and now the stock is standing on a small base (cliff?) at 20. Looking at the volume clues, the odds are that it will fall off that base and pay a visit to its 50-day moving average, now near 16.5. I’m downgrading to hold. HOLD.

Turning Point Brands (TPB)
Turning Point, which still gets 29% of its revenues from smokeless tobacco products, provides a relatively conservative anchor to our portfolio, as revenue sources are diversified, the business is legal in all 50 states, management is experienced and there’s a small dividend. We remain slightly underweight in TPB, which seems fine to me, but if you’re not on board, you could buy here, as the stock has just touched its 50-day moving average for the second time this month. BUY.

The next Cabot Marijuana Investor issue will be published on September 30, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.