Your Spring issue of Cabot’s 10 Best Marijuana Stocks is ready, with updates on the 10 stocks we’ve been following and two new stocks I’ve added to the mix.
And it’s a great time to take a fresh look at all of them, as the market’s recent correction has brought most of them down to what look like good buying areas. Yes, the correction is deep, but it was overdue, and long term, I remain very optimistic about the sector.
Cabot Marijuana Investor—Spring 2018
In the three months since my November report was published, marijuana stocks have been to the moon—and fallen roughly halfway back. Overall, it’s a very healthy pattern, indicative of a vibrant investment sector that’s attracting a flood of new money.
If you were one of my early readers, congratulations. You’re off to a great start. And if you’re a newer reader, welcome. We’re still in the first innings of a great growth story, and I’m confident there are decades of profits ahead.
The big picture is this:
The trend toward legal marijuana is big and irreversible, not only in the U.S., but also in Canada (which is leading the way in North America), Australia and Europe.
I won’t review the specifics here; you can find the news about the state-by-state movement toward legalization anywhere. My expertise is analyzing stocks, particularly stocks in fast-growing new industries where public perception is improving, so these stocks are right up my alley.
But you need to be careful.
Investing in stocks always entails some risk, and investing in this hot young sector brings increased risk for numerous reasons. First, the industry is still evolving, and the laws that govern it are evolving to keep up with it. Second, the companies are rather young, with managements that are faced with a steep learning curve. And third, the stocks tend to be lower priced and thinly traded, which means they have little institutional sponsorship, which means they tend to be pushed up and down more rapidly by changes in investor perception.
So, if you’re a beginner, start slow (and go to the Cabot website and read all you can about investing in growth stocks). And if you’re an expert investor, use everything you know about managing risk.
How to Invest in These Stocks
1. Practice the No. 1 rule of successful investing—diversify. And don’t overload your portfolio with marijuana stocks. At this point, 10% may be plenty.
2. Invest in sync with the trends of both the broad market and the marijuana sector. In general, the sector bottomed in early 2016, peaked in late 2016 and early 2017, bottomed in the summer of 2017, and peaked in January 2018. The sector (like the broad market) is now in a correction and trying to build a base right here. If the broad market suffers no more major weakness, this base is likely to hold, but if the broad market falls further, you’ll be able to buy some of these stocks even lower.
3. Employ all the usual risk-reduction strategies. Diversify your buying over time, buy on dips, consider taking partial profits when stocks are extended, and, of course, cut losses short.
With this issue, I’m introducing two new stocks, and retiring two—profitably. My goal is for the portfolio to own the 10 best marijuana stocks. Once again, the 10 stocks are presented in order of market capitalization, from largest to smallest. At the end of the issue, you’ll find brief post-mortems for the stocks that are being dropped.
In the months ahead, I will send occasional alerts when I see action worthy of comment. For example, I sent out an update on January 8, just one day before marijuana stocks peaked, recommending that traders take profits, and long-term investors consider taking partial profits.
Last but not least, if you have a specific question, you can email me directly at tim@cabotwealth.com. And you can access the comments section at the end of the online version of the report to share ideas with your fellow investors.
1. Aurora Cannabis (ACBFF) (ACB in Canada)
Canada’s Number One Grower
Thanks to a talent for deal-making and strategic thinking, Aurora has not only squeezed into first place by market capitalization, it now aims to be the largest producer of marijuana in Europe! Here’s a look at its facilities.
Aurora Mountain is the company’s original facility. Located in Cremona, Alberta at the foothills of the Rocky Mountains north of Calgary, it has been fully operational since 2015.
Aurora Vie, located in Pointe-Claire, Quebec, has been fully operational since late 2017.
Aurora Sky, the company’s massive flagship facility at the Edmonton International Airport, will produce its first crops in the second quarter of this year. The world’s largest purpose-built cannabis facility, Aurora Sky totals 800,000 sq. ft. and is designed to produce at least 100,000 kg of cannabis per year. With access to international air transport as well as a university, CCO Cam Battley has high hopes that the Edmonton area will become an industrial cluster of the cannabis industry.
Aurora Lachute is a second facility in Quebec, nearing completion.
Aurora Nordic, located in Odense, Denmark, is still on the drawing board but will be Europe’s largest cannabis facility, measuring 1,000,000 sq. ft. Being developed in partnership with Alfred Pedersen & Son (the largest grower of tomatoes and sweet peppers in Scandinavia), the new facility will be similar to Aurora Sky, with a projected production capacity in excess of 120,000 kg per year. Furthermore, through Aurora’s wholly owned subsidiary, Pedanios, Aurora Nordic will have access to Europe’s largest distributor of cannabis, providing direct access to a large and rapidly growing customer base.
The company’s biggest announcement came in January, when Aurora came to an agreement to acquire CanniMed Therapeutics for roughly $1.1 billion. Based in Saskatoon, Saskatchewan, CanniMed was the sole supplier to Health Canada under the former medical marijuana system for 13 years. In its most recent quarter, CanniMed saw revenues of $4.8 million, up 80% from the year before. So it’s this acquisition that makes Aurora more valuable than Canopy.
But once again, there’s an international component to the story. CanniMed has a wholly-owned subsidiary named Subterra, located in White Pine, Michigan, that owns a copper mine that was shut down in 1995. And Subterra aims to reopen the mine, and grow cannabis in it!
Additionally, Aurora has acquired a 19.9% ownership interest in Liquor Stores N.A.—which currently has 220 stores—with the goal of funding both the conversion of some stores to retail marijuana outlets and the construction of new stores and then operating one of Canada’s largest non-government retail cannabis networks.
For the second quarter of fiscal 2018, ended December 31, Aurora saw revenues grow to $11.7 million, up 201% from the year before and up 42% from the first fiscal quarter of 2018.
The average selling price per gram rose 1.7% from the previous quarter to $8.36, while the cost to produce a gram fell 24.6% from the previous quarter to $1.41 per gram.
As for the stock, it based between 5 and 6 in December, and peaked at 12 in January, and as I write, it’s given up roughly half that gain, and still trades above its 50-day moving average.
Thus this could be a decent entry point, but if there’s further weakness in the market, the stock could easily fall to 7.
Average trading volume is 4,400,000 shares per day, and Aurora’s market capitalization is about $4.3 billion.
2. Canopy Growth (TWMJF) (WEED in Canada)
Canada’s Number Two Grower
Canopy Growth was the biggest marijuana grower in Canada in my first two reports, but it lost the crown this quarter—just barely. Still, its future is bright.
At the heart of Canopy’s business is Tweed, the most recognized marijuana production brand in the world. The heart of Tweed’s growing operations is the former Hershey Chocolate factory in Smiths Falls Ontario, where Canopy has more than 40 acres of land with more than 350,000 sq. ft. of greenhouse space dedicated to cannabis production.
Beyond that, there’s Bedrocan, the epitome of medical-grade marijuana, based on strains developed in Holland over decades. And then there’s Spectrum Cannabis, a unique color-based strength and dosage system that helps users (and doctors) select products based on THC potency and CBD levels.
As the industry evolves, these brands will be a key strength of Canopy’s business. But growth at most Canadian growers these days is coming from acquisitions and alliances, and Canopy has no shortage of these.
Back in October, the big announcement was that alcohol behemoth Constellation Brands (STZ) (parent of Corona and Modelo beer, Robert Mondavi wine and Svedka vodka, among other brands) bought 10% of the company for roughly $190 million—a strong vote of confidence in both Canopy and the industry.
In December, Canopy announced a deal with Danish Cannabis, a leading European hemp producer, to establish a 40,000-square-meter production facility in Odense, Denmark, beginning with the immediate conversion of 30,000 square meters of existing greenhouse infrastructure.
Later in December, Canopy signed a deal with the province of Newfoundland and Labrador to supply 8,000 kg of high-quality cannabis products for the adult-use market for the first two years of the deal. And in January, the company signed a similar deal with the province of Prince Edward Island, guaranteeing 1,000 kg of high-quality cannabis in the first year. And then Canopy secured four retail license allocations in Newfoundland and Labrador, locations that represent the first announced privately owned and operated legal cannabis retail locations in Canada.
Plus, later in January, just one week after Canada unveiled industrial hemp regulations that would allow Canadian hemp flowers to be used in extracting CBD, Canopy announced the acquisition of assets and intellectual property from Green Hemp Industries of Yorkton, Saskatchewan. The plan: Principal Jason Green will join Canopy, expand field operations from 600 acres in 2018 to 2,500 acres in 2019, and make Canopy the global leader in low-cost, high-yield CBD production.
In the fiscal third quarter, ended December 31, the company sold 2,330 kilograms of cannabis, up 87% from the year before. Average selling price was $8.30 per gram, up from $7.36 the year before, while average cost per gram was $1.03, down from $1.70 the year before.
Revenues grew 123% from the prior year to $21.7 million ($1 million of which came from Germany), and earnings were a penny a share, down from two cents last year. But earnings are not the goal yet, growth is.
As for the stock, it built a base between 14 and 16 in November and December, peaked at 36 in January, and has given up slightly more than half of that gain. Sitting right at its 25-day moving average as I write, it’s probably in a decent buy area here, but if the market weakens, it could fall to 18 or even lower.
Average trading volume is 1,700,000 shares per day, and Canopy’s market capitalization is about $4.3 billion.
3. Aphria (APHQF) (APH in Canada)
Powered By Sunlight
Unlike the first two Canada growers, Aphria cares about earnings. The company has now reported nine consecutive quarters of positive EBITDA. One fact you can conclude from this is that management knows what matters to shareholders—and this is good.
But one fact you might not recognize is that Aphria—to date—has benefited from a natural advantage. Located in Learnington, Ontario, which is farther south than Detroit and close to the most southerly point in Canada, the company relies exclusively on natural sunlight to grow its plants, thus avoiding the substantial costs of lamps and electricity incurred by others.
But the company has been spending on greenhouses, which will soon be adding to its product stream. Sales from the Part III (200,000 sq. ft.) expansion are expected in late May and sales from Part IV (700,000 sq. ft) in late January 2019. When both projects are complete, the company anticipates that its one million sq. ft. of greenhouse growing space will yield 100,000 kgs of marijuana per year.
Additionally, the company signed an agreement in June with local grower GrowCo (Aphria is a minority shareholder) that will bring its annualized production capability expectations to 220,000 kgs per year.
In the second quarter of fiscal 2018, ended November 30, the company reported revenues of $8.5 million, up 63% from the year before. EBITDA was $1.6 million, up 35% from the year before. The main reason that EBITDA didn’t keep pace with revenue growth was that the approval process for the new Part II Expansion facility took longer than expected and thus the transfer of plants to the new facility was done at a more mature (less ideal) age than planned.
As a result, the company’s “all-in” costs of sales of dried cannabis per gram temporarily increased from $1.61 to $2.13. However, despite the increase, Aphria continues to have one of the lowest costs per gram in the industry.
Last but not least, in late January, Aphria agreed to acquire Nuuvera for roughly $825 million. Nuuvera has expertise in extraction, distillation and processing of advanced medical-grade derivative products, as well as a strong presence in Germany, Italy, Spain, the United Kingdom, Malta, Israel, Lesotho and Uruguay.
Furthermore—quoting from Aphria’s press release, “Aphria will capture the retail margin of the 77,000 kg of cannabis originally earmarked for [Nuuvera’s] agreements. The combined company will unlock greater economic value from future production, including expectations of realizing supply chain efficiencies, cross-selling and up-selling to customers through a broader product portfolio, developing a more diverse customer base, integrating operations and controls and implementing best practices.”
Unlike the first two stocks, APHQF didn’t build much of a base in December; it just kept climbing, hitting a peak of 20 in January. The selling wave brought it down to 10 briefly, but as I write it’s basing between 12 and 13 and if the market is cooperative, this base could hold. Otherwise, a return to 10 is possible.
Average trading volume is 1,200,000 shares per day, and market capitalization is about $2.0 billion.
4. Cronos Group (PRMCF) (MJM in Canada)
The Investor
Cronos is the fifth largest (by market capitalization) of the Canadian marijuana growers that serve the legal medical market in Canada. But Cronos is not simply a grower; it’s more of an investor, taking stakes in smaller operations and using its expertise—and its capital—to help them scale up rapidly as the industry prepares for a particularly explosive growth phase after marijuana is legalized for the adult recreational market in Canada this summer.
Guiding the company are four key strategic priorities: 1) Establish a low-cost, global production footprint. 2) Develop a diversified revenue base through a global sales and distribution network. 3) Create intellectual property to help protect margin durability over the long run. 4) Grow a portfolio of iconic brands.
Cronos owns 100% of Peace Naturals, a company licensed to produce and sell medical marijuana as well as cultivate cannabis oil. Located near Toronto, Peace Naturals has 95 acres of land zoned and licensed for cannabis production, operates three completed production buildings and is constructing additional capacity via a 286,0000 sq. ft. production facility (Building 4) and a 28,000 sq. ft. greenhouse.
Cronos also owns 100% of Original BC (OGBC), a company that is currently licensed to cultivate and sell medical marijuana. Original BC is located on 31 acres of land in the heart of the Okanagan Valley, British Columbia, and currently produces and sells (bulk intercompany) dried cannabis to Peace Naturals. Looking ahead to this summer, however, Original BC will serve as the company’s recreational cannabis platform.
Cronos has also invested in and made loans to Whistler Medical Marijuana Company, Evergreen Medicinal Supply Inc., AbCann Global Corp., Canopy Growth Corp. and The Hydropothecary Corp.
And the company has a 49.9% stake in Indigenous Roots, a medical cannabis company that will work cooperatively with Canadian First Nations towards building and operating licensed facilities and providing medical cannabis to First Nations.
On the international side, Cronos has partnered with an Israeli kibbutz (Gan Shmuel) to grow marijuana for the export market. Israel’s climate is ideal for greenhouse cultivation, and the company expects to produce cannabis at a cost between $0.40 and $0.50 per gram. When complete, the project is expected to generate about $160 million a year by producing about 53,000 pounds of cannabis annually. And given that the kibbutz has nearly 5,000 acres, there is plenty of room for expansion.
In the quarter ended September 30, revenues were $1.31 million, up from $.12 million the year before and earnings were a penny a share, up from breakeven the year before.
Looking at the chart, you might say that PRMCF based between 3 and 4 in December, peaked at 12, and is now trading roughly halfway between the two—and above its 50-day moving average. A dip to 5 is possible, but I think it looks pretty good here.
Note: The company will likely release its fourth-quarter earnings report somewhere around February 28.
Average trading volume is 760,000 shares per day, and market capitalization is about $1.1 billion.
5. Emerald Health Therapeutics (EMHTF) (EMH.V in Canada)
The Scientists
New to the report with this issue, Emerald Health is another Canadian producer/distributer, vertically integrated from top to bottom and comprised of three divisions:
Emerald Health Botanicals currently produces and sells cannabis and oils for the Canadian medical market and aims to serve the recreational market later this year. With a 32-acre site in metro Vancouver, it is ramping up growing capacity rapidly, aiming for 500,000 sq. ft. of greenhouse growing capacity by the end of 2018. Emerald also owns 50% of Pure Sunfarms, a partnership with Village Farms that is converting an existing 1.1 million sq. ft. greenhouse in Delta, BC from growing tomatoes to growing cannabis.
Emerald Health Pharmaceuticals is developing two proprietary chemical entities. The first (EHP-101), derived from cannabidiol (CBD), is being developed for the treatment of multiple sclerosis and scleroderma. The second (EHP-102), derived from cannabigerol (CBG), will target Huntington’s Disease and Parkinson’s Disease.
Emerald Health Bioceuticals plans to develop a line of safe and effective herbal remedies based on cannabinoids and treat such ills as anxiety, sleep disorders, inflammation, pain, arthritis and dermatitis.
So Emerald has big plans. And like its competitors, it’s been doing deals. In late January, the company announced the intent to form a joint venture with DMG Blockchain Solutions to develop a foundational blockchain-based supply chain management system and e-commerce marketplace for the legal cannabis industry.
And a few days later, Emerald announced the intent to work with Namaste Technologies (NXTTF) to develop a fully-integrated e-commerce platform to serve as a retail channel for Emerald’s patients. Such a site would leverage Namaste’s existing consumer databases, site traffic and e-commerce technology for marketing purposes along with Emerald’s pharmaceutical and biotech expertise to develop medical cannabis products tailored to specific markets and patients.
All that sounds great, yet it’s very hard to find reliable data about the company, in part because its corporate structure is complex. The last concrete data I have is that in the quarter ended June 30, revenues were $180,000 and the loss a penny a share.
So why recommend the stock? Because the chart looks pretty good, and the chart reflects all the perceptions, hopes and fears of everyone with an interest in the stock.
From a base just above a dollar last October, the stock ramped up to a high of 7.77 in late January (peaking later than all the other marijuana stocks). Since then, the stock has pulled back normally, and as I write, it sits right at its 50-day moving average. A dip to 4 is certainly possible, but overall, it’s a healthy pattern.
Average trading volume is 810,000 shares per day, and market capitalization is about $550 million.
6. OrganiGram Holdings (OGRMF) (OGI in Canada)
The Craft Grower
Based in the province of New Brunswick, Canada, OrganiGram is one of the mid-size Canadian public cannabis growers. Last year, I noted that the company’s chief differentiating factors seemed to be 1) its low cost of electricity and 2) its acquisition of Trauma Healing Centers, which serves over 3,500 patients (many of them veterans) in seven locations. Those factors remain important.
But this year the important new factors appear to be 1) the company’s expansion of its growing space and 2) its increasing emphasis on quality, and what we might dub “craft budtending.”
Quantity
The company’s Phase 2 expansion is set to be completed about now and the company expects to begin its vegetation cycle in February, making the expansion available for cannabis harvest and sale in time for the adult recreational market debut in July. When the Phase 2 expansion is fully operational, the Company’s total run-rate production will be increased to 16,000 kg/year.
When Phase 3 expansion is complete in May 2018, the company’s estimated production capacity will reach 25,000 kg/year. And when Phase 4—which is in the final planning stages and is fully funded—is complete, the company’s production capacity will hit 65,000 kg/year. These expansions will make OrganiGram one of the top indoor cannabis producers in Canada.
And the market will be waiting for OrganiGram’s crops! In fact, late last year, the company entered into a memorandum of understanding (MOU) with the newly named CannabisNB within the province of New Brunswick for the supply of cannabis to the adult-use recreational marijuana market. In this MOU, the company guaranteed the Provincial Authority an annual supply of a minimum of 5 million grams (5,000 kg) of cannabis product, an arrangement which management estimates will generate gross revenues of between $40 million to $60 million per annum. Then in January, the company signed a similar MOU with Prince Edward Island, promising one million grams (1,000 kg) per year.
Quality
In late November, the company announced the launch of The Edison Project, an initiative designed to produce and offer the highest quality of flowers through the adoption of three key production techniques: top flower pruning, hand-manicuring flowers and craft curing post-harvest. The first two Edison Project-related products released were #3 Edison and #7 Edison; in the first three weeks of sales to registered patients, they brought in almost $100,000 in revenue.
In December, the company announced that it was the recipient of three awards presented at the 2017 Lift Canadian Cannabis Awards, including Top Sativa Flower for its premium flower, Wabanaki. If a market develops for high-end craft marijuana, OrganiGram could be the leader!
Financially, trends are good. For the fiscal first quarter ended November 30, 2017, the company reported net sales of $2.7 million, up from $2.2 million the year before, and a net loss of $1.4 million, compared to a loss of $0.8 million the year before.
As to the chart, it’s a bit choppier than those of the bigger companies, but that’s not unusual with lower-priced and less liquid stocks. OGRMF based around 2.8 last November-December, peaked at 4.5, and has given up a bit more than half of that advance. As I write, it sits on its 50-day moving average, which is still trending up, and looks like a decent buy here.
Average trading volume is 620,000 shares per day, and market capitalization is about $420 million.
7. Turning Point Brands (TPB)
The Three-Legged Stool
Turning Point Brands is an old-school smokeless tobacco company that has been expanding into the marijuana and vaping markets, primarily through acquisitions of the Zig-Zag brand and several vaping brands.
Unlike many of the other companies in this report, Turning Point has very experienced management. Also, unlike other companies in this report, debt is high, at 592% of equity. But the trends are good as the company uses its vast distribution network to evolve from an old fogey selling cancer-causing tobacco to a new-generation company selling wares that can be viewed, in some cases, as medicinal products.
In the third quarter, revenues grew 44% to a record $73.3 million, while earnings grew 12% to $.38 per share. (Fourth-quarter results should be out very soon and you might consider delaying investing until after the report to avoid a surprise—but some surprises are good!)
Breaking the results down, smokeless products (Stoker’s snuff and nine brands of chewing tobacco, including Springfield, Beech-Nut, Trophy, Durango, Appalachia, Big Mountain and Havana Blossom) were 29% of sales in the quarter and grew 8%.
Smoking products (pipe tobacco and Zig-Zag papers and cigar wraps and cigarillos) were 37% of sales for the quarter and decreased 7%.
And NewGen products, which is where the future lies, were 35% of sales and saw growth of 664% (thanks to acquisitions). NewGen brands include VaporBeast, VaporShark, V2 and Zig-Zag Vaporizer, as well as a line of herbal smoking products.
Also, Turning Point began paying a quarterly dividend in December, and now yields 0.8%. Thus, Turning Point is the “safest” of these stocks, in that it has a legacy business, experienced management and a secure dividend. Of course, its growth prospects are smaller, too.
As to the stock, TPB came public in May 2016 and has been trending roughly higher since, though it really blasted off in late December. Like all the stocks in this report, it peaked in early January (at 23), and then fell just 12% to its low last week. It’s still above its 50-day moving average and looks like a decent buy here, though a dip to 20 is very possible.
Average trading volume is just 59,000 shares per day, and market capitalization is about $400 million.
8. Kush Bottles (KSHB)
The King of Cannabis Packaging
Headquartered in California, with additional offices in Colorado and Washington state, Kush is the king of marijuana packaging, both wholesale and retail.
Its packaging consists primarily of bottles, bags, tubes and other containers—many of them childproof—often customized with its customers’ logos, and all designed to satisfy the specific legal requirements of the customer.
Thus Kush is in a business that’s totally legal, nationally. Early on, one of my worries about Kush concerned competitors; there are no barriers to entry and there are plenty of huge companies in the packaging industry. However, management, led by CEO Nick Kovacevich and CFO John McCormick—who spent 16 years at British American Tobacco, ending as CFO—seems to have made all the right steps so far.
The latest reported results, for the fiscal first quarter ended November 30, 2017, were excellent.
Revenue was up 258% from the previous year to $8.85 million. Gross margins were 30%, down from 34% in the prior year period, thanks to increased business in the lower margin vaporizer product segment. Net income was $94,615 compared to a net loss of $161,000 the year before. Cash balance was $5.5 million, up from $0.9. And working capital was $8.6 million, up from $3.4 million.
And this was before legalization in California, which is Kush’s home state! So where did the growth come from? Selling more to exiting customers, selling in newer medical markets like the Northeast, and acquisitions—the company has done three so far, and is open to more.
Meanwhile, the company’s current business is strong and has huge growth potential. Currently Kush has 2,500 SKUs, and continues to improve its offerings by listening to the needs of its 4,000 customers.
And while it’s focused big-time on California this year, as well as the Northeast, it’s looking eagerly at Canada. Currently, the medical marijuana market in Canada is limited to flowers and oil, delivered by mail. There’s no opportunity for sellers to enhance their wares with packaging that looks good. But when the adult-use market opens, it is expected to add vaping and edibles and concentrates to the mix, creating huge opportunities for consumer packaging and display branding.
As to the chart, KSHB built a great base in December at 3, peaked at 8.5 in January, and has pulled back normally to its current level, not even touching its 50-day moving average! It’s one of the stronger patterns of these 10 stocks, though if the market weakens, the stock could easily dip to 4.5.
Average trading volume is 625,000 shares per day, and market capitalization is about $340 million.
9. CannaRoyalty (CNNRF) (CSE in Canada)
The Deal-Maker
Headquartered in Ottawa, Canada, CannaRoyaly is not a grower but an investor and deal-maker. It has an extremely diversified portfolio of assets in high-value segments of the cannabis sector, including research, consumer brands, devices and intellectual property. These are structured in a variety of ways, including royalty agreements, equity interests, secured convertible debt, licensing agreements and the company’s own branded portfolio.
Furthermore, the company’s deals are not limited to Canada. They are in six U.S. states as well as Puerto Rico, and will spread from there as legalization spreads across the U.S.
California in particular is a major focus for the company, as management notes that the medical cannabis market in Canada last year was $0.4 billion while in California it was $2.8 billion.
CannaRoyalty’s consumer brands include: Greenrock Botanicals, DermaLeaf Skincare, Soul Sugar Kitchen, Best Buds Animal Health, Freya Intimacy Spray, Breeze (inhalers), Müv (inhalers, patches and vape pens and cartridges), Stokes Confections, Absolute Extracts, and Care By Design (sprays, gel caps, vaping products and edibles).
Earlier this month, the company announced the launch of the Bhang Vaporizer product portfolio (including Bhang chocolate products) into the entire southern California region through CannaRoyalty investee River Collective, California’s largest cannabis distributor.
And just today, CannaRoyalty announced a strategic partnership regarding craft premium cannabis flower production, branding and sales, and other strategic initiatives with FloraCal. FloraCal is a 100% family owned and operated cultivator in northern California that handcrafts, brands and packages small batches of ultra-premium cannabis flower, with an average selling price of over $17 per gram. As the markets develops, it will be interesting to see what people will pay for a premium craft brand.
Like all the companies in this report (with the exception of Turning Point), CannaRoyalty has plenty of cash. But CannaRoyalty is distinguished by the fact that its stock, thanks to all those deals, is more than 80% owned by institutions, which in theory should make its stock a little less volatile.
Looking at the chart today, I see a long strong base at 2 last year, and then a surge up to a high of 4.5 on January 3 (a peak earlier than the majority). Since then, the correction has taken the stock as low as 2.75, but right now, back well above its 50-day moving average, the stock looks healthy.
Average trading volume for CNNRF is 150,000 shares per day, and market capitalization is about $185 million.
10. Innovative Industrial Properties (IIPR)
The Cannabis REIT
As most investors know, real estate investment trusts (REITs) have been under pressure recently due to perceptions that interest rates will rise. Maybe they will. But my bet is that the growth characteristics of the marijuana industry, and its growing need for indoor space, will more than offset any possible negative effect from rising rates. Plus, a REIT adds a welcome dose of diversification; I don’t think a portfolio composed solely of growers is wise.
Innovative Industrial Properties is a Maryland corporation structured as a REIT, with a singular focus on the U.S. medical marijuana market, or more specifically, the growers and producers who are serving that market.
Founder and Executive Chairman Alan Gold previously founded two other REITs listed on the NYSE: Alexandria Real Estate Equities (ARE) and BioMed Realty, which was acquired by Blackstone in 2016 for $8 billion. So he knows what he’s doing.
At present, the firm has five properties.
The first, in New York, is leased to PharmaCann, the largest vertically integrated medical cannabis grower in the U.S.
The second, in Maryland, has been leased to Holistic Industries, which owns and operates a total of five medical cannabis facilities in two states and the District of Columbia. These Holistic facilities include cultivation centers, processing centers and dispensaries.
The third and fourth are medical-use cannabis cultivation facilities in sale-leaseback transactions with subsidiaries of Vireo Health, LLC in New York and Minnesota.
And the newest, acquired in December, is a property in Willcox, Arizona that comprises approximately 358,000 square feet of greenhouse and industrial space. Bought for $15 million, the building will be leased to a subsidiary of The Pharm in a long-term, triple-net lease. (The Pharm is one of the largest wholesalers of medical grade cannabis in the state of Arizona and serves 45 of Arizona’s 104 retail dispensaries, operating under the brand “Sunday Goods.”)
Going forward, the company will continue to acquire properties through sale-leaseback transactions and third-party purchases, and tenants will generally engage in long-term triple-net lease arrangements, where the tenants are responsible for taxes, maintenance, insurance and structural repairs, in addition to base rent.
The fact that cannabis is still illegal in the U.S., nationally, means that getting financing through traditional banks can be difficult for marijuana growers. So that’s an extra wind at the company’s back.
Revenues for the third quarter were $1.6 million, and net income was $0.09 per share. Fourth-quarter results should be out very soon, so you might consider delaying investing until after the report.
The company paid its first dividend in July and will continue to pay dividends quarterly. The latest, paid in December, was $0.25, which is an annual yield of 3.9% at the current price.
As to the stock, Innovative Industrial Properties came public in December 2016 and was trading calmly (with an upward bias) at 20 when I recommended it last November. On January 2, it topped 36, and since then the stock has been digesting that gain in a normal pattern, though its pullback has been deeper than any other stock in this report because of the REIT factor.
Note: Before you invest in IIPR, I recommend you understand the implications of REIT taxation. One place to start is here.
Average trading volume for IIPR is 225,000 shares per day, and market capitalization is about $175 million.
Stocks Dropped:
Corbus Pharmaceuticals Holdings (CRBP)
Corbus is a clinical-stage pharmaceutical company that doesn’t actually use cannabis but is developing and commercializing synthetic drugs to mimic the plant’s effect on rare, chronic and serious inflammatory and fibrotic diseases.
Corbus was included in the report at the start six months ago because the stock was at a great low-risk entry point and I wanted diversification in what was then a sector rife with thinly-traded low-priced stocks.
But back in November, I wrote, “as the months roll on, and the marijuana industry slowly matures, Corbus is likely to be squeezed out of this report.” That time has come. We’ve got a decent profit, and the stock is once again at a low-risk entry point. If you’ve got a profit in it, you can hold, but I don’t feel particularly positive about it.
22nd Century Group (XXII)
22nd Century Group has the potential to develop genetically modified cannabis plants but its main business in recent years has been using genetic technology to develop very-low nicotine tobacco and getting agencies of the U.S. government to invest more than $100 million in clinical research of the company’s proprietary SPECTRUM cigarettes.
Still, I included the stock in this report from the start for the same reason as Corbus—diversification and stability. Plus, at the beginning, its chart looked great.
But the marijuana sector has grown a lot since then, and thus I feel less of a need to keep XXII around. The chart still looks great (considering the recent market selloff), and I still like the company’s prospects, so if you’ve got a nice profit it in, and you like the low-nicotine story, feel free to hang on.