Here is your summer issue of Cabot’s 10 Best Marijuana Stocks, with updates on the industry as a whole as well as all the important fundamental developments regarding the stocks in the portfolio.
In general, I remain very bullish on the marijuana sector long-term. I’m impressed by both the creativity demonstrated by the management of these companies, and the appetite for investment in the sector, by both individual investors and private equity. The future is bright.
Cabot Marijuana Investor—Summer 2018
In the three months since my February report was published, marijuana stocks have traced out a normal consolidation pattern, cooling off from the red-hot advance that sent the entire sector to the moon in January. But over the past month, an increasing number of these stocks have broken out from their bases and climbed closer to—and in some cases beyond!—their old highs. Which means there are both decent entry points for new arrivals—as well as opportunities to switch to stronger stocks, as I do with our own portfolio in this report.
But first the fundamentals.
The path toward complete legalization in the U.S. continues to grow smoother, with John Boehner, Cory Gardner, Bill Weld, Chuck Schumer, Mitch McConnell, Earl Blumenauer and President Trump (politics makes strange bedfellows) all contributing to the movement.
In Canada, the prospect of legalization for recreational use has been pushed back to the end of summer—or further. No surprise there. As in the U.S., the foot-draggers say they want to “get it right.” (Also, the terminology seems to be shifting from “recreational use” to “adult use,” recognizing that many of the new users will be self-medicating, for everything from bad backs to anxiety.)
On the medical front, GW Pharmaceuticals (GWPH), which we sold in November for a profit of about 15%, is getting closer to FDA approval of its pharmaceutical grade of CBD (cannabidiol) oil, named Epidiolex. Thanks to the Orphan Drug Act, which allows companies to not only fast-track approval for “new” drugs that address under-served conditions (in this case, early-onset drug-resistant epilepsy syndromes) but also to charge an arm and a leg to recoup their costs, the drug might cost $35,000 to $50,000 for a year’s supply—even though you could get a roughly similar product at your neighborhood cannabis dispensary for far, far less. Well, that’s how our medical system works in the U.S. Going forward, our knowledge about the medicinal properties of the components of cannabis will grow and prices will decline.
As to the companies themselves, particularly the 10 that are the focus of this quarterly report, they are all intent on growing as fast as they can. This early in the game, market share is what matters—not earnings. And there continues to be plenty of money coming into the sector from private equity.
Now, a few words of advice. 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 management teams that are faced with a steep learning curve. And third, the stocks are often lower priced and thinly traded, which means they have low levels of 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.
If you were one of my early readers when this advisory started last August, congratulations. You’re doing well. And if you’re a newer reader, welcome. We’re still in the first few innings of a great growth story, and I’m confident that there are decades of profits ahead.
Lastly, the frequency of this advisory is quarterly, because I sincerely believe that frequent trading in this young sector can be counterproductive. Generally, sitting and holding will work. So while I will send out occasional bulletins between issues as I see fit (my January 8 bulletin suggesting that traders take profits—one day before the sector peaked—was one example), in general I suggest holding patiently.
How to Invest in These Stocks
1. Practice the number one rule of successful investing—diversify. Don’t just buy marijuana growers. Consider the companies in distribution, packaging, real estate, etc. Note: I’m looking for a company that addresses the industry’s banking needs, but haven’t found one to recommend yet.
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 has been in a correction phase since then, and while some of the old leaders are still in that pattern, some new leaders of the group have been demonstrating impressive strength.
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. As always, my goal is for the portfolio to own the 10 marijuana stocks with the best prospects for growth. Once again, the 10 stocks are presented in order of market capitalization, from largest to smallest. Finally, at the end, you’ll find brief post-mortems for the stocks that are being dropped.
Last but not least, if you have a specific question, you can email me directly at tim@cabotwealth.com.
1. Canopy Growth (CGC) (WEED in Canada)
Canada’s #1 Grower
Canopy Growth is once again the most valuable marijuana grower in Canada, but the race is close.
Canopy brought in $30.4 million in revenue in 2017, up 213% from 2016. But because the company is still in investing mode, building out greenhouses in particular, the loss per share was $0.11.
At the heart of Canopy’s business is Tweed, the most recognized marijuana production brand in the world. The core of Tweed’s growing operations is in the former Hershey Chocolate factory in Smiths Falls, Ontario, where Canopy has 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 (cannabidiol) levels. Remember, CBD is the component of both cannabis and hemp that has no psychoactive affect, but does have numerous medicinal and therapeutic effects.
As the industry evolves, these brands will be a key strength of Canopy’s business. But the action at all the big Canadian growers these days revolves around 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 Canopy for roughly $190 million.
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.
In January, Canopy announced a deal with Green Hemp Industries of Yorkton, Saskatchewan to 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.
And the latest big deal came in February, when Canopy received a commitment from Sunniva of British Columbia to sell Canopy 45,000 kilograms of premium quality cannabis annually over an initial two-year period commencing in calendar Q1 2019.
Sunniva is building 700,000 square feet of greenhouse facilities expected to produce over 100,000 kg of premium medical cannabis a year and over 25,000 kg of trim used for extraction. The trim will be used to extract products such as cannabis oil, and the oil will be used for drug delivery formats such as capsules, dissolvable strips, vaporization cartridges, tinctures and creams.
Last but not least, just today, Canopy began trading on the NYSE—and for a look at what that might mean, see the write-up on Cronos.
As for the stock, like most of the stocks in the sector, TWMJF peaked in early January, bottomed in early February, and had been building an increasingly narrow “megaphone” pattern ever since—with a slight upward bias. And just last week it broke out of that pattern strongly to the upside!
Average trading volume is 850,000 shares per day, and Canopy’s market capitalization is about $6.0 billion.
2. Aurora Cannabis (ACBFF) (ACB in Canada)
Canada’s #2 Grower
In second place at the moment, but primed to vault into first thanks to its latest deal, is Aurora.
Aurora’s original growing facility is in the foothills of the Rocky Mountains north of Calgary, but the company is also growing in two facilities in Quebec, building a massive flagship facility at the Edmonton International Airport that totals 800,000 sq. ft. and is designed to produce at least 100,000 kg of cannabis per year (the first harvest is expected in June), and designing a million sq. ft. facility for Denmark that will be Europe’s largest cannabis facility.
Biggest of all, announced just last month, will be Aurora Sun, a 1,200,000 sq. ft. hybrid greenhouse facility that should produce in excess of 150,000 kilograms per year. Located in Medicine Hat, Alberta, the sunniest city in Canada, the highly automated facility will be the size of over 21 football fields and be ultra-efficient. Management anticipates production costs to fall to well below $1 per gram at full capacity and expects to start planting in the first half of calendar 2019, and complete the full facility in the second half of calendar 2019. Aurora Sun is designed to serve the high-margin European medical cannabis markets.
But there’s more!
In late March, Aurora completed its purchase of CanniMed, the sole supplier to Health Canada under the former medical marijuana system, for roughly $1.1 billion. This purchase also brings rights to patented drug delivery technologies using Orally Dissolvable Thin Film Wafers to deliver cannabinoids for pain management.
And then, on May 14, Aurora agreed to buy rival MedReleaf (which was on the short list for this portfolio) for about $2.3 billion in stock. Assuming completion of the deal, in just over a year Aurora will have the capacity to grow 1.26 million pounds a year of cannabis at nine facilities in Canada and two in Denmark (it’s aiming to be the largest producer of marijuana in Europe), with distribution networks in South America and Australia as well.
Additionally, Aurora owns 19.9% of Liquor Stores N.A., which has 220 stores in Canada; holds approximately 17% of the issued shares of leading extraction technology company Radient Technologies; has a strategic investment in Hempco Food and Fiber; has a 22.9% stake in Cann Group Limited, the first Australian company licensed to conduct research on and cultivate medical cannabis; and a 17.6% stake in Canadian producer The Green Organic Dutchman. It’s got a lot going on—but of course the bigger investments push profitability farther out.
In the quarter ended March 31 (the third fiscal of 2018), revenues grew 37.6% from the year before to $16.1 million. The number of patients served grew 111% to 45,776. The number of grams sold grew 16.5% to 1,352,982. Average cost to produce a gram grew 8.5% to $1.53, and average selling price per gram fell 4.4% to $7.99.
As for the stock, it based between 5 and 6 in December, peaked at 12 in January, and returned to the 5.5 region in February, April and May, though as I write, it’s trying, like Canopy, to break out of that pattern. ACBFF is one of the weaker stocks in the portfolio, in part because all that spending pushed profitability farther out, but from a long-term perspective, this is probably a great entry point.
Average trading volume is 1.6 million shares per day, and Aurora’s market capitalization is about $3.7 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 10 consecutive quarters of positive EBITDA. One fact you can conclude from this is that management is fiscally conservative—a fact that might be important if marijuana prices ever plummet due to an excess of capacity.
But one fact you might not recognize is that Aphria—to date—has benefitted 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 add to its product stream. Sales from its Part III (200,000 sq. ft) expansion are expected in late May and sales from its Part IV (700,000 sq. ft) expansion are expected 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. Beyond that, the Aphria Diamond 1.3 million sq. ft. retrofit project remains on schedule, with first sales expected in January 2019.
And now Aphria is expanding internationally. In March, it announced a deal to acquire Nuuvera, a Canadian company that’s working with partners in Germany, Israel and Italy to develop commercial production and global distribution of medical grade cannabis in legalized markets. And just last week, the company announced that Nuuvera Deutschland had acquired a 25.1% interest in Berlin-based Schöneberg Hospital to facilitate their “long-term strategy to educate German physicians and patients and advance evidence that supports the effectiveness of medical cannabinoids.”
Also last week, in a bit of what appears to be a coals-to-Newcastle move but probably makes sense, the company announced an agreement with Colcanna SAS, a Colombia-based pharmaceutical import and distribution company, which is licensed to import, sell and distribute medical cannabis and derivatives in Colombia.
Finally, there was a deal with Great North Distributors, a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits, to serve as exclusive manufacturer’s representative for Aphria’s adult-use cannabis products throughout Canada, following the legalization of recreational cannabis for adult use that’s anticipated later this year.
Revenue for the three months ended February 28, 2019 was $10.3 million versus $5.1 million in the same period of the prior year, an increase of more than 100%. Adjusted EBITDA for the quarter was $2.9 million, an increase of 238% from the prior year. And net income was $12,945, or $0.08 per share, as opposed to a net income of $4,950, or $0.04 per share, in the same period of the prior year, an increase of more than 161%.
Last but not least, Vic Neufeld, CEO of the company, commented, “We continue to hold a strong cash position that will give us the flexibility to pursue attractive investment opportunities both domestically and around the world.”
As for the stock, APHQF peaked in January like the first two stocks, but as the correction wore on, it grew weaker than them, dipping below its 200-day moving average—twice. But in May—thanks in part to all the company’s news—it’s come back to life and now is ready to embark on a renewed uptrend.
Average trading volume is 650,000 shares per day, and market capitalization is about $2.1 billion.
4. Cronos Group (PRMCF) (CRON.V in Canada)
The Investor—and First on the Nasdaq
Cronos is the fourth 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.
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 and a 28,000 sq. ft. greenhouse.
Cronos also owns 100% of Original BC (OGBC), which currently produces and sells (bulk intercompany) dried cannabis to Peace Naturals, which is sold under the Peace Naturals brand—and when recreational cannabis is legal, 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 Corporation, Canopy Growth Corp. and The Hydropothecary Corporation. 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. When complete, the project is expected to generate about $160 million a year by producing about 53,000 pounds of cannabis annually. And in February, the company announced a joint venture in Australia that will begin with the construction of a 20,000 sq. ft. purpose-built indoor facility that can produce up to 2,000 kilograms of cannabis annually
But perhaps biggest of all is the news that on March 19, Cronos announced a joint venture (50/50) with MedMen Enterprises USA, to create a Canadian branded retail chain named MedMen Canada. MedMen is the largest cannabis retail chain in California, has assets in Nevada and New York, and is the most recognized cannabis brand in the world today.
In short, Cronos is lagging the big three in production, but its joint ventures have the makings of a diversified powerhouse.
Cronos sales were $2.9 million for the first quarter of 2018, compared to $0.5 million for the first quarter of 2017, representing an increase of 473%.
As to the chart, CRON was the first cannabis stock to trade on the Nasdaq market (until February 27, it was PRMCF). The stock peaked at 12 in early January with the entire sector, bottomed in early February at 5, and saw a burst of new buying after the Nasdaq upgrade, but the burst faded. In general, the pattern since the top has been a rational megaphone, which has now tapered to a range between 5.50 and 7.00, and is likely to be resolved soon, presumably to the upside. In the meantime, the stock’s 200-day moving average is now at 5.0, approaching to provide support.
Average trading volume is 2.9 million shares per day, and market capitalization is about $1.1 billion.
5. Hydropothecary (HYYDF) (THCX.V in Canada)
The Prettiest Marijuana Products
Located on a 143-acre farm in Gatineau, Quebec, Hydrotherapy has created what I consider the prettiest packaging in the industry.
But there’s more to the company than good looks. Hydropothecary was the first licensed producer in Quebec, and currently produces 3,600 kg of cannabis per year in a 50,000 sq. ft. facility. A new 250,000 sq. ft. state-of-the-art greenhouse will be operational by this summer. And another 1 million sq. ft. greenhouse facility should be completed in December. When these expansions are finished, Hydropothecary will have close to 1.3 million sq. ft. of greenhouses and be capable of producing 108,000 kg of cannabis per year.
On the product side, the company currently has four product lines for users.
Time of Day, its Signature product line, is a series of mixes of dried marijuana buds, designed for different times of the day.
Good Morning, an indica-dominant hybrid, has 15%-19% THC and 0% CBD.
Midday, a sativa-dominant hybrid, has 5%-8% THC and 7%-10% CBD.
After Dinner, originating from an Afghanistan indica and a classic sativa, has 8%-10% THC and 0%-1% CBD.
And Bedtime, an indica-dominant hybrid, has 16%-22% THC and 0%-1% CBD.
H2 is a line of Classical Medical Marijuana products, identified by strain including Pink OG Kush, Papaya Grove, Dragon Fruit, Juniper Berry, Passion Fruit, Honeydew and Bitter Melon.
Decarb, which was named Best New Cannabis Product at the Lift Canadian Cannabis Awards, is fine milled medical marijuana, designed for oral consumption. Canadian law (unlike the law in some U.S. states) forbids edible marijuana products, but Hydropothecary has circumvented that prohibition by selling the powder directly (and throwing in complementary capsules that you can put the powder in). The name Decarb comes from the fact that the marijuana is decarboxylated (pre-heated to activate the THC and CBD) so that it doesn’t need to be burned or vaporized to do its job; it can be eaten directly or mixed in drinks or sprinkled on food. Decarb comes in six different “strengths,” ranging from high THC to high CBD.
Elixir is a sublingual spray that delivers cannabis oil (either high-THC or high-CBD) mixed in a peppermint spray—discreet and convenient.
In April, Hydropothecary signed an agreement with Société des alcools du Québec (SAQ) to be the preferred supplier of cannabis products for the recreational market in Quebec, supplying 20,000 kg of products in the first year of the agreement, 35,000 kg in the second year and 45,000 kg in the third, with volumes for the final two years to be established based on the sales generated in the first three years.
In the quarter ended January 31 (the second quarter of fiscal 2018), revenue was $1.18 million, up 28% from the year before, while the loss per share was 10 cents, compared to two cents the year before.
As for the chart, note that the lower the price of the stock (in general), the greater the risk. HYYDF peaked at 4.20 in January, pulled back for just 11 trading days, and then built a triple bottom at and above 2.60—with each bottom higher than the last—never coming close to its 200-day moving average. Then in early May the buyers took charge, sending the stock back up and close to its old high. We saw a new closing high Tuesday, spurred perhaps by rumors of interest by Molson Coors, but it’s not a conclusive breakout yet.
6. OrganiGram Holdings (OGRMF) (OGI in Canada)
Surprisingly High Yields!
Based in the province of New Brunswick, Canada, OrganiGram is a mid-size Canadian grower, but it’s not to be underestimated!
In my November report I noted that a chief differentiating factor of the company was its low cost of electricity. In my February report I noted that important new factors appeared 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.”
And today I can report not only that Phase 2 of the expansion is complete and that harvests have begun, but also that thanks to a fully automated irrigation system, automated potting, fully automated waste destruction system and automated packaging lines, yields have been as much as 50% higher than management’s estimates. Furthermore, management expects the trend to continue as the data-driven approach yields economies of scale through optimization of its pre-vegetation and cloning processes.
Following the revelation, CEO Greg Engel commented, “With these results we are revising our current production forecast estimates as well as those for our next expansion…so that by early 2020 we will be producing over 110,000 kg/annum from fully funded operations.” When the expansions are complete, OrganiGram will be one of the top indoor cannabis producers in Canada.
Branding
But it’s not all about quantity and efficiency at OrganiGram. Back in November, the company launched The Edison Project, an initiative designed to produce the highest quality of flower through the adoption of three key production techniques: top flower pruning, hand-manicuring flowers and craft curing post-harvest.
And on May 15, with the recreational market in Canada drawing closer, management unveiled its Phase 1 branding strategy for the adult recreational market in Canada.
Top-of-the-line will be Edison Cannabis Company, a brand built on innovation, sophistication, creativity & quality. Think premium pricing.
Next will be Ankr Organics, poised to offer consumers the best quality organically-grown cannabis in the country.
And third will be Trailer Park Buds, a tongue-in-cheek offering for the value-conscious consumer.
With these offerings, OrganiGram will be poised to go national—but that’s only once they’ve satisfied their commitment to supply the Province of New Brunswick an annual minimum of 55,000 kg of cannabis product, an arrangement which will generate gross revenues of between $40 million to $60 million per annum—and the similar commitment to Prince Edward Island, promising 1,000 kg per year.
Financially, trends at the company are good. For the fiscal second quarter ended February 28, the company reported net sales of $3.2 million, up 123% from the year before, and earnings per share of $0.01, improved from a loss of $0.06 the year before.
As to the chart, it peaked at 4.5 in January, pulled back with the sector to a low at 2.7 in February, and retested that low in early April, touching its 200-day moving average in the process. But since then the trend has been up, and as I write, the stock is closing in on its old high of 4.5.
Average trading volume is 240,000 shares per day, and market capitalization is about $475 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. In some companies this would be a difficult transition; you can imagine the resistance to these new lines by traditionalists. But at Turning Point Brands, the transition is going swimmingly; the stock was the first in the portfolio to break out to new highs this spring!
And it’s all because of what I like to call the three-legged stool—and good management.
In the first quarter, net sales increased 10.7% to $73.9 million, while diluted EPS increased 50% to $0.15 per share.
In the Smokeless Products Segment, which accounted for 28% of sales in the quarter, sales increased 2.5% to $20.7 million on the continuing growth of Stoker’s moist snuff tobacco (MST), even though year-over-year industry volumes for chewing tobacco declined by approximately 7%.
In the Smoking Products Segment, which accounted for 37% of sales in the quarter, sales decreased $0.2 million to $27.0 million, though Zig-Zag retained market leadership in both premium cigarette papers and MYO cigar wraps. At the same time, first-quarter industry volumes for U.S. cigarette papers decreased by low-single-digits.
Meanwhile, in the NewGen Products Segment, which accounted for 35% of total net sales in the quarter and will almost certainly be the company’s biggest segment in the current quarter and going forward, sales grew 35.3% to a record $26.2 million on continued VaporBeast momentum.
Then, in April, TPB announced the acquisition of the assets of Vapor Supply LLC and its related subsidiaries for $4.8 million. For the 12 months ending December 31, 2017, Vapor Supply had net sales and gross profit of approximately $33 million and $6 million, respectively.
To refresh your memory, Turning Point had acquired VaporBeast in 2016 and Vapor Shark in 2017 and has been growing those brands nicely, and now Vapor Supply is sure to help that trend. (The vaping products these firms deal in can be used for nicotine products, cannabis products and other substances.)
After the announcement, CEO Larry Wexler commented, “We are delighted to welcome Vapor Supply to the Turning Point Brands family. Vapor Supply has swiftly built a compelling business model, including a powerful B2B marketing platform that ships to over 1,400 U.S. retail vapor stores and an efficient e-liquid manufacturing facility for its proprietary products. Given our now well established NewGen distribution engine via the VaporBeast and Vapor Shark businesses, we intend to release operational and financial synergies through thoughtful integration and a transfer of best-in-class business practices.”
Last but not least, there’s one more differentiating factor for TPB; the stock pays a quarterly dividend, which right now is $0.04 per common share, for a yield of 0.66%. Thus, Turning Point is the “safest” of these stocks, in that it has a legacy business, experienced management and a secure dividend.
As for the stock, TPB peaked in early January (at 23) with the sector, and then trended slowly down for a correction of just 17% at its nadir at the end of March. But then it turned sharply higher, breaking out to new highs on May 10 on growing volume and trending higher since. This is very positive action, so if you don’t own it yet, try to buy on pullbacks.
Average trading volume is just 55,000 shares per day, and market capitalization is about $475 million.
8. Kush Bottles (KSHB)
The King of Cannabis Packaging—and More
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 moves so far.
And a lot of these steps involve acquisitions, which have been possible because 1) there’s lots of money coming into the industry and 2) Kush faces none of the legal and banking barriers that constrain many U.S. companies in the industry. And now Kush is moving in a new direction!
A New Direction
Kush’s most recent acquisition, completed May 3, signals an expanded focus for the company. The acquired company is Summit Innovations, a leading distributor of the hydrocarbon gases that are used to turn cannabis plants into oils. Summit Innovations operates seven distribution facilities located across the country, producing high purity butane, propane, iso-butane and blends.
Commenting on the acquisition, CEO Nicholas Kovacevich said, “Gas is the lifeblood of the cannabis market and Summit Innovations offers a broad range of hydrocarbon gases that meet the complex needs of cannabis extractors across the country. By bringing Summit Innovations under the Kush Bottles umbrella, we expect to leverage synergies in our distribution channels to grow sales at both Summit and our existing business lines. This is a major step forward in our strategy to position Kush Bottles as a one-stop shop for any business looking to operate responsibly within the legal cannabis market.” I’m impressed.
Additionally, Kush hired a Regional Sales Director to expand Kush’s physical presence in the rapidly growing East Coast legal cannabis market. And it continues to evaluate opportunities in Canada, where the opening of the adult-use market will create opportunities for vendors to differentiate with consumer packaging and display branding.
Meanwhile, on the financial side, the company’s fiscal second quarter, ended February 28, saw revenue grow 249% from the year before to $10.4 million, while the net loss was approximately $920,000 compared to net income of $3,619 in the fiscal second quarter of 2017.
As to the chart, KSHB peaked at 8.5 in January with the sector, bottomed at 4 at the end of February, built a nice base at 5 through March and April, and then surged higher through most of May. This week, however, the stock pulled back sharply to its 50-day moving average, and that means there’s a buying opportunity in this neighborhood.
Average trading volume is 280,000 shares per day, and market capitalization is about $390 million.
9. Innovative Industrial Properties (IIPR)
The Cannabis REIT
Diversification is a cardinal principle of wise investing; you should never put all your eggs in one basket—or own stocks in only one market sector—and Innovative Industrial Properties is a low-volatility component of our marijuana portfolio that is designed to zig when the majority of the stocks zag.
That’s because it’s a real estate investment trust (REIT), which is concerned mainly with developing and managing properties (warehouses, generally) that are used by growers and distributors in the marijuana industry.
Because the large-scale marijuana industry is relatively new, the company’s expertise in the sector conveys a first-mover advantage. And because cannabis is still illegal in the U.S. nationally, getting financing to build big warehouses through traditional banks can be difficult for marijuana growers. So that’s an extra wind at the company’s back.
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.
As of May 9, Innovative Industrial Properties owned six properties located in Arizona, Maryland, Minnesota, New York and Pennsylvania, totaling approximately 706,000 rentable square feet, which were 100% leased with a weighted-average remaining lease term of approximately 14.4 years.
The company’s average current yield on invested capital is approximately 15.7% for these six properties.
Additionally, the company had executed an agreement to purchase one additional property for a total investment of $3 million and executed three non-binding letters of intent for three properties representing a total expected additional investment of approximately $38 million. Plus, it’s identified and was in various stages of reviewing approximately $100 million of additional potential properties for acquisition.
So the pipeline is busy; as I said, money is flowing into the sector.
In the first quarter, the company generated rental revenues of approximately $2.7 million, and net income was approximately $607,000, or $0.09 per diluted share. Additionally, adjusted funds from operations (“AFFO”) was approximately $1.4 million, or $0.23 per diluted share.
Last but not least, the company paid its fourth consecutive quarterly dividend of $0.25 per common share on April 16, to stockholders of record as of March 29, for an annual yield of 3.0%.
As to the stock, it came public in December 2016, and spent its first year going nowhere. But in December 2017, it rocketed ahead, peaking on January 2 at 36 (a week before the regular marijuana group), and bottoming at 24 the end of February, before returning to 36 in mid-April. Since then it’s been working —not successfully yet—to break through that old high and into virgin territory. But it’s only a matter of time before it will.
Average trading volume for IIPR is 110,000 shares per day, and market capitalization is about $240 million.
Note: Before you invest in IIPR, I recommend you understand the implications of REIT taxation. One place to start is here.
10. iAnthus Capital (ITHUF) (IAN in Canada)
The Biggest U.S. Investor
iAnthus has interests in marijuana businesses in six U.S. states, encompassing eight cultivation facilities, five processing facilities and 46 potential dispensaries, but its real focus is the East Coast, particularly the heavily populated triad of New York, Florida and Massachusetts, with a combined population of 48 million.
In Florida, the company has 200,000 sq. ft. of cultivation facilities—which have been producing since April 2017—and licenses for up to 30 dispensaries, operating under the GrowHealthy and McCrory’s brands. GrowHealthy began delivery sales in November 2017, and expects to open dispensaries in Tampa, Orlando, West Palm Beach and Deerfiled Beach over the next year.
In New York, the company has 39,500 sq. ft. of cultivation facilities and four dispensaries, scheduled to open between now and the third quarter of 2019, operating under the Citiva brand. The company’s flagship dispensary, located across from Barclay’s Center in Brooklyn, is expected to open in Q4 2018.
In Massachusetts (the Colorado of the East), the company has 36,000 sq. ft. of cultivation facilities (the first harvest should be this month), a Boston dispensary scheduled to open in this quarter, and locations for two more dispensaries secured—all operating under the brands Mayflower and Pilgrim.
And then there’s Vermont, the first state to legalize recreational marijuana via legislative action. Even though there are only 600,000 residents in the state, there’s a large tourist population (about 13 million visitors annually). iAnthus’ brand, GrassRoots, has 6,900 sq. ft. of cultivation facilities and one of only five licenses in the state, with one dispensary open now and another proposed.
Additionally, out west, the company operates Organix in Colorado, which includes both a cultivation facility in Denver and a dispensary in Breckenridge. In Denver the company also has an interest in The Green Solution, with one cultivation facility and 16 dispensaries. And in New Mexico the company has an interest in Reynold Greenleaf, a management service company.
Going forward, I expect to see more acquisitions, either partial or whole, as founders of smaller operations look to cash out before they are steamrolled by the “big boys.” The pace of acquisitions will be determined not only by the available supply of founders looking to sell but also by the cash, credit and shares that iAnthus has available to spend. That, of course, is uncertain but trends are good.
In 2017, revenues—mainly from consultation fees—were minimal ($151,000), though up 123% from 2016. But revenues from growing and selling product are what will matter from here on.
As for the stock, which is listed in Canada because the federal legal issue won’t allow U.S. marijuana stocks on the major U.S. exchanges (but will allow Canadian stocks), ITHUF peaked in January at 5, bottomed at 2.25 in late March, and has been climbing since, heading back toward its old January high. I don’t see a rush to get in here, as the stock is due for a pullback and getting through that old high is likely to take some time. But long term, the prospects are bright.
Average trading volume is 145,000 shares per day, and market capitalization is about $225 million.Average trading volume for IIPR is 225,000 shares per day, and market capitalization is about $175 million.
Stocks Dropped:
Emerald Health Therapeutics (EMHTF) (EMH.V in Canada)
Emerald Health is a Canadian producer/distributer, vertically integrated from top to bottom and composed of three divisions, Emerald Health Botanicals, Emerald Health Pharmaceuticals and Emerald Health Bioceuticals.
When I added the stock to the portfolio back in February, I wrote, “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.”
Well, since then, the company has made some progress with expanding its infrastructure, but it remains well behind the major players.
It’s announced 2017 calendar results: Revenue in 2017 was $937,654, up from $253,321, and the loss per share was 10 cents, compared to five cents the year before.
But the stock, while following a pattern much like the others in the group, is looking decidedly weaker than the others in the group. And, it’s the only loser in the portfolio, so out it goes.
CannaRoyalty Corp. (CNNRF) (CSE in Canada)
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.
And 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, and the company’s recent deals there are one reason for the stock’s strength.
But I’m dropping CNNRF from the portfolio with this issue (though it’s not an easy decision) and adding iAnthus Capital for a combination of three reasons. One, because it gets another U.S. company in the portfolio (iAnthus has a similar business model and chart), and two, because the ITHUF is less discovered than CNNRF and thus has somewhat more potential. And three, because CNNRF has climbed right back to its January high and thus upside potential is likely limited for a while.
But if you own CNNRF and you have a nice profit, you could easily hold on! Long term, I expect it will do quite well.