You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Cannabis stocks have rebounded greatly since June 30th, the lowest close ever for the Global Cannabis Stock Index. Even with Friday’s pullback, it has advanced 9.4% in July. Still, the index has dropped 50.8% so far in 2022 after dropping 26.0% in 2021.
The performance of cannabis stocks remains much weaker in 2022 than the overall market’s returns:
This week, the Global Cannabis Stock Index rallied 7.2%, substantially more than the S&P 500, which advanced 2.6%. We believe the introduction of the Cannabis Administration and Opportunity Act (CAOA) to the Senate influenced the rally. In our view, it was less about bulls getting excited and paying up than bears covering. Any bulls that acted were climbing aboard because the long decline looked to be potentially over.
We believe the CAOA is unlikely to pass, though we do understand that the discussion by Congress could lead to the passage of certain other legislation, including possibly SAFE Banking, the MORE Act or the Capital Lending and Investment for Marijuana Businesses (CLIMB) Act, which would allow cannabis companies to list on major stock exchanges in the U.S.
If Congress doesn’t legalize or passes only the narrower legislation, stocks could suffer, but we believe that any pullback will be brief and small. Cannabis stocks remain very oversold and deeply depressed. We see value in them and view the rally as much less than what we have previously anticipated. Investor sentiment remains weak.
We are interested in a lot of securities at our premium service 420 Investor, though we include in our model portfolios names from only the Ancillary, the Canadian LPs and the MSOs at this time. We are overweight in each of these sectors compared to the Global Cannabis Stock Index exposure. The MSO weighting has come down as we have increased Ancillary exposure this month.
Ancillaries are now the largest part of the Global Cannabis Stock Index at 41.3%. The index members all trade on higher exchanges. In our view, the sector has been hurt by holders reducing exposure with limited new buyers. The Ancillary Cannabis Index, up 9.0% in July, is down 56.1% in 2022. These stocks, unburdened by the 280E tax, could be pressured a bit if CLIMB passes due to more competition for investors. The status quo, though, should be very helpful, as this sector should benefit from fundamental improvement that we project.
Canadian LPs shot up very strongly early in the week but sold off sharply late in the week. The Canadian Cannabis LP Index is down 50.5% in 2022 after rallying just 1.2% this week. It is lagging the Global Cannabis Stock Index in July with a return of only 1.2% after making a new recent low in the middle of the month. Legalization would probably be negative for these stocks, as would the CLIMB Act. The companies could enter the U.S. if legalization passes, but most of the large LPs aren’t adequately capitalized. The Canadian market has been challenging, but the status quo of cannabis being federally illegal in the U.S. would not hurt these companies in our view.
MSOs have been performing incredibly well recently. The American Cannabis Operator Index, down 36.2% in 2022, has rallied 28.6% in July. This was our biggest sector in the model portfolios and helps explain their significantly stronger performance than the market’s. We view the sector as attractive still and understand the positive impact passage of the CLIMB Act would have.
We explained in June why we are more constructive on the market, and our argument didn’t include the possibility of federal legalization, which we think is very unlikely but positive. The upcoming vote has impacted the market, but we don’t think the failure of legalization to pass will doom the market. Cannabis stocks suffer from poor sentiment still, and we think that the current situation will allow big growth ahead. Investors will likely be rewarded through owning most cannabis stocks, and any sort of dip once the news comes out that the U.S. isn’t passing CAOA will likely be another buying opportunity.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
California-based cannabis company Presidential is expanding into three states – Oklahoma, Nevada and Michigan. Although the company has grown organically, the leadership team has not ruled out acquiring assets to expand its brand across the country with the ultimate goal to become an acquisition target according to co-founder Everett Smith.
Canadian cannabis sales for May increased by 0.7% to a record $C375.8 million sequentially. Sales rose 20.1% from a year ago. Broken down, sales in Ontario were up 0.5% sequentially. Sales in Alberta were up 1% from April. Quebec saw a 0.7% sequential increase, while sales in British Columbia grew 4%.
Canix hopes that it becomes the go-to software management system for cannabis operators across North America. Since 2020, the seed-to-platform company has more than doubled its U.S. market and has entered international markets. Co-Founder and CEO Stacey Hronowski discusses how the company has grown its capabilities and its plan to grow the company’s market share.
It’s been almost a year since Trulieve closed its deal with Harvest Health & Recreation, bringing Steve White to the team as president. The company has spent the last year opening new retail locations, relocating dispensaries and rebranding others. In an exclusive interview, CEO Kim Rivers said the company is looking to expand further in Florida under the state’s medical cannabis program and is looking to bring more capacity online whenever adult-use moves forward in the Sunshine State.
22nd Century Group entered into agreements with institutional investors to sell units at $2.05 to raise $35 million. The company plans to use the proceeds to expand and speed up the launch of its reduced nicotine content tobacco cigarettes in additional markets, research and development expenses, procurement and development of additional intellectual property rights, working capital and general corporate purposes.
Alleaves, another ERP in the cannabis space, is finalizing a $40 million Series A funding round at a valuation of $240 million. The company will use the funding to launch a multi-state commercial roll out with many of the industry’s leading MSOs. The company also said it is looking to acquire and roll up other complementary cannabis technology platforms to expand its customer base and create a more comprehensive and seamless software platform.
Canopy Growth, in an effort to “navigate broader economic headwinds,” retired approximately C$263 million of debt. The exchange involved certain 4.25% unsecured notes due in 2023. The company, upon announcing its plans in late June, saw its stock take a beating. The company has a C$900 million credit facility due in 2026 and more convertible debt due in June 2023. CFO Judy Hong said of the future: “We continue to assess all available options to further optimize our balance sheet and address the remaining 4.25% unsecured notes in advance of their maturity to ensure Canopy Growth is well positioned to continue investing in the highest potential areas of our business to drive future growth.”
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Alan & Joel