Three Reasons Why the Cannabis Stock Rally Could Continue

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Friends,

More than five months ago, we detailed our optimistic outlook for the cannabis industry, suggesting that the rally that had begun in March likely represented the beginning of what we called the “Third Wave” of cannabis investing. We discussed then how we expected to see more states legalize, and this played out as well as possible this past week, with Arizona, Montana, New Jersey and South Dakota all doing so for adult-use and Mississippi and South Dakota doing so for medical cannabis. As we have previously discussed, this is a particularly unique opportunity for public company investors, as many publicly traded operators are already in those markets. Further, the New Jersey legalization is already spurring nearby states to contemplate doing so as well, and all of these states have significant public company exposure.

Cannabis stocks, as measured by the New Cannabis Ventures Global Cannabis Stock Index, which rose 27.4%, enjoyed their best week since late March, when they rallied 32%. Still, the index, which posted its highest close since late February, remains down more than 10% year-to-date:

The Global Cannabis Stock Index has been weighed down by Canadian LPs this year and masks a more bullish price action in American cannabis companies. Looking at the New Cannabis Ventures American Cannabis Operators Index, which includes 14 MSOs and 3 CBD companies, we see that it was able to post a 52-week high on Friday and is now up more than 13% year-to-date:

We expect that the rally is likely to continue. First, as we have discussed previously, we anticipate a very bullish earnings season beginning this week that is likely to include at least a few companies providing very optimistic guidance for 2021. Unlike some of the rallies the market has enjoyed over the years, this one has a solid foundation of strong fundamentals that include high and rapidly growing revenue as well as profits that are improving. While the elections have spurred interest in the sector, these earnings reports are likely to amplify it.

Another reason we think the move in the market is sustainable is that there is yet another powerful driver at work, the emergence of a robust legal cannabis market in California. In this newsletter five weeks ago, we discussed how it was showing signs of growth after being flat for a couple of years, and we received further confirmation this week. BDSA data indicated that the market grew 33% compared to a year ago, an acceleration that was driven by strong growth in flower, which increased a stunning 59% from a year ago. While the market is already strengthening, we are especially encouraged that over 70% of the local ballot initiatives to permit adult-use sales passed. This will help address the major constraint of no distribution in certain parts of the state. We believe investors are not yet realizing the changes taking place, but it could be the biggest story of 2021 given the size of the market. There are dozens of publicly traded companies in the market to some degree.

Finally, we believe that while cannabis stocks have certainly improved over the past eight months, sentiment is awfully cautious among investors. We see this in our own data at New Cannabis Ventures as well as in social media engagement. Cannabis investors have been burned so many times in the past that we can appreciate that investors are being cautious.

We have never been more optimistic about the prospects for the industry, but, after years of watching it, we know that things aren’t always as smooth as we would like. We think that some are overly optimistic about the time-line for rolling out adult-use sales in New Jersey, which has a medical market that isn’t yet robust. While it may be slower than some hope, we are confident that it won’t end up being another Massachusetts. Another near-term concern is the potential for equity sales. Most of the large MSOs have established registrations statements permitting them to sell stock or are in the process of doing so. We note that recent capital raises by Trulieve, Jushi, Planet 13, 4Front and Harvest have been well absorbed, and we point to the increasing institutional demand as evidenced in the recent GTI stock purchase by a single investor. Capital raising could be a short-term negative, but the industry has many high-return investment opportunities that will fuel long-term growth and, hopefully, continued improvement in the stocks.


Recently recapitalized by a group of investors led by its highly engaged Chairman, George Allen, Indus Holdings is singularly focused on its cultivation, manufacturing and distribution operations in the California market. Its award-winning brands include Cypress Cannabis, House Weed, The Original Pot Co., MOON, Humble Flower, and Kaizen Medicinals. The company pre-announced record quarterly revenue in excess of $14 million for Q3 and will host a call Tuesday morning to discuss its financial results.

Get up to speed by visiting the Indus Holdings Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.


New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:


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Get ahead of the crowd! If you are a cannabis investor and find value in our Sunday newsletters, subscribe to 420 Investor, Alan’s comprehensive stock due diligence platform since 2013. Gain immediate access to real-time and in-depth information and market intelligence about the publicly traded cannabis sector, including daily videos, weekly chats, model portfolios, a community forum and much more.

Use the suite of professionally managed NCV Cannabis Stock Indices to monitor the performance of publicly-traded cannabis companies within the day or over longer time-frames. In addition to the comprehensive Global Cannabis Stock Index, we offer a family of indices to track Canadian licensed producers as well as the American Cannabis Operator Index.

View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks that generate industry sales of more than US$10M per quarter.

Stay on top of some of the most important communications from public companies by viewing upcoming cannabis investor earnings conference calls.

Discover upcoming new listings with the curated Cannabis Stock IPOs and New Issues Tracker.

Sincerely,

Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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