Navigate the fast-moving cannabis sector with 420 Investor, a premium service that sends real-time alerts and explanations of the news below and much more.
Summary
- NJ introduced initial rules for adult-use.
- Canadian retail sales grew 59% to a record $319 million in June.
- Health Canada added no new licenses, leaving the total now at 744.
- 420 Investor model portfolios have gained 20.5-55.2% year-to-date, while the Global Cannabis Stock Index has gained 15.4%.
Review
New Jersey issued its initial draft of rules for adult-use
Statistics Canada data for June showed that cannabis sales for the country of $319 million grew 59% from a year ago. Health Canada added no new licenses, leaving the total at 744 including 6 that are expired, revoked or suspended.
During the week, I shared these insights with subscribers at 420 Investor:
- Model Portfolio Composition 08/13/21
- Cannabis Sub-Sector Review – 08/13/21
- Previews for Greenlane Lowell Farms, Schwazze, TerrAscend and TPCO Holding Corp
Here are some of this week’s highlights for 420 Investor Focus List names:
- CCHWF opened its second New Jersey dispensary
- CRLBF opened its 9th Florida dispensary and acquired a Maryland dispensary
- GDNSF opened two additional NM dispensaries, bringing its total to 4 in the state.
- GNLN Q2 revenue increased 7% to $34.5 million with adjusted EBITDA of -$3.7 million.
- GRAMF reported Q2 revenue at $54.2 Million, with adjusted EBITDA of -$10.4 Million. The company named Clorox veteran Troy Datcher as its incoming CEO.
- HRVSF executed a sale/leaseback for its Maryland facility with Innovative Industrial Properties with a total value of $29.5 million. Its merger plans moved forward as the Supreme Court of BC approved the arrangement. It opened its 11th PA dispensary.
- LOWLF Q2 Revenue grew 53% to $15.2 million, with adjusted EBITDA of $740K
- LQSIF Q2 revenue totaled $159 million, with same-store liquor sales increasing by 10.6%
- OGI introduced JOLTZ lozenges
- SHWZ Q2 revenue was $30.7 million, with adjusted EBITDA of $10 million. It announced home delivery service.
- SMG bought a nutrients company for $33.5 million, about 4X revenue
- TCNNF saw its CEO and CFO make open-market buys of the stock. It names a new Chief Technology Officer. It launched clone sales in Massachusetts.
- TLLTF began trading on the NEO Exchange in Canada after previously trading on the CSE. It expanded its relationship with Old Pal to bring its brand to Pennsylvania.
- TLRY announced the pending acquisition of convertible notes and warrants in MedMen which could give it 20% ownership, paying 9 million shares. The company postponed again its shareholder meeting to approve a boost in the authorized shares.
- TRSSF missed expectations as it reported Q2 revenue of $58.7 million and adjusted EBITDA of $24.3 million. Issues in PA and NJ offset strength in CA and Canada. The company retracted its 2021 guidance and also reported some management departures. It gained the exclusive distribution rights to the Cookies brand in New Jersey, where it also boosted its ownership from 75% to 87.5% for $25 million in cash and another $25 million in cash and stock by 12/31.
- VFF announced a $75 million acquisition ($30 million cash and 4.7 million shares) of U.S. CBD company Balanced Health Botanicals
- VLNCF enhanced its testing capabilities. It moved closer to entering the Quebec market. It will be introducing CBD products in Japan.
The Global Cannabis Stock Index was clobbered after four consecutive weekly gains, decreasing 8.4% to 51.23:
The index, which lost 34.1% in 2019 and lost 54.9% in 2018 after gaining 91.8% in 2017 and 88.8% in 2016, was up 5.2% in 2020. It has gained 15.4% in 2021 thus far. It currently includes 44 stocks and ended 2020 at 44.39:
Model Portfolios
420 Investor offers three model portfolios for subscribers, including two that are long-term focused and fully invested with a goal of beating the Global Cannabis Stock Index, 420 Opportunity and 420 Quality. 420 Opportunity ended the week valued at $137,991, down 7.9%. The model portfolio, up 31.0% in 2021, gained 35.6% in 2020 and has increased 176.0% since April 2014. 420 Quality ended the week at $194,653, down 7.6% for the week, and is now up 20.5% in 2021 after gaining 42.8% in 2020. The model was launched in March 2017 targeting long-term investors seeking to invest in leading cannabis stocks with low portfolio turnover and has gained 289.3% since inception compared to the 36.6% decline in the index. Flying High, which is focused on swing trades, ended the week valued at $391,718, down 9.0%. The model portfolio gained 52.7% in 2020 and is up 55.2% in 2021, and the return since inception in late 2013 has been 3817%.
Outlook
After a strong rally to begin 2019, the cannabis sector experienced a sharp decline over the next year to unprecedented levels due to several negative developments, including the CannTrust fraud, the surprise termination of Bruce Linton as CEO of Canopy Growth, a disappointing roll-out of legalization in Canada, regulatory confusion in the U.S. regarding CBD and a slow roll-out of legalization in California, the vaping crisis and then financial turmoil and market disruptions due to the COVID-19 pandemic. The sector saw capital available to fund expansion dry up, a situation that continues to leave companies operating with negative cash flow severely challenged, as the availability is limited to stronger operators.
Cannabis stocks overreacted and put in a bottom in March 2020, and benefited from a perception that the industry offers strong growth prospects, something that wasn’t clear then. A big change was that the pandemic caused many regulators to permit previously prohibited types of retail activities, like curbside pickup and delivery. The legal market rapidly capitalized on becoming even more convenient than the illicit market, with the ability to order online. States and municipalities moved to broaden adult-use and medical access. Access to capital improved dramatically, and the leading companies began generating large and rapidly growing revenue and profits.
The strong finish to 2020 continued into 2021 after the Democrats took control of the Senate in early January, but the stocks got way ahead of themselves and have been consolidating since then. In addition to concerns that federal legalization will take a longer time than many have expected, there have been some tough comparisons to year-ago sales levels. Additionally, while several institutions embraced the sector early in the year, there has been a lull in additional interest.
There are several potential catalysts ahead, including the FDA (or Congress) providing clarity on CBD regulation, progress in the Canadian legalization that commenced in October 2018 and that is beginning to include a broader set of products and the continued growth in German and Israeli MMJ and other international markets that have been slow to develop. The adult-use implementations in California and Massachusetts for adult-use were slow to roll out but are beginning to show great improvement. Michigan and Illinois legalized for adult-use at the end of 2019, and these markets are showing strong growth that could encourage other states to legalize. Voters in Arizona, Montana, South Dakota and New Jersey all approved adult-use legalization in November, and Connecticut, New Mexico, New York and Virginia have enacted legalization through the legislative process in 2021.
The big themes ahead are likely to be continued cross-industry investment into the sector and more consolidation in Canada and in the U.S., potential federal regulatory reform (SAFE Banking Act and other more comprehensive legislation, which could eliminate 280E taxation and enable trading on higher exchanges for MSOs as well as the broad usage of credit cards for cannabis purchases), steps to enable cannabis research, the roll out of MMJ in Germany, Mexico and in Australia as well as continued advances in South America and potential adult-use legalization in Israel and Mexico, new legal cannabis implementations in AZ, MT, NJ and SD, and MMJ implementations in AL, WV and VA, possible legalization via the legislatures in DE, FL, MD, MN, NH, PA and RI and implementation of the CT, NM, NY and VT commercial programs in 2022 and VA in 2024.
After bottoming in March 2020, the cannabis sector has been in a new bull market. Many companies are generating substantial revenue and some even a profit, and liquidity is much better. The sector has transitioned away from many legacy penny stocks that had never proven that they had viable businesses towards better capitalized companies, many of which have strong management teams and substantial businesses. The investor base has also transitioned, becoming increasingly more institutional.
