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
- Michigan and Illinois both reported growing and slowing cannabis sales in June.
- Health Canada added 5 licenses, leaving the total now at 717.
- 420 Investor model portfolios have gained 48.7-86.7% year-to-date, while the Global Cannabis Stock Index has gained 25.3%.
Review
Michigan cannabis sales were flat in June compared to May at $149 million, as medical shrank and adult-use expanded. Illinois adult-use sales fell slightly in June, growing 143% compared to a year ago to $115.6 million. BDSA data for May showed a slowing sequentially across almost all of the markets it covers, with year-over-year growth slowing in most markets too, especially the mature Western ones of CO and OR.
Health Canada added 2 licenses, leaving the total at 712, including 3 that are expired, revoked or suspended. It published data for March showing continued high levels of inventory in all product categories.
During the week, I shared these insights with subscribers at 420 Investor:
- Model Portfolio Composition 07/02/21
- Cannabis Sub-Sector Review – 07/02/21
- Previews for KushCo Holdings and Organigram Financial Reports
- This Canadian LP Is Best Positioned to Enter the U.S.
- Hifyre June Canadian Retail Estimates
Here are some of this week’s highlights for 420 Investor Focus List names:
- CCHWF launched operations in West Virginia
- CURLF has partnered with Agrify for R&D on its Vertical Farming Units at its facility in Massachusetts
- GDNSF announced an $8 million Maryland dispensary acquisition
- HBORF completed its $43.8 million acquisition of Sublime
- KSHB reported in line with reduced expectations, with Q3 revenue of $28 million and an adjusted EBITDA loss of $1 million
- LOWLF achieved record quarterly harvest yields in Q2, with the 9700 pounds increasing 10% from Q1
- PLNHF added Moxie as its third store-in-store in its new Orange County SuperStore.
- TCNNF commenced operations in West Virginia. It also completed the acquisition of three dispensaries in Pennsylvania for $60 million.
- TLRY completed its first harvest in Germany
- VFF reported that its Pure Sunfarms flower brand remains the top in Alberta, BC and Ontario.
The Global Cannabis Stock Index extended last week’s decline while holding May’s low, losing 1.8% to 55.61:
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 25.3% 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 $167,140, down 0.2%. The model portfolio, up 58.6% in 2021, gained 35.6% in 2020 and has increased 234.3% since April 2014. 420 Quality ended the week at $240,168, down 0.2% for the week, and is now up 48.7% 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 380.3% since inception compared to the 31.2% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $471,209, up 0.7%. The model portfolio gained 52.7% in 2020 and is up 86.7% in 2021, and the return since inception in late 2013 has been 4612%.
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 they are now benefiting from a perception that the industry offers strong growth prospects, something that wasn’t clear then. A big change has been that the pandemic caused many regulators to permit previously prohibited types of retail activities, like curbside pickup and delivery. The legal market is rapidly capitalizing on becoming even more convenient than the illicit market, with the ability to order online. High unemployment and large deficits have begun to spur state legalization efforts as well as more favorable regulatory control at the local level. Access to capital has improved dramatically, and the leading companies are generating large and rapidly growing revenue and profits.
There are several potential catalysts ahead, including the FDA 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 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.
