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
- Data from BDSA suggested cannabis sales were very sluggish across the U.S. in January
- Hifyre data suggested a that cannabis sales in February were similar on a per-day basis to January
- Illinois adult-use sales of $114 million in February grew 41% from a year ago and increased on a per-day basis from January
- 420 Investor model portfolios have returned -18.0% to -13.2% year-to-date, while the Global Cannabis Stock Index has lost 20.3%
Review
BDSA data for January suggests that cannabis sales were weak across the country. Illinois adult-use sales for February of $114 million, down slightly from January, which had 3 more days, and up 41% from a year ago. Hifyre data for February suggests that sales per day were similar to January, with the largest LPs continuing to lose market share.
During the week, I shared these insights with subscribers at 420 Investor:
- Previews of Financial Reports for Cronos Group, Curaleaf, GrowGeneration and Lowell Farms
- Cannabis Sub-Sector Review – 02/25/22
- Model Portfolio Composition 02/25/22
Here are some of this week’s highlights for 420 Investor Focus List names:
- CEAD reported its first complete design services contract.
- CRON Q4 revenue increased 26% sequentially to $25.8 million.
- CURLF Q4 revenue was slightly behind expectations as it grew 1% to $320 million, but its adjusted EBITDA was ahead of expectations at $80 million. Guidance for 2022 of $1.4-1.5 billion revenue was below the prior expectation of $1.6 billion.
- GDNSF launched flower in Minnesota.
- GNLN received notification from NASDAQ that it faces delisting on 8/24.
- GTBIF met expectations with a Q4 4% sequential increase in revenue to $244 million, but its profitability was slightly below what had been expected.
- GRWG Q4 revenue increased 46% to $90.6 million as adjusted EBITDA swung to a $2 million loss. The company’s 2022 outlook was disappointing.
- LOWLF Q4 revenue increased 21% sequentially to $15.1 million due to increased licensing and the addition of Lowell Farm Services
- OGI received C$6.3 million from strategic investor BAT, which boosted its position from 18.8% to 19.5%.
- PLNHF closed on its acquisition of Next Green Wave, issuing 21.36 million shares.
- TLLTF launched delivery from its Taunton, MA store. It announced Timeless Refinery as a license partner in Ohio.
- TLRY filed a $400 million ATM shelf. It announced a proposed transaction to buy up to $211 million of HEXO’s convertible debt
- VFF cannabis revenue, which includes Pure Sunfarms and CBD, was $34.4 million. The company partnered with NOYA Cannabis to launch Cookies concentrates in Canada.
- VLNS Q4 revenue of C$18.4 million fell 15% from Q3.
- VRNOF closed on its additional $100 million borrowing from Chicago Atlantic and AFC Gamma and now can access up to an additional $175 million.
Market Performance
The Global Cannabis Stock Index posted a new 2022 closing low as it fell for the third consecutive week, decreasing 6.3% to 26.19:
The index, which lost 26% in 2021 following a 5.2% gain in 2020, is down 20.3% in 2022. It currently includes 38 stocks and ended 2021 at 32.85:
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 $78,881, down 8.9%. The model portfolio, down 13.8% in 2021 after a 35.6% gain in 2020, is down 13.2% in 2022 and has increased 57.8% since April 2014 despite the large loss in the index since then. 420 Quality ended the week at $108,440, down 8.7% for the week. It is down 14.2% in 2022 and was down 21.8% 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 116.9% since inception compared to the 67.6% decline in the index since then. Flying High, which is focused on swing trades, ended the week valued at $241,229, down 10.5%. The model portfolio gained 16.6% in 2021 and 52.7% in 2020 and is down 18.0% in 2022. The return since inception in late 2013 has been 2312%.
Outlook
The cannabis sector has continued to evolve through several ups and downs over the past few years. 2021 began by extending on massive gains in Q4 but hit a wall in mid-February, sliding the balance of the year after the market had gotten ahead of itself. Disappointment over the slow pace of federal reforms or the move towards legalization was a factor, but decreasing growth in cannabis sales, regulatory delays in several states and the implosion of the wholesale flower market in California played roles as well. In Canada, while the market has continued to grow, the evolution to derivative products has been slow. Additionally, the largest LPs have lost market share and have been unable to scale thus far.
The bull market that began in March 2020 after the pandemic and the capital crunch that followed the vaping crisis in 2019 appears to be intact for the American cannabis operators, which continue to trade sharply higher than where they traded in the summer of 2020 despite large declines from the peak in February. Looking forward, the outlook appears strong, with the leading companies moving to positive operating cash flow and having increasing access to non-dilutive capital, including debt, mortgages and sale-leasebacks. Several states will be moving from medical-only to adult-use, including New Jersey, New Mexico, Vermont and Connecticut in 2022, New York in 2023 and Virginia in 2024. Several other states could move to legalize for adult-use as well, including Delaware, Florida, Maryland, Minnesota, New Hampshire, Pennsylvania and Rhode Island. Several states are expanding programs as well, with additional dispensaries ahead for Illinois. Medical-only state Minnesota will be adding flower and edibles in 2022, and Ohio is expanding its program as well. Increasing competition within certain state markets that is weighing on profitability will likely remain a challenge. Further, while many see federal legalization as a positive, this remains a potential risk-factor in my view.
While the stocks of American cannabis companies continue to be held by mainly retail investors, 2021 saw an increase in institutional investment. Another big development has been the growth in AdvisorShares Pure US Cannabis ETF (MSOS), which has broadened the access to cannabis companies for investors that don’t trade OTC stocks. Additionally, a number of ancillary companies have gone public and trade on higher exchanges, offering institutional investors a way to invest in the industry. We have seen several investments into American cannabis companies, mainly by Canadian LPs, but, looking ahead, strategic investment through creative financial structures will likely extend to CPG companies in 2022.
At the federal level, the FDA (or Congress) could provide clarity on CBD regulation. With respect to THC, both Democrats (Cannabis Administration and Opportunity Act) and Republicans (States Reform Act) are advancing legislation to legalize cannabis. While this is going to be a long process in my view due to the complexity (varying state regulations, role of FDA, social equity, taxation), this is very different from what the developing cannabis sector faced just a few years ago: potential crackdowns against state legalization. I remain hopeful that Congress can advance small reforms, including expanded research and SAFE Banking. An enhanced financial reform that explicitly permitted companies operating in state-legal cannabis to trade on higher exchanges would be extremely positive.
Beyond America, cannabis legalization continues to proliferate. While Canada remains the largest federally legal cannabis market, many other countries have medical programs, including Argentina, Chile, Colombia, Ecuador, Peru and Uruguay (fully legal) in South America. Mexico has legalized for possession but doesn’t yet have a regulated program, and it could legalize for adult-use as well. Australia’s medical program was slow to start but has gained traction. New Zealand has a medical program as well. In Africa, several countries have legalized medical cannabis. Europe, of course, has seen widespread adoption of medical cannabis. Germany has been slow to develop but could move to legalize for adult-use. Other markets where there is medical cannabis include Denmark, Greece, Italy, Netherlands, Poland, and Portugal. The UK and Israel have medical cannabis, and Israel could move to legalize for adult-use. Of course, let’s not forget Jamaica!
