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.
Friends,
Despite cannabis stocks having a very challenging year, this quarter has been quite strong. The New Cannabis Ventures Global Cannabis Stock Index is up 31.4% since 9/30, when it posted an all-time closing low:
The index, which closed at a three-month high on Friday, is up a small amount since June 30th now. The strong rally since 9/30 has outpaced the S&P 500 rally of 13.5%, but the modest gain since the end of June leaves it trailing the S&P 500 since then. In 2022, cannabis stocks are down a lot more than the S&P 500’s decline of 14.3%. The Global Cannabis Stock Index is down 55%, and it has declined 84% since the peak close in February 2021.
As we have shared over the past few months, we are optimistic that better returns lie ahead for the cannabis sector. With a powerful rally now underway, we want to warn our readers that investors need to be careful with the securities they select for investment.
We have shared stocks and funds that we don’t like in this newsletter. These include some of the ETFs, which we find highly undiversified, as well as Canopy Growth, which is trying to execute a strategy that doesn’t excite us.
Today, we want to warn our readers to be very careful with low quality cannabis stocks, most of which are not ever covered by us. While we may name names, it’s not our goal to create a list of stocks to avoid. Instead, we are hoping to teach our readers some characteristics of companies that suggest caution.
Avoid Heavily Promoted Stocks
In the almost 10 years of watching the cannabis sector, we have seen a lot of nasty stock promotion, which is egregious outreach to investors paid for by a company or a third-party that suggests buying the stock. Stock promotion doesn’t help in the long-term, but it can, sometimes, cause short-term interest in the stock. Investors should be cautious of stocks that are running up after the company has promoted the stock.
Know the Management Team
Let’s face it: Scammers know that the cannabis industry excites a lot of investors at times. Someone looking to get rich quickly might be tempted to become a cannabis company or a company that services cannabis companies. We saw a company go public on the NASDAQ recently that was launched by a sub-penny stock owner. The CEO is the head of the sub-penny stock too. The sub-penny stock spiked in early 2021 above $0.10 and then to $0.02 this summer around the time of the IPO but now trades below $0.002. There is more to the story that concerns us, but this was a red flag in our view.
Understand the Balance Sheet, Cash Flow and Access to Capital
This year has been tough for cannabis companies, as capital availability has tightened. Perhaps now investors are in tune with this lesson, but historically, they haven’t paid too much attention. Simply, investors need to assess a company’s capital needs. Dilution can really harm investors.
Check the Story
We aren’t trying to call out negatively Agrify today, but we were concerned when the company’s stock was much higher. It is down 99% in 2022 after running up post-IPO in 2021. The company claimed to have a technique for helping cannabis growers become more efficient and productive, which captured the attention of investors. We waited for the company to announce a big customer, but they never did. Instead, the company announced in October 2021, after its stock had peaked, an acquisition of two extraction companies. The move seemed at odds with the focus of the company on growers. Investors should always check the story! For example, there is a Canadian LP that likes to talk about its asset in Texas that could be converted into a THC production facility, but this Texan has never credited the company for this. There is a California-based grower that talks up its ability in the future to export to other states, but we are not counting on this to happen in the near-term. If it sounds too good to be true, then it probably isn’t true!
Conclusion
We are optimistic that the long and deep decline of cannabis stocks could be over, but we don’t think all cannabis stocks are a buy. While today’s newsletter has been about avoiding low quality stocks, we think that investors that buy only the highest quality stocks face risks as well. The biggest are not necessarily the best! We are finding a lot of apparent bargains in a lot of different sub-sectors, but the one sub-sector that stands out right now are the ancillary stocks.
At 420 Investor, we focus on 31 stocks and hold just 12 currently in our model portfolios. We are careful to avoid heavily promoted stocks, we look for management teams that are strong and we pay attention to the financials and are always checking the story, too.
We have long suggested that subscribers interested in cannabis stocks consider 420 Investor, which is moving from Benzinga to Seeking Alpha. You can join the waitlist, and we will notify you as soon as you can subscribe. Plus, if you join the waitlist today, we will send you Alan’s December edition of the 420 Investor Newsletter.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Exclusives
The Global Cannabis Index realized a second month of good news, continuing its rally from the previous month. In October, the index rose 17.1% to 13.18, and increased another 3.7% to 13.67 in November.
New Cannabis Ventures also maintains a number of other indices: The American Cannabis Operator Index, Ancillary Cannabis Index and Canadian Cannabis LP Index, as well as Canadian Cannabis LP index Tier 1, 2 and 3. The American Cannabis Operator Index dipped 1.9% in November, despite the rally in cannabis stocks, while the Ancillary Cannabis Index gained 6.7% last month. Things weren’t looking so good for the Canadian Cannabis LP, which fell 7.5% in November. The Tier 1 Index dropped 8.1%, Tier 2 Index inched up 0.3% and the Tier 3 Index plunged 14.1%.
Earnings
Cansortium Q3 revenue inched down 1% sequentially to $22.1 million, but was up 42% year-over-year. The company attributed the Q3 loss to having to close stores due to Hurricane Ian. “Had it not been for Hurricane Ian driving store closures in late September, we would have generated our 11th consecutive quarter of revenue growth, so I am very pleased with our team’s consistent effort to deliver on our goals,” said CEO Robert Beasley. He said they expect to continue to open new stores in Florida, grow organically in its three Pennsylvania dispensaries and have plans to begin building out its footprint in Texas in the new year.
Organigram Q4 revenue rose 19% sequentially to C$45.5 million and was up a whopping 83% from C$24.9 million in the same prior-year period. The company attributed its positive earnings to its “innovative product launches, comprehensive retail distribution, sales execution, and operational excellence.” CEO Beena Goldberg said she expects continued success in FY 2023.
Red White & Bloom Brands Q3 revenue fell 7% sequentially to C$25.5 million, but rose 128% over the same quarter a year ago. The company is driving growth through the expansion of product offerings, as well as its geographic footprint, according to Colby De Zen, president and director. “We are achieving operational improvements throughout the organization and have bolstered the management team while reducing headcount throughout the company. We continue to increase the depth and breadth of the Platinum line while aggressively monitoring our costs,” De Zen said.
Debt Reduction
TerrAscend’s has reduced its outstanding debt by $30 million through the refinancing of an existing term loan of $55 million it borrowed to fund its expansion in Michigan. On Nov. 29, 2022, the borrowers repaid $55.0 million outstanding principal amount under the original Michigan loan, using $30 million of cash on hand and $25 million through borrowing pursuant to the amendment. “This refinancing exemplifies TerrAscend’s focus on reducing expenses, including interest expense, while driving sales growth and continued positive cash flow from operations,” said Executive Chairman Jason Wild.
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View the Public Cannabis Company Revenue & Income Tracker, which ranks the top revenue producing cannabis stocks.
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Sincerely,
Alan & Joel
