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
- Stock market volatility played a role in the sector’s action, but supply played a role too.
- Health Canada added 9 licenses.
- 420 Investor model portfolios have gained 28.5-38.8% year-to-date, while the Global Cannabis Stock Index has gained 27.8%.
Review
The cannabis market was a side-show this week to a volatile overall market. Supply continued to be a theme.
Health Canada added 9 new licenses this week, leaving the total, including the expired license of Toronto Research Chemicals and the suspended license of Ten-10 Ventures, at 592, which excludes the revoked licenses of Agrima, Alberta Green Biotech, Bloomera, Hexo’s 4th site, Maricann’s 2nd site, Medican Organic’s 2nd site and a small processing facility that belonged to Canopy Growth, the revoked licenses of BC Tweed (2), FV Pharma and Zenalytics Laboratories, the expired license of Evergreen Medicinals, two transferred licenses held formerly by James Wagner, a license previously held by Total Cannabis Solutions and the voluntarily cancelled license of Avalite Sciences.
During the week, I shared these insights with subscribers at 420 Investor:
- These Two Tiny Canadian LPs Sure Look Cheap to Me
- Cannabis Sub-Sector Review – 01/22/21
- Model Portfolio Composition 01/22/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- ACB closed its upsized $138 million offering of units at US$10.45
- APHA entered a co-promotion agreement with AMP German Cannabis Group to distribute its cannabis in Germany. It introduced three high-potency topicals in Canada.
- CGC launched Martha Stewart CBD for Pet
- CCHWF launched adult-use sales in Arizona
- CRLBF introduced new High Supply Live Cartridges in California and Illinois
- CURLF opened a dispensary in Pennsylvania
- FFLWF expanded its gift card program to include almost 300 Circle K stores in Ontario, Alberta and Saskatchewan
- FLOOF rebooted its Board of Directors and leadership team as it raised convertible debt capital and restructured some debt
- GRWG acquired two stores in Washington
- HRVSF executed a sale-leaseback with IIPR for its Florida cultivation and production facility
- IIPR will invest up to $34.6 million in acquiring and improving the Harvest Florida cultivation and processing facility
- SPRWF raised C$23 million selling units at C$0.19
- TCNNF opened its 73rd Florida dispensary
- TLRY was one of several providers selected by France for a program to distribute medical cannabis for experimental purposes
- TRSSF closed its C$224 million equity private placement sale at C$12.35
- VREOF registered as a U.S. reporting company
The Global Cannabis Stock Index gave up some more of its early-in-the-month gains, decreasing 5.3% to 56.71:
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 27.8% in 2021 thus far. The index currently includes 38 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 $137,439, down 8.5%. The model portfolio, up 30.4% in 2021, gained 35.6% in 2020 and has increased 174.9% since April 2014. 420 Quality ended the week at $207,572, down 9.0% for the week and is now up 28.5% in 2021, and it gained 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 315.1% since inception compared to the 29.9% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $350,422, down 6.3%. The model portfolio gained 52.7% in 2020 and is up 38.8% in 2021, and the return since inception in late 2013 has been 3404%.
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.
After the stocks overreacted and put in a bottom in March, 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 has 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 will likely spur state legalization efforts as well as more favorable regulatory control at the local level. Access to capital is now improving quickly.
There are some potential catalysts ahead, including the FDA providing clarity on CBD, progress in the Canadian legalization that commenced in October 2018 and is beginning to include a broader set of products and the continued growth in German MMJ and other international markets that have been slow to develop. The implementations in California and Massachusetts for adult-use have been disappointing but are beginning to show great improvement. Michigan legalized in December and Illinois legalized in January, 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.
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 Virginia and soon Mississippi and West Virginia, possible legalization via the legislatures in CT, FL, MD, MN, NH, NM, NY, PA and RI and implementation of the VT commercial program in 2022.
