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
- A big acquisition helped fuel gains this week.
- Cannabis sales trends improved in December.
- Health Canada added 7 licenses.
- 420 Investor model portfolios have gained 61.7-80.9% year-to-date, while the Global Cannabis Stock Index has gained 58.2%.
Review
February began with a massive extension of the January stock gains. A leading catalyst was the long-awaited entry of Big Pharma into the cannabis industry, with Jazz Pharmaceuticals announcing its pending acquisition of GW Pharma. Illinois January cannabis sales were flat from December, with adult-use up 2% but medical down 5%. Compared to a year ago, combined sales grew 94%. BDSA data indicated that year-over-year growth accelerated in 8 markets during December after a sharp slowdown in November. Virginia took a step closer to adult-use legalization as the House approved a bill.
Health Canada added 7 new licenses this week, leaving the total, the suspended license of Ten-10 Ventures, at 598, 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 licenses of Evergreen Medicinals and Toronto Research Chemicals, 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:
- Earnings Previews for Three Canadian LPs Reporting Next Week
- Why MSOS Is Not the Best Way to Invest in MSOs
- Scotts Miracle-Gro FY21-Q1 Earnings Preview
- Cannabis Sub-Sector Review – 01/29/21
- Model Portfolio Composition 01/29/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- CCHWF received 5 dispensary permits in West Virginia, where it had already won cultivation and processing licenses.
- CGC unveiled its SurityPro CBD products for dogs
- CRLBF launched adult-use sales in its Phoenix dispensary
- CURLF opened its 34th Florida dispensary
- FFLWF reached 200K members in its Sparks Perks loyalty program
- FLOOF made its delinquent interest payments on its convertible notes
- GNLN will be opening three retail accessory stores in Uruguay through a partnership
- GRWG acquired two stores in Maine
- GTBIF opened a dispensary in Erie, Pennsylvania, its 52nd in total.
- OGI saw its SVP, Operations, a long-time employee, announce his pending departure
- SHWZ repriced all of its options to $1.26. It also closed on two additional Star Buds locations, paying $9.3 million that was raised through the sale of preferred stock to a group led by its CEO.
- SMG reported a very strong Q1, driven by 71% growth in its Hawthorne business and its core business up 147%. The company raised its revenue outlook but kept its EPS guidance of $8-8.40 intact.
- TCNNF, which already had a processing license in West Virginia, added four dispensary permits (and its recently acquired Solevo Wellness won three). It filed a C$750 million base shelf. Additionally, its S-1 registering shares of existing holders went effective. The company began offering Blue River Cold Cure Live Rosin in Florida.
- TLRY became the first cannabis producer authorized to provide products to patients in Portugal. It also made its first export from Portugal to Spain.
- VFF launched gummies
The Global Cannabis Stock Index soared after having consolidated early-in-the-year gains over the past two weeks, increasing 23.9% to 70.24:
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 58.2% 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 $176,640, up 28.5%. The model portfolio, up 67.6% in 2021, gained 35.6% in 2020 and has increased 253.3% since April 2014. 420 Quality ended the week at $261,179, up 25.8% for the week and is now up 61.7% 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 422.4% since inception compared to the 13.1% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $456,554, up 30.3%. The model portfolio gained 52.7% in 2020 and is up 80.9% in 2021, and the return since inception in late 2013 has been 4466%.
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.
