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
- The cannabis sector saw big volatility this week.
- Health Canada added 9 licenses.
- 420 Investor model portfolios have gained 89.7-106.2% year-to-date, while the Global Cannabis Stock Index has gained 73.3%.
Review
The story of the week was extreme volatility as Canadian LPs surged higher and then crashed. The implementation of adult-use in South Dakota will be delayed as the state will look to launch medical cannabis ahead of adult-use.
Health Canada added 9 new licenses this week, leaving the total, the suspended license of Ten-10 Ventures, at 607, 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:
- This Strange Cannabis Company Offers Compelling Valuation
- Cannabis Sub-Sector Review – 02/05/21
- Model Portfolio Composition 02/05/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- ACB revenue in its Q2 was flat to Q1 at C$67 million, with adjusted EBITDA improving but still negative at -C$12 million. The company reported current cash balances of C$565 million
- APHA put Chief Strategy Officer Denise Faltischeck in charge of its German operations.
- CCHWF raised C$25 million from primarily a single institutional investor at C$9
- CGC reported modestly better revenue and adjusted EBITDA than analysts had projected and provided revenue and profit targets for the next three years.
- CRLBF signed California-based Emerald Family Farms to an exclusive distribution agreement
- CURLF opened a dispensary in Florida and in Maine, its 101st, and expects to reach 102 by the end of February.
- FFLWF complated a C$15 million at-the-market equity financing program
- GTBIF sold $100 million of its stock to a single institutional buyer
- IIPR expanded its relationship with California grower Kings Garden, agreeein gto purchase land for $1.4 million and provide construction reimbursement of up to $51.4 million for 180K sq.ft. facility
- LQSIF announced that the Nova Cannabis financing of C$40 million closed
- SPRWF reported strong growth in its Q2, with revenue growing to C$18 million that generated adjusted EBITDA of C$3 million
- TCNNF will cary SLANG Worldwide’s O.pen Cured Resin. It opened its 74th Florida dispensary
- TLRY reached an agreement to export cannabis products to the UK with Grow Pharma
- VFF repaid the C$20 million promissory note to Emerald
- VREOF opened its 7th and 8th Minnesota dispensaries
The Global Cannabis Stock Index ended sharply higher despite a nasty pullback on Thursday, 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 73.3% 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 $209,483, up 18.6%. The model portfolio, up 98.8% in 2021, gained 35.6% in 2020 and has increased 319.0% since April 2014. 420 Quality ended the week at $306,346, up 17.3% for the week and is now up 89.7% 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 512.7% since inception compared to the 4.9% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $520,559, up 14.0%. The model portfolio gained 52.7% in 2020 and is up 106.2% in 2021, and the return since inception in late 2013 has been 5106%.
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, 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 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 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 implementations in California and Massachusetts for adult-use were slow to roll out but are beginning to show great improvement. Michigan and Illinois legalized 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.
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, RI and VA and implementation of the VT commercial program in 2022.
