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
- Cannabis sales picked up in Michigan in January and in Canada in December.
- Health Canada added 3 licenses.
- 420 Investor model portfolios have gained 97.6-114.0% year-to-date, while the Global Cannabis Stock Index has gained 71.4%.
Review
Delaware legislators are introducing a bill to legalize for adult-use. Michigan cannabis sales increased 7% in January compared to December to $108 million. HEXO corp announced the stock-based acquisition of Zenabis, continuing consolidation in Canada.
Statistics Canada data for December showed Canadian cannabis sales surged 14% from November. Health Canada added 3 new licenses this week, leaving the total, the suspended license of Ten-10 Ventures, at 610, 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:
- Weighing MSO Valuations
- Tilray Q4 Earnings Preview
- Model Portfolio Composition 02/12/21
- Cannabis Sub-Sector Review – 02/12/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- CRLBF completed the acquisition of 4 Ohio medical cannabis dispensaries
- FFLWF announced that it has applied for a NASDAQ listing
- GRAMF added a new CFO, Mike Batesole, who previously was the CFO for the California operations of Origin House
- GRWG acquired a four-store chain of hydroponics stores in Colorado and Oklahoma
- GTBIF was named as a 5% holding by Palestra Capital Management
- HBORF closed an upsized C$35.1 million unit offering. It also settled its 280E tax issue with the IRS
- KSHB announced the dismissal of a class action suit
- LQSIF continued to monetize non-core assets, disposing of 19 small format liquor stores in British Columbia for C$80.8 million
- SPRWF priced a C$25.9 million unit offering at C$0.31
- TCNNF announced that its S-1 resale registration is now effective
- TLRY reported a solid Q4, with revenue ahead of expectations despite weakness in its hemp business and slightly positive adjusted EBITDA
- TRSSF pre-announced Q4 revenue at C$65 million with adjusted EBITDA of C$26 million, both ahead of expectations, and reaffirmed its 2021 outlook
- VREOF completed its Arizona cultivation expansion
The Global Cannabis Stock Index fell modestly in volatile trading, decreasing 1.1% to 76.07:
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. The index has gained 71.4% in 2021 thus far. It currently includes 38 stocks and ended 2020 at 44.39:
420 Investor 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 $218,414, up 4.3%. The model portfolio, up 107.3% in 2021, gained 35.6% in 2020 and has increased 336.8% since April 2014. 420 Quality ended the week at $319,126, up 4.2% for the week and is now up 97.6% 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 538.3% since inception compared to the 5.9% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $540,075, up 3.8%. The model portfolio gained 52.7% in 2020 and is up 114.0% in 2021, and the return since inception in late 2013 has been 5301%.
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, DE, FL, MD, MN, NH, NM, NY, PA, RI and VA and implementation of the VT commercial program in 2022.
