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
- March Illinois cannabis sales were quite strong, but sales growth slowed across the country in February.
- Health Canada added 7 licenses.
- 420 Investor model portfolios have gained 70.9-82.5% year-to-date, while the Global Cannabis Stock Index has gained 41.4%.
Review
Illinois sales for the combined medical and adult-use markets grew 120% in March to $145 million. BDSA reported a big slowing in sales across 8 markets in the U.S. during February.
Health Canada added 7 licenses, leaving the total at 641, including 10 that are expired, revoked or suspended.
During the week, I shared these insights with subscribers at 420 Investor:
- Previews for Aphria and Organigram Financial Reports
- A Look at Ancillary Cannabis Giant Hydrofarm After Its IPO
- Cannabis Sub-Sector Review – 04/02/21
- Model Portfolio Composition 04/02/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- CGC announced that it will acquire Supreme Cannabis, agreeing to issue .0117 shares for each Supreme share
- CURLF rebranded all of its stores in Illinois, adding a new one, and in Pennsylvania, adding two new ones. It sold 31.5% of its new international for $130 million and closed the purchase of EMMAC.
- GRAMF launched a new loyalty program, Caliva CLUB
- GTBIF received incentives as part of a $50 million cultivation expansion project in Warwick, NY.
- KSHB met expectations with revenue growing 23% sequentially to $33 million but missed on EBITDA projections, reporting a small loss due to issues related to the shipping delays which increased freight
- LQSIF announced that it will repurchase via Dutch auction up to C$30 million in shares between C$7.55 and C$8.30
- OGI announced the acquisition of an edibles manufacturer for C$22 million in stock, with the potential for an additional C$13 million if certain milestones are achieved
- PLNHF missed estimates on sales and adjusted EBITDA for Q4 and pre-announced a shortfall in sales for Q1 at $23.8 million. The company saw a surge in March as tourists began to return to Las Vegas, with revenue at a record $9.7 million.
- SHWZ rebannered Mesa Organics stores to Star Buds.
- SMG raised its outlook for fiscal 2021, increasing its sale guidance from 1-5% to 8-12%, with Hawthorne expected to be at the high-end of its prior 20-30% range, and boosting its EPS projection from $8-8.40 to $8.60-9. It also reduced its free cash flow outlook from $325 million to $250 million as it invests in capital expenditures for growth initiatives and builds inventory.
- SPRWF agreed to be acquired by Canopy Growth in an all-stock deal
- TCNNF raised C$250 million selling shares at C$50. It opened its 79th Florida dispensary.
The Global Cannabis Stock Index extended its decline since mid-February modestly this week, ending at 62.78, down 0.8%:
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 41.4% in 2021 thus far. It currently includes 48 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 $187,251, up 7.3%. The model portfolio, up 77.7% in 2021, gained 35.6% in 2020 and has increased 274.5% since April 2014. 420 Quality ended the week at $276,066, up 5.9% for the week, and is now up 61.5% 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 452.1% since inception compared to the 22.4% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $460,563, up 6.1%. The model portfolio gained 52.7% in 2020 and is up 82.5% in 2021, and the return since inception in late 2013 has been 4506%.
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 2020, 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 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 have begun to spur state legalization efforts as well as more favorable regulatory control at the local level. Access to capital has improved dramatically, and the leading companies are generating large and rapidly growing revenue and profits.
There are several potential catalysts ahead, including the FDA providing clarity on CBD regulation, 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 adult-use implementations in California and Massachusetts for adult-use were slow to roll out but are beginning to show great improvement. Michigan and Illinois legalized for adult-use 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, and New Mexico, New York and Virginia have enacted legalization through the legislative process in 2021.
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 MS, WV and VA, possible legalization via the legislatures in CT, DE, FL, MD, MN, NH, PA, and RI and implementation of the NM, NY and VT commercial programs in 2022 and VA in 2024.
