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
- New Mexico’s governor signed into law cannabis legalization.
- Health Canada added 7 licenses.
- 420 Investor model portfolios have gained 60.6-80.6% year-to-date, while the Global Cannabis Stock Index has gained 30.7%.
Review
As expected, the governor of New Mexico signed into law adult-use legalization.
Health Canada added 7 licenses, leaving the total at 648, including 10 that are expired, revoked or suspended.
During the week, I shared these insights with subscribers at 420 Investor:
- The Hunt for Winning Canadian LPs
- Model Portfolio Composition 04/09/21
- Cannabis Sub-Sector Review – 04/09/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- APHA Q3 revenue was well below expectations as it saw adult-use sales fall 17% sequentially, leaving net cannabis revenue of $51.7 million down 8% from a year ago and down 24% sequentially. Shareholders approved the Tilray merger. It introduced high potency oils to the adult-use market in Canada
- CCHWF launched a dose-metered medical cannabis capsule in the UK market in partnership with IPS Pharma and Grow Pharma
- CGC launched the Vert brand exclusively in the Quebec market
- CRLBF closed its acquisition of Florida operator Bluma Wellness. It launched Wonder Wellness Gummies in Illinois.
- CWBHF filed a C$350 million base shelf prospectus to replace its previous one that was expiring.
- FLOOF received debt-holder approval to amend its convertible debt, potentially allowing it to convert 60% to units, extending the maturity on the balance, reducing the interest rate and reducing the conversion price to C$0.385
- GRAMF launched an advertising campaign for Monogram featuring photos by Hype Williams
- GTBIF launched Cann beverages in Illinois.
- LOWLF licensed its Lowell Farms pre-rolls to Ascend Wellness for the Illinois and Massachusetts markets
- OGI Q2 revenue fell 24% sequentially to C$14.6 million, far worse than expected, with the company reporting a negative gross margin and an adjusted EBITDA loss of C$8.6 million
- TCNNF closed its C$287.5 million offering of shares at C$50. It paid $650K to pick up three additional dispensary license permits in WV.
- TLLTF reported 8% sequential growth in revenue to $42.3 million, with adjusted EBITDA of $4.5 million
- TLRY delayed its shareholder vote for the Aphria merger by two weeks to allow more time for voting
- TRSSF launched Houseplant products in its California Apothecarium stores
- VREOF expanded its New Mexico cultivation facility ahead of opening two additional dispensaries
The Global Cannabis Stock Index continued to consolidate its gains since Q3, ending at 58.02, down 7.6%:
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 30.7% in 2021 thus far. It currently includes 48 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 $175,848, down 6.1%. The model portfolio, up 66.9% in 2021, gained 35.6% in 2020 and has increased 251.7% since April 2014. 420 Quality ended the week at $259,381, down 6.0% for the week, and is now up 60.6% 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 418.8% since inception compared to the 28.3% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $455,924, down 1.0%. The model portfolio gained 52.7% in 2020 and is up 80.6% in 2021, and the return since inception in late 2013 has been 4459%.
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.
