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
- Pro-cannabis legislation advanced in Louisiana and Texas.
- Canadian retail cannabis sales grew 74% in February.
- Health Canada added 8 licenses, leaving the total now at 665.
- 420 Investor model portfolios have gained 63.2-81.9% year-to-date, while the Global Cannabis Stock Index has gained 37.8%.
Review
Louisiana made some progress on an adult-use legalization bill, while Texas could improve its medical cannabis program, as legislators consider raising the THC limit and expanding the number of medical conditions.
Statistics Canada showed February retail sales of C$263 million grew 74% from a year ago. Health Canada added 9 licenses, leaving the total at 657, including 10 that are expired, revoked or suspended. It released data for December suggesting more than 1100 tons of dried flower inventory, well ahead of consumption levels.
During the week, I shared these insights with subscribers at 420 Investor:
- Previews for Cronos Group, Lowell Farms and Scotts Miracle-Gro Financial Reports
- Model Portfolio Composition 04/23/21
- Cannabis Sub-Sector Review – 04/23/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- APHA announced that its Broken Coast unit has begun selling concentrates. It also introduced concentrates under its Good Supply brand.
- CCHWF is acquiring a massive greenhouse in Riverhead, Long Island for $42.5 million.
- CGC settled a licensing dispute with Cure Pharmaceutical, paying $3.95 million
- CRLBF announced that its $1 billion shelf registration was finalized and is now effective with the SEC as well
- CURLF reported that its European unit has achieved the first step in receiving Novel Food authorization for its synthetic CBD products. It opened its first adult-use store in Maine.
- FFLWF reported Q4 revenue of C$43.2 million, up 157%, with adjusted EBITDA of C$1.5 million. The company promoted its CFO to COO and hired a new CFO
- GNLN announced the management team of the combined company after the acquisition of KushCo Holdings
- GRAMF introduced Caliva Flowersticks for the Omura vaporizer
- GRWG entered the Mississippi market with its pending new 40K sq. ft. store it is developing. It announced a project in Oregon with Belushi Farms.
- GTBIF refinanced its prior debt and replaced it with a larger $217 million three-year issue at 7%, issuing 1.46 million 5-year warrants at US$32.68
- HBORF Q4 net revenue grew 11% to $12.5 million
- SHWZ pre-announced Q1 revenue of $19.3 million and $26.8 million on a pro forma basis
- SMG boosted its dividend by 7%
- TLLTF received local approval for its adult-use store in Brockton, Massachusetts
- TLRY shareholders approved the Aphria merger
- VREOF introduced its own line of ground flower in New York
The Global Cannabis Stock Index moved higher for the second consecutive week to end at61.19, up 3.8%:
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 37.8% 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 $177,482, up 4.4%. The model portfolio, up 68.4% in 2021, gained 35.6% in 2020 and has increased 255.0% since April 2014. 420 Quality ended the week at $263,624, up 4.8% for the week, and is now up 63.2% 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 427.3% since inception compared to the 24.3% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $459,073, up 3.6%. The model portfolio gained 52.7% in 2020 and is up 81.9% in 2021, and the return since inception in late 2013 has been 4491%.
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.
