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
- Illinois adult-use sales grew 209% in April.
- BDSA data for March showed a rebound in most states.
- Health Canada added 5 licenses, leaving the total now at 670.
- 420 Investor model portfolios have gained 59.7.2-82.0% year-to-date, while the Global Cannabis Stock Index has gained 33.8%.
Review
A Barron’s cover story sparked interest in MSOs early in the week. Illinois adult-use sales grew 209% from a year ago to push combined sales up 120% to $150 million in April. BDSA data for March showed a rebound in most states from the slowing of sales in February, particularly in California, which grew 26.5% from a year ago. Alabama moved closer to approving a medical cannabis program.
Health Canada added 8 licenses, leaving the total at 665, including 10 that are expired, revoked or suspended.
During the week, I shared these insights with subscribers at 420 Investor:
- Previews for Charlotte’s Web, Curaleaf, Green Thumb Industries, Harvest Health and Recreation and Village Farms Financial Reports
- Strong Q4 Confirms Bullish Thesis for This Canadian Cannabis Retailer
- Cannabis Sub-Sector Review – 04/30/21
- Model Portfolio Composition 04/30/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- CRLBF announced the expiration of the HSR Act waiting period for its pending Massachusetts acquisition
- CRON saw revenue sink 26% in Q1 from Q4 to $12.6 million, far below expectations
- CURLF completed the acquisition and processing facility and a dispensary in Maryland and sold their prior cultivation and processing facility to TerrAscend
- GTBIF announced the pending acquisition of Virginia operator Dharma for $82.5 million in cash and stock and unspecified earnouts.
- HBORF announced that it will be moving its San Leandro location and will be catering to the adult-use market in the city.
- HRVSF opened two dispensaries in Florida, its 7th and 8th, and was allowed to re-open its Agrimed facility in Pennsylvania
- LOWLF improved revenue in Q1 by 20% over Q4 to $11 million and guided for Q2 revenue to increase to $14-16 million with positive adjusted EBITDA
- OGI CEO Greg Engel stepped down, with the Chairman assuming the role on an interim basis.
- PLNHF reported record revenue of $10.7 million in April
- SMG saw Hawthorne sales increase 66% in fiscal Q2 to $364 million and boosted its outlook for the year to 30-40%.
- TCNNF opened its 82nd Florida dispensary and closed its West Virginia acquisition of Mountaineer Holding for $6 million
- TLRY settled arbitration related to a CBD supply agreement, paying $25 million upfront and up to $20 million within nine months
- TRSSF opened its second New Jersey dispensary and closed its acquisition of three Pennsylvania dispensaries and a Maryland cultivation and processing facility.
The Global Cannabis Stock Index broke a two-week winning streak to end at 59.40, down 2.9%:
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 33.8% 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 $175,450, down 1.1%. The model portfolio, up 66.5% in 2021, gained 35.6% in 2020 and has increased 250.9% since April 2014. 420 Quality ended the week at $257,898, down 2.2% for the week, and is now up 59.7% 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 415.8% since inception compared to the 26.5% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $459,464, up 0.1%. The model portfolio gained 52.7% in 2020 and is up 82.0% in 2021, and the return since inception in late 2013 has been 4495%.
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.
