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 set a record in May, rising 163%.
- Amazon supported the MORE Act.
- Health Canada added 4 licenses, leaving the total now at 681.
- 420 Investor model portfolios have gained 55.7-89.6% year-to-date, while the Global Cannabis Stock Index has gained 33.2%.
Review
Amazon announced its support for cannabis legalization, endorsing the MORE Act, and changed some internal policies regarding cannabis usage by employees. Illinois adult-use sales increased 163% from a year ago to $116.4 million. BDSA data for April showed record sales in several markets, with California standing out for its 42% growth from a year ago.
Health Canada added 4 licenses, leaving the total at 681, including 2 that are expired, revoked or suspended.
During the week, I shared these insights with subscribers at 420 Investor:
- Cannabis Sub-Sector Review – 05/28/21
- Model Portfolio Composition 05/28/21
I also was interviewed by Cannabis Investing Network
Here are some of this week’s highlights for 420 Investor Focus List names:
- ACB paid down its entire $89 million debt facility
- CGC Q4 revenue slipped slightly from Q3 and grew 38% from a year ago to C$148.4 million, with adjusted EBITDA of -C$90 million.
- CRON amended its agreement with Gingko Bioworks and began commercial production of CBG from biosynthesis
- CWBHF announced a collaboration with University of Colorado-Boulder to study CBD and CBN for improved sleep. It filed a C$60 million ATM preliminary prospectus.
- GRAMF announced its first Social Equity Investment
- GRWG launched a newly redesigned e-commerce website that includes “buy online pickup in store” as an option in some locations
- GTBIF announced the acquisition of Massachusetts Cannabis Operator Liberty Compassion, which has medical cannabis dispensaries in Boston and Springfield.
- HBORF reported net revenue of $12.4 million with slightly positive adjusted EBITDA in Q1. It announced the pending acquisition of Sublime, a California manufacturer, for $43.8 million in mainly stock, representing 1.8X projected 2021 revenue. It also acquired its 47-acre production campus for $10.84 million.
- LQSIF said that its Nova Cannabis will open at least 30 Value Buds in Ontario during 2021
- OGI named a new SVP of Marketing and announced that it is adding up to 75 new positions
- PLNHF plans to complete the buildout of its consumption lounge in Las Vegas following the passage of legislation
- SHWZ announced the pending $11.3 million acquisition of Southern Colorado Growers, expanding its access to premium quality flower.
- SMG again increased its outlook for fiscal 2021, boosting overall revenue expectations to 17-19%, aided by an increase in Hawthorne to 40-45% from 30-40% previously. The company now expects EPS to be $9.00-9.30, previously $8.60-9.00
The Global Cannabis Stock Index snapped a two-week winning streak with a small loss, falling 0.8% to 59.11:
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 33.2% in 2021 thus far. It currently includes 46 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 $175,354, down 0.8%. The model portfolio, up 66.4% in 2021, gained 35.6% in 2020 and has increased 250.7% since April 2014. 420 Quality ended the week at $251,478, down 1.8% for the week, and is now up 55.7% 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 403.0% since inception compared to the 26.9% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $478,498, up 0.8%. The model portfolio gained 52.7% in 2020 and is up 89.6% in 2021, and the return since inception in late 2013 has been 4685%.
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 AL, 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.
