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 rocketed higher in July.
- Health Canada added 5 new licenses, leaving the total now at 741.
- 420 Investor model portfolios have gained 34.8-73.8% year-to-date, while the Global Cannabis Stock Index has gained 24.0%.
Review
Illinois recreational sales grew 110% in July, increasing 10.6% sequentially to $127.8 million.
Health Canada added 5 new licenses, leaving the total at 741, including 5 that are expired, revoked or suspended.
During the week, I shared these insights with subscribers at 420 Investor:
- Model Portfolio Composition 07/30/21
- Cannabis Sub-Sector Review – 07/30/21
- Another SPAC Off to a Rough Start
- Previews for Curaleaf, GTI, Harvest, urban-gro and Village Farms Quarterly Financial Reports
Here are some of this week’s highlights for 420 Investor Focus List names:
- CGC Q1 revenue fell 8% sequentially, growing just 23% from a year ago to C$136 million, with adjusted EBITDA at -C$64 million
- CRON Q2 revenue was in line with expectations at $15.6 million
- FFLWF acquired the digital assets of Wikileaf for $7.5 million in stock
- GNLN issued a prospectus for a $50 million ATM equity sale program
- GRAMF added a dispensary in Ceres, California, expanding its coverage by 1.7 million people
- GTBIF acquired one of three Rhode Island medical cannabis vertical operations with a contractual license with Summit Medical Compassion Center
- HRVSF opened its 16th retail store in Arizona
- LOWLF continued to experience better yields in July. Its partner in Illinois, Ascend, launched its pre-rolls.
- OGI named former Supreme CEO Beena Goldenberg as its new CEO
- PLNHF reported July sales of $11.9 million, including $800K from its new Orange County store. The company won a retail license in the Chicago area.
- SMG reported a strong Q3, with Hawthorne growing 48% to $422 million, but the company maintained its full year guidance. It also acquired Hydrologic for $65 million, 3.25X its revenue.
- TCNNF introduced several new brands for the adult-use and medical markets
- TLRY launched a new line of medical edibles in Canada
- UGRO closed the acquisition of MJ12 Design Studio
- VLNCF introduced two new flavors to tis Summit 10 beverage line
The Global Cannabis Stock Index endured mid-week volatility to score its third consecutive weekly gain, increasing 4.5% to 55.05:
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 24.0% in 2021 thus far. It currently includes 44 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 $154,609, up 0.6%. The model portfolio, up 46.7% in 2021, gained 35.6% in 2020 and has increased 209.2% since April 2014. 420 Quality ended the week at $217,642, down less than 0.1% for the week, and is now up 34.7% 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 335.3% since inception compared to the 31.9% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $438,767, up 1.5%. The model portfolio gained 52.7% in 2020 and is up 73.8% in 2021, and the return since inception in late 2013 has been 4288%.
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 DE, FL, MD, MN, NH, PA and RI and implementation of the CT, NM, NY and VT commercial programs in 2022 and VA in 2024.
