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 increased 61% from a year ago in November.
- The SAFE Banking Act was removed from the National Defense Authorization Act.
- 420 Investor model portfolios have returned -15.3% to 26.0% year-to-date, while the Global Cannabis Stock Index has lost 20.7%.
Review
Illinois adult-use sales increased 2% sequentially and 61% from a year ago to $120.8 million in November. Combined with medical, total cannabis sales grew 44% to 152.3 million. The National Defense Authorization Act didn’t include the SAFE Banking Act in the final version, something that some had hoped would happen. Canadian retail cannabis sales in November appear to have been quite weak according to Hifyre data.
During the week, I shared these insights with subscribers at 420 Investor:
- Preview of Fire & Flower Q3 Financials
- 2022 Year-End Target Prices for the Leading MSOs
- Model Portfolio Composition 12/03/21
- Cannabis Sub-Sector Review – 12/03/21
Here are some of this week’s highlights for 420 Investor Focus List names:
- AYRWF received approval to begin cultivation in its Phoenix cultivation and production facility
- CCHWF completed the rebranding of its stores in Florida to Cannabist
- CRLBF opened its 12th Florida dispensary and closed its $80 million acquisition in Pennsylvania of Laurel Harvest
- CURLF launched a new edible, Select X Bites, with faster onset and longer duration of effects.
- FFLWD announced the pending acquisition of Canadian cannabis delivery and logistics company Pineapple Express Delivery for C$5.3 million in cash and 1.13 million shares, valuing the transaction at about 1.1X trailing revenue.
- GDNSF launched a new line of Edibles in Maryland
- GRWG relocated its store in Phoenix to a new location offering 25K sq. ft.
- GTBIF opened a Rise dispensary in Reno, Nevada
- TCNNF opened its 111th Florida dispensary
- TLRY issued 11.24 million shares valued at $102.9 million to acquire a Colorado-based alcoholic beverage maker, Breckenridge Distillery, with estimated annual sales of $20 million and EBITDA of approximately $5 million. IntelGenx filed for arbitration against the company for breaching its agreement to co-develop and commercialize cannabis-infused strips.
- VLNS began trading on the NASDAQ
- VRNOF opened its 40th Florida dispensary
Market Performance
The Global Cannabis Stock Index posted a new 52-week closing low early in the week and then rebounded, increasing 1.4% during the week to 35.21:
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 lost 20.7% in 2021 thus far. It currently includes 42 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 $99,957, up 1.1%. The model portfolio, down 5.1% in 2021, gained 35.6% in 2020 and has increased 99.9% since April 2014 despite the large loss in the index since then. 420 Quality ended the week at $138,418, up 1.4% for the week, and is now down 14.3% 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 176.8% since inception compared to the 56.5% decline in the index since then. Flying High, which is focused on swing trades, ended the week valued at $318,142, up 0.6%. The model portfolio gained 52.7% in 2020 and is up 26.0% in 2021, and the return since inception in late 2013 has been 3171%.
Outlook
The cannabis sector has continued to evolve through several ups and downs over the past few years. 2021 began by extending on massive gains in Q4 but hit a wall in mid-February, sliding the balance of the year after the market had gotten ahead of itself. Disappointment over the slow pace of federal reforms or the move towards legalization was a factor, but decreasing growth in cannabis sales, regulatory delays in several states and the implosion of the wholesale flower market in California played roles as well. In Canada, while the market has continued to grow, the evolution to derivative products has been slow. Additionally, the largest LPs have lost market share and have been unable to scale thus far.
The bull market that began in March 2020 after the pandemic and the capital crunch that followed the vaping crisis in 2019 appears to be intact for the American cannabis operators, which continue to trade sharply higher than where they traded in the summer of 2020 despite large declines from the peak in February. Looking forward, the outlook appears strong, with the leading companies moving to positive operating cash flow and having increasing access to non-dilutive capital, including debt, mortgages and sale-leasebacks. Several states will be moving from medical-only to adult-use, including New Jersey, New Mexico, Vermont and Connecticut in 2022, New York in 2023 and Virginia in 2024. Several other states could move to legalize for adult-use as well, including Delaware, Florida, Maryland, Minnesota, New Hampshire, Pennsylvania and Rhode Island. Several states are expanding programs as well, with additional dispensaries ahead for Illinois. Medical-only state Minnesota will be adding flower and edibles in 2022, and Ohio is expanding its program as well. Increasing competition within certain state markets that is weighing on profitability will likely remain a challenge. Further, while many see federal legalization as a positive, this remains a potential risk-factor in my view.
While the stocks of American cannabis companies continue to be held by mainly retail investors, 2021 saw an increase in institutional investment. Another big development has been the growth in AdvisorShares Pure US Cannabis ETF (MSOS), which has broadened the access to cannabis companies for investors that don’t trade OTC stocks. Additionally, a number of ancillary companies have gone public and trade on higher exchanges, offering institutional investors a way to invest in the industry. We have seen several investments into American cannabis companies, mainly by Canadian LPs, but, looking ahead, strategic investment through creative financial structures will likely extend to CPG companies in 2022.
At the federal level, the FDA (or Congress) could provide clarity on CBD regulation. With respect to THC, both Democrats (Cannabis Administration and Opportunity Act) and Republicans (States Reform Act) are advancing legislation to legalize cannabis. While this is going to be a long process in my view due to the complexity (varying state regulations, role of FDA, social equity, taxation), this is very different from what the developing cannabis sector faced just a few years ago: potential crackdowns against state legalization. I remain hopeful that Congress can advance small reforms, including expanded research and SAFE Banking. An enhanced financial reform that explicitly permitted companies operating in state-legal cannabis to trade on higher exchanges would be extremely positive.
Beyond America, cannabis legalization continues to proliferate. While Canada remains the largest federally legal cannabis market, many other countries have medical programs, including Argentina, Chile, Colombia, Ecuador, Peru and Uruguay (fully legal) in South America. Mexico has legalized for possession but doesn’t yet have a regulated program, and it could legalize for adult-use as well. Australia’s medical program was slow to start but has gained traction. New Zealand has a medical program as well. In Africa, several countries have legalized medical cannabis. Europe, of course, has seen widespread adoption of medical cannabis. Germany has been slow to develop but could move to legalize for adult-use. Other markets where there is medical cannabis include Denmark, Greece, Italy, Netherlands, Poland, and Portugal. The UK and Israel have medical cannabis, and Israel could move to legalize for adult-use. Of course, let’s not forget Jamaica!
