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Summary

• Canadian Cannabis sales slipped in January from December levels, which were revised lower.
• 420 Investor model portfolios have returned 0% to -1.5% year-to-date, while the Global Cannabis Stock Index has lost 17.4%

Review

Canadian cannabis sales fell 2% in January from December levels that were revised significantly lower, increasing 24% from a year ago to $347 million.

During the week, I shared these insights with subscribers at 420 Investor:

• Here’s Why GTI’s Stock Stumbled
• Previews of Q4 Financial Reports for Ayr Wellness, Columbia Care and TerrAscend
• Cannabis Sub-Sector Review – 03/11/22
• Model Portfolio Composition 03/11/22

Here are some of this week’s highlights for 420 Investor Focus List names:

• AAWH released its 2021 ESG Metrics.
• AYRWF exceeded expectations for Q4, reporting $111.8 million, up 16% sequentially. The company lowered its 2022 outlook due to regulatory delays and market conditions.
• CCHWF delayed its financial releases as it struggled to finalize its U.S. GAAP conversion from IFRS Accounting. Preliminary results suggest that revenue was in line with Q4 expectations with U.S. GAAP adjusted EBITDA substantially lower than IFRS adjusted EBITDA due to lease accounting.
• CEAD named a new CFO.
• CGC partner Martha Stewart introduced three new CBD gummies flavors.
• CRLBF launched an expanded product lineup in Florida.
• CURLF opened its 45th Florida dispensary. It named its former CFO as the successor to its recently hired CFO, who departed for another position after joining the company last July.
• PLNHF announced that its first Florida dispensary location will be in Jacksonville suburb Orange Park.
• SHWZ announced a pending $3.2 million acquisition of a Denver dispensary. It will be listing its shares in Canada on the NEO Exchange.
• TCNNF named Ethan Zohn as a brand ambassador for its Momenta brand. It launched a nationwide supplier diversity initiative.
• TLLTF extended the due diligence period to May for its potential purchase of its facility in Taunton, Massachusetts.
• TLRY launched oils into the Maltese market.
• TRSSF launched a mobile retail app on the Apple App Store for Apothecarium customers in California and New Jersey. Q4 revenue was flat from Q3 at $49 million as the company generated improved adjusted EBITDA of $11.9 million.
• UGRO announced the acquisition of Emerald Construction Management for up to $7 million.
• VRNOF announced the opening of its first West Virginia dispensary and its 42nd and 43rd in Florida.

Market Performance

The Global Cannabis Stock Index posted a new 2022 closing low during the week but then rebounded sharply as it broke a four-week losing streak, increasing 6.6% to 27.13:

The index, which lost 26% in 2021 following a 5.2% gain in 2020, is down 17.4% in 2022. It currently includes 38 stocks and ended 2021 at 32.85:

Model Portfolios

20 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 $92,156, up 14.4%. The model portfolio, down 13.8% in 2021 after a 35.6% gain in 2020, is up 1.5% in 2022 and has increased 84.3% since April 2014 despite the large loss in the index since then. 420 Quality ended the week at $126,313, up 14.2% for the week. It is unchanged in 2022 and was down 21.8% 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 152.6% since inception compared to the 66.4% decline in the index since then. Flying High, which is focused on swing trades, ended the week valued at $297,015, up 14.9%. The model portfolio gained 16.6% in 2021 and 52.7% in 2020 and is up 0.9% in 2022. The return since inception in late 2013 has been 2870%.

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!

Here are some of the most interesting stories we published on New Cannabis Ventures this week:

Agrify Borrows $65 Million Under New Debt Facility

Ayr Wellness Q4 Revenue Increases 16% Sequentially to $111.8 Million

Exclusive: Canadian Cannabis Sales Declined 2% in January Sequentially

HEXO Reports $670 Million Q2 Operating Loss

High Tide Q1 Revenue Increases 34% Sequentially to C$72.2 Million

iAnthus Q4 Revenue Declines 3% Sequentially to $47.1 Million

MariMed Q4 Revenue Declines 7% Sequentially to $31 Million

Exclusive: Pricing Pressure Emerges as a Key Theme Among Cannabis Companies

TerrAscend Generates Flat Q4 Revenue Sequentially at $49.1 Million

Exclusive: This Cannabis Fund Is Behind Some of the Biggest Ancillary Players in the Industry

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