Capitalize On Cannabis Report - 04/09/22

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 Cannabis Sales grew 12.5% compared to a year ago in March
  • The House passed the Medical Marijuana Research Act
  • 420 Investor model portfolios have returned -5.9% to -3.4% year-to-date, while the Global Cannabis Stock Index has lost 19.0%

Review

Illinois cannabis sales grew 14.6% sequentially in March to $163 million, which was up 12.5% from a year ago. BDSA data for February showed a lift from depressed January levels across all markets. The House passed similar legislation to the Senate’s recent medical cannabis research bill. The Medical Marijuana Research Act, H.R. 5657, passed 343-75.

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

  • Model Portfolio Composition 04/01/22
  • Cannabis Sub-Sector Review – 04/01/22
  • Previews of Upcoming Financial Reports for Tilray and Verano Holdings
  • Hifyre Q1 Canadian Retail Estimates
  • A First Look at Leafly
  • Previews for Upcoming Financial Reports from Organigram and Valens

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

  • CEAD announced that an existing customer purchased an air filtration system.
  • HBORF completed the acquisition of Loudpack and will change its name to StateHouse later in April.
  • TCNNF partnered with DeLisioso to become its exclusive producer, processor and retailer in Florida. It also opened an adult-use store in Massachusetts, its third in the state.
  • TLRY introduced its first edible in Quebec. The company’s Q3 revenue and adjusted EBITDA fell below expectations, with cannabis sales declining 6% sequentially. The 10-Q revealed that the company tapped its ATM aggressively from March into early April, raising $90 million gross proceeds.
  • TRSSF opened its third Cookies dispensary in Michigan.
  • VLNS closed its unit offering, which totaled C$32.3 million after the exercise of the underwriters’ option. The company issued a letter to shareholders detailing recent working capital issues it is working to address and discussing two growth initiatives, including bringing Green Roads manufacturing in-house and buying discounted assets. The company also is shuttering the recently acquired Citizen Stash facility.
  • VRNOF relocated its Canton, Ohio dispensary. The company delayed its Q4 filings due to what it described as a minor issue with the auditor signing off on the accounting for a single dispensary acquisition in 2019.

Market Performance

The Global Cannabis Stock Index retreated for the second consecutive week, decreasing 6.6% to 26.60:

The index, which lost 26% in 2021 following a 5.2% gain in 2020, is down 19.0% in 2022. It currently includes 38 stocks and ended 2021 at 32.85:

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 $87,087, down 10.2%. The model portfolio, down 13.8% in 2021 after a 35.6% gain in 2020, is down 4.1% in 2022 and has increased 74.2% since April 2014 despite the large loss in the index since then. 420 Quality ended the week at $118,896, down 11.2% for the week. It is down 5.9% 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 137.8% since inception compared to the 67.1% decline in the index since then. Flying High, which is focused on swing trades, ended the week valued at $284,333, down 9.4%. The model portfolio gained 16.6% in 2021 and 52.7% in 2020 and is down 3.4% in 2022. The return since inception in late 2013 has been 2743%.

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:

Exclusive: Cannabis Companies Reduce 2022 Growth Expectations After Challenging Q4

Cannabis REIT NewLake Funds $34 Million C3 Missouri Project

Exclusive: Cannabis Sales Bounce Back in February

Harborside Closes Loudpack Acquisition Ahead of Transition to StateHouse

Exclusive: Here Is How a Leading Cannabis Beverage Company Is Going After Big Alcohol

Exclusive: How Cresco is Combining with Columbia Care to Create a New Leader in Cannabis

Exclusive: Illinois Cannabis Sales Increase 14.6% Sequentially in March

Jushi Completes $45 Million Nevada Acquisition

Exclusive: This Fintech Company Banking the Cannabis Industry Is Coming to the NASDAQ

Tilray Q3 Cannabis Revenue Declines 6% Sequentially to $55 Million

Resources:

Posted to 420 Investor on Apr 09, 2022 — 5:04 AM
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