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Weekly Cannabis Report: The Rally Resumed In Pot Stocks

by: Cornerstone Investments

Cannabis stocks resumed rally last week with HMMJ up 4.0% and MJ up 3.2%; both ETFs remain well below their September highs.

Canopy gained another 11% after Piper Jaffray hiked its target price by 50% after the U.S. hemp entry; stock is up 80% in January so far.

The sector has recovered only some of the losses it experienced since September 2018 and we think the risk of a pullback remains benign.

Cannabis, Marijuana, Hemp, Cornerstone Investments

Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.

Trading Summary

The rally resumed last week while extending impressive returns in January so far. The Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF) rose 4.0% and the ETFMG Alternative Harvest ETF (MJ) gained 3.2%. Both ETFs have gained around 30% during the first three weeks this year.

Canadian Large-Cap: Canadian large-caps saw positive movements. Canopy (CGC) rallied another 11.4% amid a flurry of upgrades from research analysts on the back of entry into the U.S. hemp industry. Tilray (TLRY) lost another 2.4% putting it as one of the worst performers in 2019. Cronos (CRON) continued to rise as Altria's investment is set to close soon. Aurora (ACB) gained 3.4% after finalizing a US$345 million of unsecured convertible notes. Aphria (APHA) gained 7.2% after Green Growth formally launched its bid.

Canadian Mid-Cap: CannTrust (OTC:CNTTF) gained 10.1% after announcing that it has received approval for its revised Phase 3 expansion. HEXO (HEXO) lost 2.2% after announcing a C$50 million raise at C$6.50 and the stock began trading on the NYSE. Organigram (OTCQX:OGRMF) lost 6.2% after a class action suit was approved by the court to proceed. TGOD (OTCQX:TGODF) gained 30.1% after announcing a record date for its SpinCo warrants.

Canadian Small Cap: The small/mid-cap stocks had a blowout week. A large number of stocks gained >30% which is a sign that the market is once again heating up as risk appetite returns. TerrAscend (OTCQX:TRSSF), Village Farms (OTCQX:VFFIF), and Aleafia Aleafia (OTCQX:ALEAF) all gained more than 30%. Village Farms announced that it is applying for an NYSE listing and that it has completed converting the entire 1.1 million sq ft of its Pure Sunfarms greenhouse and is waiting for Health Canada approval. Aleafia surged 30.1% after issuing a press release on a small research study but we think the study does not have any practical impact on the stock.

U.S. Multistate Operators: The MSOs had mixed performances last week. Curaleaf (OTCPK:LDVTF) gained 7.6% and MedMen (OTCQB:MMNFF) gained 10.2%. Harvest Health (OTC:HTHHF) was flat and we plan to initiate coverage next week. Green Thumb (OTCQX:GTBIF) lost 3.4%, Acreage (OTC:ACRZF) lost 4.6%, and Cresco Labs (OTCPK:CRLBF) lost 5.5% without news.

Trulieve (OTCPK:TCNNF) pulled back 11.4% after strong recent performance buoyed by share lock-up by its founders. Khiron (OTCQB:KHRNF) gained 11.5% after announcing its entry into Uruguay and Brazil.

Ancillary: CBD stocks had a strong week as Charlotte's Web (OTCQX:CWBHF) gained 10.3% and CV Sciences (OTCQB:CVSI) gained 16.7%. KushCo (OTCQB:KSHB) was flat after raising US$34 million equity and Innovative Industrial Properties (IIPR) gained 10.3%.

Industry News

Market Outlook

The month of January has proven to be one of the best for pot stocks. Aided by a recovery in the global equities market, the pot sector continued its impressive rally. The rally is well supported, in our opinion, by the fast-growing U.S. market and a shift towards legalization in an increasing number of countries globally. The prolonged sell-off between October and December was painful and could be linked to the disastrous legalization rollout in Canada. However, after the 2018 Farm Bill passed, the larges Canadian LPs have begun to enter the U.S. hemp industry. Canopy Growth is approaching its all-time high and has been up 80% in January so far. Clearly, investors are looking past the near-term challenges facing the Canadian cannabis operators and focusing on the global opportunities with the U.S. being the biggest near-term one.

Despite the huge rally, it is important to note that valuations remain well below the September highs. For investors that worry about the pot sector potentially overheating in the near-term, we think the risk of a pullback remains benign at this point. The sector has many near-term tailwinds and companies on both borders continued to report impressive growth. We are also seeing the small caps outperforming in general as a result of higher inherent volatility due to limited liquidity and predominantly retail investor base.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.