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Capitalize On Cannabis Report - 02/10/18

|Includes: Aurora Cannabis Inc. (ACB), APHA, CANN, CGC, GBLX, GWPH, LHSIF, MDCL, MEDFF, MPXEF, NXTTF, ORHOF
Summary

Cannabis stocks recovered some of the big losses from the prior week.

The model portfolios at 420 Investor are performing quite well despite challenging market conditions.

NYSE-listed global tobacco company Alliance One International acquired a controlling stake in Canadian LP Canada's Island Garden the tobacco industry's first move into direct cannabis cultivation.

The big story this week was that the sector bounced after a terrible start to February, advancing during the week despite pressure on the broad market. Israeli PM Netanyahu ordered a halt to plans to allow cannabis producers to export, something that was reported to be due to pressure from President Trump. A global tobacco company based in the U.S., Alliance One International (NYSE: AOI), took a 75% stake in Canadian LP Canada's Island Garden and a 80% stake in ACMPR applicant Goldleaf Pharm. It also bought a 40% stake in Criticality, a North Carolina company that is focused on extracting CBD from industrial hemp. There were no financial terms provided on the Canadian investments.

In Canada, BC announced rules regarding distribution that will effectively lock LPs out of retailing their own products. The system will include private and government stores. Very importantly for several Focus List names, the Canadian Securities Administrators ("CSA") completed its review of its policies and will continue to allow its disclosure approach. This means that the delisting threat for CSE companies following the rescission of the Cole Memo last month goes away.

Here are some of this week's highlights for Focus List names:

  • ACBFF took a 20% stake in publicly-traded Liquor Stores N.A. for $103.5 million, investing at a premium, to create a retail cannabis footprint jointly in Alberta by converting existing liquor stores and opening new ones. it also launched a B2B platform, Aurora PRO, to serve other LPs and retailers in Canada. FY18-Q2 sales of $11.7 million reflected strong international growth.
  • APHQF began to divest its holdings in Liberty Health Sciences, selling about 1/4 of its stake and setting in motion a plan to complete the divestiture.
  • CANN filed an S-3 to sell up to $50 million in securities
  • CNNRF expanded its Bhang Vaporizer offering to Southern California
  • GBLX filed a patent for anti-inflammation therapies, including asthma, arthritis and eczema.
  • GWPH reported its FY18-Q1, providing additional detail on its pipeline beyond Epidiolex, which was accepted by the European Medicines Agency ("EMA") for review with an outcome expected in about a year.
  • LHSIF saw a group led by the Serruya family (Yogen Früz) take down 26.7 million shares at $1.25 from Aphria, which now will hold 28% of the company. The strategic buyers and Aphria have a put/call agreement that will allow Aphria to divest the rest of its stake over time.
  • MDCL added ten new clients so far since December's last update, including six in Michigan, one in Massachusetts, one in Maryland and one in Canada, and it expanded a Cultivation MAX agreement with a California client.
  • MEDFF didn't issue a press release, but its Australian partner, Indica Industries Pty, which operates as MedReleaf Australia, is now taking orders for Q1 product delivery. MedReleaf owns 10%. The company also introduced its recreational brand, San Rafael '71. It also received approval from Health Canada for its softgels.
  • NXTTF reported that it will be correcting previous financials for errors
  • TWMJF closed its $200MM offering at $34.50 (for WEED)

The Global Cannabis Stock Index bounced back a bit after last week's almost 30% decline, posting a gain of 5.4% to 134.15. The market opened lower on Monday morning but ended up holding those lows.

Global Cannabis Index

The index, down 5.6% so far in 2018, was up 91.8% in 2017 after gaining 88.8% in 2016. The index currently includes 75 stocks and ended 2017 at 142.10.

global cannabis stock index 020918 420 Opportunity ended the week valued at $102,482, up 5.3%. The model portfolio has gained 12.1% year-to-date after increasing 103.5% compared to the 91.8% increase in the index in 2017. 420 Quality ended the week at $131,988, up 5.2%, and has increased 20.6% year-to-date. This model portfolio was launched in March 2017 targeting long-term investors seeking to invest in leading cannabis stocks with low portfolio turnover and has gained 164.0% since inception compared to the 65.9% increase in the index.

Outlook

The cannabis sector is seeing improving quality due to new entrants and some of the older names executing. Valuations generally remain cautionary, and fundamentals are questionable for most of the over 600 companies in the sector. The market has been in bull mode since late October and remains so, despite the "Sessions Storm" that hit on January 4th. There are some catalysts ahead, including progress in the Canadian legalization and in German MMJ as well as the rollout of the California implementation. My bullish near-term outlook has been put into "time-out" as I contemplate the demise of the Cole Memo.

The big themes ahead are likely to be insight into the President's plans regarding the federal view on state-legal cannabis (especially in light of the Jeff Sessions Memo from January 4th), hopeful extension of the Rohrabacher-Farr (now Rohrabacher-Blumenauer) Amendment (which is now set to sunset on March 23rd) to insulate state-legal medical cannabis businesses from DOJ intervention, better clarity from the federal government for banks and cannabis research (both part of the proposed CARERS Act and other proposed legislation), DEA pushback towards the CBD from industrial hemp industry, the inclusion of a broader range of extracts in Health Canada's ACMPR program and its continued growth in patient enrollment, likely legalization in Canada, the rollout of MMJ in Denmark, Germany, Mexico and in Australia as well as continued advances in South America, progress with respect to the new legal cannabis implementations in CA and MA, and the new MMJ implementations in Arkansas, Florida, Maryland, Ohio, Pennsylvania and Texas, the implementation of the new medical program in California and the possible legalization via the legislatures in NH, NJ, NM, and RI and implementation of potential commercial programs in ME and VT.

The slide, which began in March of 2014, reversed out the entire gains from early 2014, with the market currently rallying since February 2016 and making new highs in December ahead of California legalizing. Most valuations remain high. Positively, we are seeing some new entrants into the publicly-traded sector of higher quality, and hopefully we see more in 2018, especially with the number of legal states doubling. Please remember that it remains the case that most of the penny stocks will not succeed. I expect that there will be just a few winners among the over 600 companies that are currently on our Broad List.

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

Aurora Cannabis Invests $103.5 Million for 19% Stake in Liquor Stores N.A.

Beware Cannabis Companies Aggressively Soliciting Investment

DeepCell Industries Builds Upon its Cannabis Ingredients Platform

Harvest One Expands Targeted Year-End 2019 Capacity to 70 Million Grams

How a California Cannabis Pioneer with $30 Million Annual Sales is Pursuing Growth

How Elizabeth Stavola, Mother of 6, Assembled a Multi-State Cannabis Operation

MedReleaf Australia Commences Commercial Operations

Publicly-Traded Global Tobacco Company Bets on Cannabis

RavenQuest to Consult Saskatchewan First Nations on Cannabis and Hemp

Regulators Update Disclosure Requirements for Canadian Listed Companies with U.S. Cannabis Operations

Serruya Family Leads 26.7 Million Share Liberty Health Purchase at $1.25 per Share from Aphria

Tracking Canadian Cannabis Licensed Producer Stock Performance

Using Radio Frequency Technology to Improve Cannabis Quality

With Epidiolex Awaiting FDA and EMA, GW Pharma Focuses on Pipeline

Resources:

420 Investor, founded in 2013, is an online due diligence platform that includes a Forum, 10 videos a week, news alerts, blogs, a weekly live chat, model portfolios and a monthly newsletter. The annual cost is $599. The newsletter is also offered as a separate offering for $199 per year. Based on over 1500 reviews, the service has a 4.6 rating on a scale of 1 to 5.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: At New Cannabis Ventures, we work with several publicly-traded companies, including ABcann, Aurora Cannabis, Canopy Growth, Emblem, GrowGeneration, Harvest One, Hiku Brands, iAnthus Capital, Kush Bottles, Liberty Health Sciences, MariCann, MPX Bioceutical, RavenQuest and TerrAscend, providing each of them with Investor Dashboards