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Capitalize On Cannabis Report - 06/09/18

|Includes: ACB, AMMJ, APHA, CGC, CVSI, KSHB, LHSIF, MDCL, Medmen Enterprises Inc. (MMNFF), MPXEF, NXTTF, OGRMF, ORHOF, SNNVF, TGODF, TRTC
Summary

Cannabis stocks snapped a two-week losing streak with a sharp advance.

The Canadian Senate voted to pass C-45 with dozens of amendments.

Senators Cory Gardner and Elizabeth Warren followed through and introduced Strengthening the Tenth Amendment Entrusting States (STATES) Act, which President Trump said he would "probably support".

420 Investor model portfolios continue to maintain a large advantage over the performance of the Global Cannabis Stock Index in 2018.

Review

This was truly an historical week for the cannabis industry. In the United States, Senators Cory Gardner and Elizabeth Warren followed through and introduced Strengthening the Tenth Amendment Entrusting States (STATES) Act, which President Trump said he would "probably support". Additionally, the Senate Appropriations Committee approved an amendment that would allow doctors with the Department of Veterans Affairs to discuss medical cannabis with their patients. Currently doing so is not permissible, even in states with legal medical or consumer cannabis, with veterans facing risk of loss of benefits. Democrats Tammy Baldwin of Wisconsin and Kirsten Gillibrand of New York and Independent Bernie Sanders of Vermont joined Mitch McConnel and the other 24 prior sponsors of the Hemp Farming Act of 2018. Colorado's outgoing Governor Hickenlooper vetoed legislation that would have permitted public companies to hold cannabis licenses.

In Canada, the Senate approved C-45, but added on dozens of amendments and sending it back to the House of Commons. It is very likely that Canada will finalize legalization next week. Deloitte posted an updated report on the market, predicting over $4 billion in legal sales in 2019. Health Canada issued 4 new cultivation licenses. Doug Ford will lead Ontario with a Conservative majority, leading to early speculation that he may allow the private sector into the retail distribution of cannabis in the province.

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

  • ACBFF is investing $10 million to buy a 20% stake in a softgel maker based in Quebec
  • AMMJ lost its OTCQB status due to being delinquent in its SEC reporting
  • APHQF executives and directors gave back some previously awarded stock compensation. The company's Board of Directors approved a $55 million extraction facility and the spending of an additional $30 million to further boost cultivation at their two Leamington facilities. It priced a $225 million bought deal, selling shares at C$11.85
  • CGC announced a partnership to advance cannabis testing in Canada through a collaboration with Molecular Science Corp
  • CNNRF announced that its subsidiary Trichome Financial is raising $20 million ahead of public offering
  • CVSI announced that it will be holding its annual meeting in early August, with shareholders voting on a potential reverse-split
  • KSHB announced a new division focused on providing FDA-compliant packaging solutions to the pharmaceutical and veterinary industries. It priced a $36 million direct registered offering
  • LHSIF won a dispensary license in Ohio
  • MDCL raised $1 million and reported that one of its customers won an Ohio dispensary license
  • MPXEF added a new independent director and announced a conference call for next week
  • NXTTF announced a Canadian distribution deal with California-based Lowell Herb Co
  • OGRMF announced a non-binding term sheet to acquire 26% of a publicly-traded company, Eviana, that owns Serbian industrial hemp cultivation assets. It also received additional facility licensing from Health Canada and projects it will hit 36 million grams annual production capacity by the end of the month as it completes its remaining grow rooms.
  • SNNVF announced Farmacy Phactory as a customer for its extraction services in California
  • TRTC began cultivating in its JV facility in Sparks, Nevada

The Global Cannabis Stock Index recovered recent losses, increasing 4.5% to 109.23. 

5-day cannabis stock index

The index, up 1.2% in Q2 but down 23.1% so far in 2018, was up 91.8% in 2017 after gaining 88.8% in 2016. The index currently includes 68 stocks and ended 2017 at 142.10.

6 month Cannabis Index 420 Opportunity ended the week valued at $115,910, up 3.4%. The model portfolio has gained 26.8% year-to-date after increasing 103.5% compared to the 91.8% increase in the index in 2017. 420 Quality ended the week at $143,193, up 2.5%, and has increased 30.8% 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 186.4% since inception compared to the 29.3% increase in the index. Flying High ended the week valued at $160,226, up 3.3%. The year-to-date gain has been 41.9%, while the return since inception in late 2013 has been 1451%.

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 healthy 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 roll-out of the California implementation and Massachusetts in July. The demise of the Cole Memo had left a big overhang in the U.S. market, but I believe this is now behind us and advocate a more aggressive approach for investors with respect to legitimate U.S. companies.

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 apparent deal with Senator Cory Gardner and the introduction in the Senate of Strengthening the Tenth Amendment Entrusting States (STATES) Act ), hopeful approval of the Hemp Farming Act of 2018, introduced by Senate Majority Leader Mitch McConnell with bi-partisan support and intended to legalize industrial hemp, hopeful extension later this year of the Rohrabacher-Blumenauer Amendment in the House and the Leahy Amendment in the Senate (which are now set to sunset on September 30th) 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 CT, NH, NJ, NM, and RI and implementation of potential commercial programs in ME and VT. Finally, the November elections will be another potential catalyst, with Michigan voters already set to decide on adult-access in that state.

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

Aphria to Raise $225 Million Selling Shares at $11.85

Aurora Cannabis Invests $10 Million to Acquire 20% Stake in Softgel Manufacturer

Cresco Labs Awarded Ohio Medical Cannabis Dispensary License

Deloitte Projects over $4 Billion in Legal Canadian Cannabis Sales in 2019

Kush Bottles Nets $32.9 Million Selling Units at $4.80

MedMen Founders To Forfeit Equity Awards Unless Stock Exceeds C$10

Ohio Names 56 Medical Cannabis Dispensary Provisional License Winners

Public Cannabis Company Revenue Tracker Provides Updates through May 30, 2018

Starbuds Canada Wins Saskatchewan Retail Cannabis License

TGOD Launches Beverage Division and Quebec Research Facility

Resources:

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, Harvest One, Hiku Brands, iAnthus Capital, Khiron Life Sciences, Kush Bottles, Liberty Health Sciences, MariCann, MPX Bioceutical, RavenQuest, Supreme Cannabis and TerrAscend, providing each of them with Investor Dashboards. We also provide Organigram with advertising on our Cannabis Careers page.