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Capitalize On Cannabis Report - 07/28/18

|Includes: ACB, APHA, CVSI, Emblem Corp (EMMBF), GBLX, GNAL, ITHUF, KSHB, LHSIF, MDCL, MMNFF, NXTTF, OGRMF, TLRY, TRTC
Summary

Cannabis stocks continued to move lower, with the Global Cannabis Stock Index reaching levels not seen since November.

Ontario reversed direction and opted for distribution through private retailers instead of through government-owned stores, with details pending.

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

Review

It wasn't widely reported, but Canadian broker GMP Richardson issued research that suggest the U.S. offers better opportunities than Canada. In Canada, it appears likely that Ontario will ditch government run stores in favor of private retailers, with an announcement due early next week.

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

  • ACBFF closed the acquisition of MedReleaf. The company added medical cannabis to its insurance plan for employees. It also received approval for a cultivation license in Malta to serve the small island as well as to export to Europe. It also picked up Colombian operations via MedReleaf.
  • APHQF has invested, like many other LPs, in retailer Fire & Flower and was able to secure an 18-month lock-up from the buyers of its Liberty Health shares along with a call option.
  • CVSI has applied for uplisting to the NASDAQ. The company pre-announced sales that tripled in Q2 to over $12 million.
  • GBLX CEO John Poss boosted his ownership stake to 225K shares by buying 100K shares at .40-.415 in a transaction from 7/11 that was disclosed well beyond the filing deadline.
  • ITHUF announced the beginning of construction in its upstate NY cultivation facility
  • KSHB announced three new product offerings
  • LHSIF should benefit from an agreement between the buyers of its stock, the Serruya family, and Aphria, the seller that locks the shares up for 18 months. It reported FY19-Q1 sales of $1.1 million.
  • MDCL pre-announced Q3 sales at $1.38 million and indicated it expects full year revenue to be $9 million, including $4.5 million in Q3 that is partially related to the Canadian licensing deal.
  • MMNFF added a high-profile member to its Board of Directors, Stacey Hallerman. It made a strategic investment in Lowell Smokes (no terms disclosed).
  • NXTTF has applied to the NASDAQ. FY18-Q3 financials showed slowing revenue growth and mounting losses in its core business
  • OGRMF updated that it has begun the fourth and final phase of its buildout that is expected to be complete by August, with 89 million grams of capacity at that time.
  • SLTK provided an update on its Arizona operations, which it expect to commence operations in H1-19.
  • TLRY increased the size of its IPO by 15% as the underwriters exercised the option to buy an additional 1.35 million shares. Key insiders filed Form 4s indicating that they participated in the IPO at $17.
  • TRTC received two dispensary permits in Santa Ana and purchased 25% of another licensed dispensary.

The Global Cannabis Stock Index continued to move lower as it reached the lowest close since late November before a modest bounce Friday, decreasing 1.1% to 89.00.

Cannabis Stocks 072718

The index, down 7.2% in Q2 and down 11.1% so far in July, has now declined 37.4% so far in 2018, after gaining 91.8% in 2017 and 88.8% in 2016. The index currently includes 53 stocks and ended 2017 at 142.10.

cannabis stock index 072718 420 Opportunity ended the week valued at $102,285, up 4.0%. The model portfolio has gained 11.9% year-to-date after increasing 103.5% compared to the 91.8% gain in the index in 2017. 420 Quality ended the week at $127,261, up 3.2%, and has increased 16.6% 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 154.5% since inception compared to the 10.1% increase in the index. Flying High ended the week valued at $138,521, up 5.5%. The year-to-date gain has been 22.7%, while the return since inception in late 2013 has been 1285%.

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 almost 700 companies in the sector. The market has been in bull mode since late October but is mired in a broad correction. There are some catalysts ahead, including progress in the Canadian legalization slated to launch on October 17th and in German MMJ as well as the roll-out of the California implementation and Massachusetts. 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. A major change has been the stepped up pace at which higher quality U.S. operators are going public via the CSE in Canada.

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, Michigan, Ohio, Oklahoma, 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:

10-State Cannabis Operator PalliaTech Plans Public Listing in Canada

Acreage Holdings Raises $119 Million Ahead Of Fall CSE Listing

Aphria Amends Liberty Divestment Agreement and Invests in Cannabis Retailer

Aurora Cannabis and MedReleaf Complete Merger

Colorado Cannabis Company Dixie Brands to Go Public in Canada

CV Sciences Triples CBD Sales in Q2 to $12 .3 Million

Emblem to Acquire Ontario Cannabis Greenhouse Grower for $76 Million in Cash and Stock

Growth Slows at Namaste Technologies in Q3 as Gross Margins Decline from Q2

LivWell Enters Canada As ACMPR Applicant Invests $20 Million in Denver Cannabis Branding Company GCH Inc.

MedReleaf Co-Founder Targets Canadian Market with New Licensed Producer

Meet the Leading Public and Private Cannabis Companies at Benzinga’s Toronto Conference

SLANG Cross-Border Cannabis Conglomeration Moves Closer to Trading Publicly

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, INDIVA, 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.