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Capitalize On Cannabis Report - 07/20/19

Summary

Cannabis stocks bounced modestly in choppy trading.

M&A was front and center with the Curaleaf proposed acquisition of Grassroots Cannabis for $875 million.

The three 420 Investor model portfolios are up 23-37% in 2019.

Review

After two weeks of negative shocks, this week saw a positive surprise, with the announcement that a Senate Committee will meet next week for testimony related to the SAFE Banking Act. In another eye-opener, Curaleaf, with already a big deal pending to buy Cura Partners, announced that it will buy MSO Grassroots for $875 million, mainly in stock, in a deal projected to close in early 2020. Utah named 8 license holders for its medical cannabis program slated to begin in early 2020. Health Canada added 3 more licenses, bringing the total to 199.

During the week, I posted an article at Forbes.com:

A Walk Through The Cannabis Stock Graveyard

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

  • ACB received two outdoor licenses and an approval for its Alberta processing facility. It also was the sole winner of the Italian cannabis tender, a very small deal
  • ACRGF announced that its CEO and founder bought $2 million of stock on the open market
  • CVSI expanded its operations with a new production and warehouse facility in San Diego expected to become operational later this year and to support expansion domestically and internationally
  • CWBHF continued to upgrade and expand its management team with the addition of a Chief Customer Officer with extensive CPG experience
  • ELLXF announced a new CEO. It also received its medical cannabis production license in Australia. It also announced a research initiative focused on regenerative organic hemp farming.
  • HEXO co-founder Adam Miron will depart his role as Chief Brand Officer while remaining a director
  • HRVSF was one of the 8 Utah license recipients
  • IIPR will be buying and leasing back DionyMed Brands' Southern California facility for a $15 million investment.
  • KSHB received a subpoena from the SEC regarding its restatement of financials earlier this year
  • MDCL closed on its second investment from Dye Capital and expanded the total funding to $21 million from $14 million, with $10 million executed thus far.
  • OGI reported Q3 financials, with revenue falling short of expectations and declining slightly from the prior quarter and gross margin declining as well due to a one-time factor
  • ORHOF preliminary sales of C$21 million fell short of expectations but expanded dramatically from Q1, with gross margin expanding to 17%
  • SNNVF received a $1 million deposit on its pending Canadian asset sale and announced a C$5 million debt and warrant offering
  • SPRWF announced a $20 million stock acquisition of Canadian LP focused on extraction with European CBD operations, Truverra

The Global Cannabis Stock Index rose for the first time since June, gaining 1.5% to 76.18: 

The index, up 19.0% so far in 2019, lost 54.9% in 2018 after gaining 91.8% in 2017 and 88.8% in 2016. It currently includes 64 stocks and ended 2018 at 64.02:

Model Portfolios

420 Opportunity ended the week valued at $116,953, up 5.8%. The model portfolio has gained 23.9% year-to-date and has increased 134% since April 2014. 420 Quality ended the week at $149,774, up 3.1%, and has increased 25.8% 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 199.6% since inception compared to the 5.8% decrease in the index. Flying High ended the week valued at $220,953, down 2.3%. The year-to-date gain has been 36.9%, while the return since inception in late 2013 has been 2110%.

Outlook

The cannabis sector is seeing rapidly 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 800 companies in the sector. While the sector has been volatile and has declined since early 2018, the longer-term trend since early 2016 has been bullish. There are some catalysts ahead, including the changes ahead due to hemp legalization, progress in the Canadian legalization that commenced October 17th and in German MMJ as well as the continued roll-out of the implementations in California and Massachusetts for adult-use as well as medical cannabis in several other states. 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. Consolidation within both Canada and the U.S. will continue, but the Canopy deal with Acreage paves the way for potentially more cross-border consolidation. Finally, expect to see more of the Canadian LPs list on major U.S. exchanges.

The big themes ahead are likely to be continued cross-industry investment into the sector and more consolidation in Canada and in the U.S., 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 ), better clarity from the federal government for banks and cannabis research, FDA pushback towards the CBD from industrial hemp industry, the GW Pharma launch of Epidiolex, the inclusion of a broader range of extracts in Health Canada's ACMPR program and its continued growth in patient enrollment, 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, IL, MA and MI, and the new MMJ implementations in Arkansas, Florida, Maryland, Michigan, Ohio, North Dakota, Oklahoma, Pennsylvania, Texas and Utah possible legalization via the legislatures in CT, MD, MN, NH, NJ, NM, NY and RI and implementation of potential commercial programs in ME and VT. The 2020 elections will start to get a lot of attention later this year as well.

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

Aurora Gains Outdoor Cannabis Cultivation Licenses in BC and Quebec and a Processing License in Alberta

Canadian Cannabis Pioneer Poised to Capitalize with HollyWeed North as Industry Changes

Cannabis Technology Firm Behind IHeartJane.Com Raises $21 Million

Curaleaf to buy Grassroots for $875 Million in Stock Primarily

DionyMed Brands Taps Cannabis REIT for $15 Million Financing for Southern California Expansion

Leading Cannabis Investors Up Their Stakes as GrowGeneration Executes

MediPharm Labs Conditionally Approved to Graduate to the TSX

Neptune Wellness Solutions Raises US$41 Million Selling Shares at $4.40

Organigram Q3 Net Revenue Grows 621% to $24.75 Million

Origin House Expects Q2 Revenue at $21 Million

Price Decline Prompts Columbia Care $25 Million Share Repurchase Program

Supreme to Buy Canadian LP Truverra for $20 Million in Stock

TerrAscend Puts Patients First on Path to Becoming a Top 5 Global Cannabis Company

TILT Holdings Begins Sale of up to $125 Million 8% Convertible Notes

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 48North, Aurora Cannabis, Canopy Growth, Charlotte's Web, Cresco Labs, DionyMed Brands, Fire & Flower, Green Growth Brands, Harvest One, iAnthus Capital, INDIVA, KushCo Holdings, Liberty Health Sciences, Medicine Man Technologies, MediPharm Labs, MPX International, Organigram, Plus Products, Supreme Cannabis, TerrAscend, TILT Holdings, Vireo Health and VIVO Cannabis, providing each of them with Investor Dashboards. Please see our disclaimer for more detail:
www.newcannabisventures.com/disclaimer/