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Capitalize On Cannabis Report - 08/17/19

|Includes: Aurora Cannabis Inc. (ACB), CGC, CTST, CVSI, CWBHF, GGBXF, GTBIF, HEXO, HRVSF, IIPR, MDCL, MEDIF, MJ, MMNFF, SPRWF, TCNNF, TLRY, TRSSF, ZBISF
Summary

Cannabis stocks posted large declines.

Health Canada added another three licenses, pushing the total to 214, including suspended licenses.

Evidence emerged that the sharp moves at the close on 8/9 for several Canadian LPs was due to the ETFMG ETF MJ doing rebalancing.

MSO earnings reports were generally favorable, while a few large Canadian LPs disappointed.

The three 420 Investor model portfolios are up 16-27% in 2019.

Review

The cannabis sector posted new recent lows this week. MSO earnings reports were generally favorable, while a few large Canadian LPs disappointed. Health Canada issued 3 new licenses, bringing the total, including suspensions, to 214 as of 8/16. Evidence emerged that the sharp moves at the close on 8/9 for several Canadian LPs was due to the ETFMG ETF MJ doing rebalancing.

I posted the second of three feature articles for the September edition of the 420 Investor Newsletter this week:

This Metric Suggests Valuations on Many Canadian LPs Are Reasonable

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

  • ACB boosted its BMO Credit facility by 80% to C$360 million
  • CGC continued its string of terrible financial reports, with sales falling 4% overall and 13% excluding acquisitions. The operating margins improved only slightly due to gross margin improvement to just 14.6%, way below peers.
  • CVSI CEO Dowling issued a shareholders letter. The company received coverage from a major U.S. investment bank, Piper Jaffray ($5 target).
  • CWBHF saw relatively strong growth, bouncing back from a weak quarter with 45% revenue growth to $25 million, but this was slightly below expectations, and profitability declined from the prior quarter.
  • GTBIF announced it is opening its fifth Florida dispensary
  • HEXO added 18 new listings in Ontario. It named a new CFO.
  • HRVSF opened its second dispensary in North Dakota, acquired a dispensary in California serving San Luis Obispo, Santa Barbara, Ventura and Monterrey County and resolved its issues with the Pennsylvania regulators. Q2 sales of $26.6 million were in line with their pre-announcement, with adjusted EBITDA improving to -$2.2 million.
  • IIPR agreed to fund another facility with their largest tenant, PharmaCann, a $30 million sales/leaseback in Pennsylvania
  • MDCL announced it sixth pending Colorado acquisition, most of which the company doesn't expect to close until next March., The company is clearly a partner of choice for the state's operators. Q2 sales were $1.8 million
  • MMNFF pre-announced Q4 sales of $42 million. It appears the PharmaCann expected closing won't be until near the end of the year.
  • SPRWF pre-announced a massive Q4, with sales of $19 million well ahead of the $12.7 million consensus. Similarly, the outlook for Fiscal 2020 of $150-180 million was well ahead of the expectations of $127 million..It closed the Truverra acquisitions
  • TCNNF reported impressive sales of $58 million, with stunning 54.9% adjusted EBITDA margins. It opened its 31st dispensary in Florida
  • TLRY beat on revenue expectations but disappointed investors on its profitability
  • TRSSF commenced sales to Europe

The Global Cannabis Stock Index was pulled lower by the overall stock market weakness again, but also saw disappointing financial results and outlooks from some large Canadian LPs, falling 4.6% to 69.21:

The index, up 8.1% so far in 2019, lost 54.9% in 2018 after gaining 91.8% in 2017 and 88.8% in 2016. It currently includes 52 stocks and ended 2018 at 64.02: 

Model Portfolios

420 Opportunity ended the week valued at $109,666, down 4.1%. The model portfolio has gained 15.9% year-to-date and has increased 119% since April 2014. 420 Quality ended the week at $144,299, down 3.2%, and has increased 21.2% 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 188.6% since inception compared to the 14.4% decrease in the index. Flying High ended the week valued at $205,147, down 5.4%. The year-to-date gain has been 27.2%, while the return since inception in late 2013 has been 1951%.

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 is set to include a broader set of products later this year 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 Cannabis Boosts BMO Credit Facility by 80% to $360 Million

Cannabis REIT to Provide PharmaCann Up to $30 Million to Build Out Pennsylvania Cultivation Facilities

Cannabis Technology Company HEXO is Partnering with Fortune 500 Brands to Become a Top 3 Global Player

Canopy Growth Sees Jump in International Sales as Revenue Decreases 4% From Q4

Ex-Yahoo CEO Discusses Rapid Growth of California Cannabis Brand Caliva

Green Growth Brands Lines Up Investors for $77 Million Convertible Note Funding

Harvest Health & Recreation Q2 Revenue Grows 38% Sequentially to $26.6 Million

Health Canada Accuses CannTrust of Additional Violations 

Irresponsible Rebalancing by ETF Managers Group Creates Chaotic Close for Cannabis Stocks on August 9th

MediPharm Labs Boosts Q2 Revenue 43% Sequentially to $31.5 Million

MedMen Sees Q4 Revenue at $42 Million

Supreme Cannabis Sees Q4 Revenue at $19 Million and FY20 Revenue in Excess of $150 Million

Tilray Reports Strong Cannabis Revenue Growth in Q2 to $26 Million

Trulieve Generates 149% Growth in Q2 Revenue to $57.9 Million

Zenabis Global Q2 Net Revenue Increases 117% to $25 Million

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, GABY Inc., 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/