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Capitalize On Cannabis Report - 02/15/20

|Includes: ACB, CGC, CRLBF, CURLF, FFLWF, FLOOF, Invictus MD Strategies Corp. (IVITF), KERN, PYX, SPRWF, TCNNF
Summary

News in Alberta and Ontario was favorable to the industry.

Health Canada added 3 new licenses,.

The three 420 Investor model portfolios returned -18.8% to -7.6% in 2020, while the market has lost 10.5%.

Review

Sector news was light in the U.S. this week. Alberta lifted its cannabis vape ban. Ontario announced it is conducting consultations to help expand the cannabis industry. Health Canada added 3 new licenses, leaving the total, including three suspended licenses of CannTrust (2) and Evergreen Medicinal Supply and the voluntarily cancelled license of Avalite Sciences, at 308, which excludes the revoked license of Agrima.

During the week, I published the second of three feature articles for the March edition of the 420 Investor Newsletter:

Planet 13 Is a One-Hit Wonder So Far

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

  • ACB reported its pre-announced quarter, with revenue as indicated at $56 million after a $10.6 million adjustment for returns, with weaker gross margin and worse EBITDA than expected
  • CGC reported sequential growth and beat analyst expectations with overall revenue of C$124 million and improved but large operating losses
  • CRLBF added a Chief Commercial Officer with experience at Pfizer, Johnson & Johnson, Molson Coors and Walgreens. Greg Butler had been working at an affiliate of the company for a year.
  • CURLF announced the expiration of HSR Waiting Period for Grassroots Cannabis, paving the way for a close to the acquisition next month.
  • FFLWF announced that it had converted debt held by two LPs into 12.2 million shares, reducing pressure on its near-term liquidity, as the debt was due in July.
  • FLOOF launched partner HUXTON in Nevada
  • KERN reported revenue that grew 28% but was less than expected. Its operating loss narrowed, but by less than expected.
  • SPRWF announced a 15% reduction in headcount and reported weak results in Q2, with sales declining from Q1 by 21% to $9.1 million and the operating loss expanding to $17 million. The company also announced a partnership with ancillary company Humble+Fume as its sales agent
  • TCNNF opened its 44th Florida medical cannabis dispensary

The Global Cannabis Stock Index extended losses from the past three weeks as it posted a new recent closing low during the week before reversing, gaining 0.5% to end at 37.75:

The index, which lost 34.1% in 2019 and lost 54.9% in 2018 after gaining 91.8% in 2017 and 88.8% in 2016, is down 10.5% to begin 2020. It currently includes 41 stocks and ended 2018 at 42.20:

Model Portfolios

420 Opportunity ended the week valued at $68,460, down 10.0%. The model portfolio has lost 11.9% year-to-date and has increased 37% since April 2014. 420 Quality ended the week at $104,548, up 0.2% for the week, and it has lost 7.6% in 2020. The model was launched in March 2017 targeting long-term investors seeking to invest in leading cannabis stocks with low portfolio turnover and has gained 109.1% since inception compared to the 53.3% decrease in the index. Flying High ended the week valued at $134,292, down 3.4%. The year-to-date loss has been 18.8%, while the return since inception in late 2013 has been 1243%.

Outlook

The cannabis sector has experienced a sharp pullback to levels not seen in more than three years after several negative developments this year, including the CannTrust fraud, the surprise termination of Bruce Linton as CEO of Canopy Growth, a disappointing roll-out of legalization in Canada, regulatory confusion in the U.S. regarding CBD and a slow roll-out of legalization in California. Most recently, the vaping crisis threatened a large and rapidly growing part of the industry. The sector is seeing capital available to fund expansion dry up, a situation that will leave companies operating with negative cash flow severely challenged. Consequently, investors have been selling cannabis stocks. There are some catalysts ahead, including the changes ahead due to hemp legalization in late 2018, progress in the Canadian legalization that commenced in October 2018 and is beginning to include a broader set of products 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. In the very near-term, Michigan legalized in December and Illinois legalized in January. 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 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 ) as well as its successor, the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (MORE Act), which was approved by the House Judiciary Committee, better clarity from the federal government for banks (SAFE Banking Act, which may be voted upon by the Senate next year though the odds seem slim) and cannabis research, FDA pushback towards the CBD from industrial hemp industry, 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 recent MMJ implementations in Arkansas, Michigan, Ohio, North Dakota, Oklahoma, Pennsylvania, Texas and Utah, possible legalization via the legislatures in CT, FL, MD, MN, NH, NJ, NM, NY, PA and RI and implementation of potential commercial programs in ME and VT. The 2020 elections could start to get a lot of attention later this year and in early 2020 as well, with Arizona and New Jersey at the top of the list, and ballot initiatives are already approved in MS and SD for medical cannabis and SD for adult-use. MT could see ballot initiatives for both medical and adult-use.

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

Aurora Cannabis Generates $56 Million Revenue in Fiscal Q2

Canadian LP Invictus Granted Creditor Protection

Canopy Growth Expands Revenue in Q3 to $123.8 Million as Losses Decline

Disastrous Results and Looming Debt Maturities Push Pyxus to Potentially Ditch Cannabis Operations

Ohio Medical Cannabis Program Has Been Slow to Develop

Resumption of Vaping Growth Fuels Cannabis Market Sales Expansion in December

Supreme Cannabis Announces 15% Reduction in Workforce

Texas Cannabis Market Restrictions Stunt Growth

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 Aurora Cannabis, Canopy Growth, Charlotte's Web, Cresco Labs, Fire & Flower, iAnthus Capital, INDIVA, KushCo Holdings, Medicine Man Technologies, MediPharm Labs, MPX International, Organigram, Plus Products, Supreme Cannabis, TerrAscend, TILT Holdings and Vireo Health, providing each of them with Investor Dashboards. Please see our disclaimer for more detail:

www.newcannabisventures.com/...