Capitalize On Cannabis Report - 07/04/20

Summary

• BDSA data for May showed a sharp acceleration in cannabis sales across 8 American markets.
• Health Canada added 5 new licenses.
• The three 420 Investor model portfolios have returned -3.8% to +9.6% in 2020, outpacing the market, which has lost 30.4% as measured by the Global Cannabis Stock Index.

Review

This week provided confirmation of very robust growth in cannabis sales growth, with BDSA reporting very strong May revenue across 8 states, especially for flower.

Health Canada added 5 new licenses this week and revoked 1, leaving the total, including a suspended license of CannTrust, at 417, which excludes the revoked licenses of Agrima, Alberta Green Biotech, Bloomera, Medican Organic's 2nd site and a small processing facility that belonged to Canopy Growth, the expired license of Evergreen Medicinals and the voluntarily cancelled license of Avalite Sciences.

During the week, I shared these posts with subscribers at 420 Investor:

Earnings Preview for KushCo Holdings

Cannabis Sub-Sector Review - 07/02/20

Special Mid-Year Cannabis Sub-Sector Review - 06/30/20

Changes to the Global Cannabis Stock Index for July 2020

Cannabis Sub-Sector Review - 06/26/20

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

• ACB founder Terry Booth departed the Board of Directors
• CRLBF entered a sale-leaseback with Innovative Industrial Properties for its 118K sq. ft. Massachusetts cultivation, production and dispensing facility, its fifth deal with the company
• CURLF shared expansion plans for Select into Maine, Massachusetts, Ohio and Florida this summer. It also announced a private placement of up to C$27.5 million at C$7.75
• FLOOF closed a C$8.2 million unit sale at C$0.50
• GRWG priced $42 million equity offering at $5.60
• GWPH shared a clinical timeline for the development of nabiximols in the U.S. The company will launch three Phase 3 trials over the next year for MS spasticity and three Phase 3 trials for spinal cord injury over the next 18 months
• IIPR closed its $259 million equity offering, priced at $83.85. It will invest about $29 million into the Cresco Massachusetts facility
• KERN replaced its recently hired CTO with a five-year veteran of the company. The former CTO will focus solely on the solo platform
• OGI announced a 25% staff reduction and plans to cultivate below full capacity as it focuses on higher THC and stronger terpene profiles.  The company suggested revenue will decline during fiscal Q3 due to wholesale revenue not recurring, with operating expenses declining as well. It will be writing down inventory and the value of its production facility as well. 
• SHWZ announced the termination of three additional merger agreements, including Dabble ($4 million), Los Suenos ($6 million) and Farm Boy ($6 million). The latter two were associated with recently departed COO and Director Robert DeGabrielle. The company also shared financials for recently acquired Mesa Organics, which generated revenue in Q1 of $2.7 million.
• TCNNF opened its 51st Florida medical cannabis dispensary
• TRSSF announced the opening of its third Pennsylvania dispensary
• VREOF replaced its recently hired CFO with a new hire

The Global Cannabis Stock Index broke a three-week losing streak with a tiny gain, increasing 0.1% during the week to 29.37:

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 30.4% thus far in 2020. It currently includes 37 stocks and ended 2018 at 42.20:

Model Portfolios

420 Opportunity ended the week valued at $74,794, down 1.6%. The model portfolio has lost 3.8% year-to-date and has increased 49.6% since April 2014. 420 Quality ended the week at $111,612, down 1.0% for the week, and it has lost 1.3% 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 123.2% since inception compared to the 63.6% decrease in the index. Flying High ended the week valued at $181,035, down 1.5%. The year-to-date gain has been 9.6%, while the return since inception in late 2013 has been 1710%.

Outlook

After a strong rally to begin 2019, the cannabis sector experienced a sharp decline over the next year to unprecedented levels due to several negative developments, 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, the vaping crisis and then financial turmoil due to the COVID-19 pandemic, which could add additional cost burden to operators. The sector has seen capital available to fund expansion dry up, a situation that will leave companies operating with negative cash flow severely challenged.

I believe stocks overreacted and put in a bottom in March, and they are now poised to benefit from a perception that the industry will hold up better than most in a weak environment, something that wasn't clear then. A big change has been that the pandemic has caused many regulators to permit previously prohibited types of retail activities, like curbside pickup and delivery. The legal market is rapidly capitalizing on becoming even more convenient than the illicit market, with the ability to order online. High unemployment and large deficits will likely spur state legalization efforts as well as more favorable regulatory control at the local level. The rising tide, though, will not lift all boats.

There are some potential catalysts ahead, including the FDA providing clarity on CBD, progress in the Canadian legalization that commenced in October 2018 and is beginning to include a broader set of products and the continued growth in German MMJ. The implementations in California and Massachusetts for adult-use have been disappointing but are likely to show great improvement. Michigan legalized in December and Illinois legalized in January, and these markets are showing strong growth that could encourage other states to legalize. Voters in New Jersey will vote on legalization in November, and it is very likely that Arizona voters will do the same. 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., managing through the COVID-19 crisis, steps to enable cannabis research, FDA push-back towards the CBD from industrial hemp industry, the roll out of MMJ in 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, Missouri, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas and Utah, possible legalization via the legislatures in CT, FL, MD, MN, NH, 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, 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. At the federal level, investor sentiment could brighten if the Democrats are able to recapture control of the Senate.

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

American Cannabis Operator Stocks Gain 29% in Q2

Ancillary Cannabis Supplier GrowGeneration Prices $42 Million Equity Offering at $5.60 Per Share

Canadian Cannabis Producer Stocks Pull Back 11% in June

Cannabis REIT Raises Another $225 Million

Cresco Labs Expands Innovative Industrial Properties Partnership with $28.8 Million Massachusetts Cannabis Sale-Leaseback

Curaleaf Holdings to Raise C$27.5 Million in Private Placement Sale of Shares at C$7.70

Global Cannabis Stocks Post First Winning Quarter Since Early 2019

How Cannabis Testing Company SC Labs Builds Collaborative Relationships with Clients

MedMen Substantially Dilutes Shareholders Again to Appease Creditors

New Cannabis Ventures Upgrades Canadian Cannabis Index Criteria

Profitable Privately Owned Cannabis Operator Verano Expects Strong Organic Growth

Public Cannabis Companies Continue to Rapidly Ramp Up Revenue

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