Capitalize On Cannabis Report - 12/05/20

Summary

• Votes in Congress and the UN pointed to the decades of cannabis prohibition nearing an end.
• Health Canada added 6 new licenses.
• The three 420 Investor model portfolios have returned 44.5% to 69.0% in 2020, outpacing the market, which has gained 6.6%.

Review

The House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act ("MORE Act"), which, if signed into law, would remove cannabis from the federal Controlled Substances Act. The United Nations Commission on Narcotic Drugs moved to adopt a WHO recommendation to remove cannabis from Schedule IV of the 1961 Single Convention on Narcotic Drugs.

Health Canada added 6 new licenses this week, leaving the total, including the expired license of Toronto Research Chemicals, at 556, which excludes the revoked licenses of Agrima, Alberta Green Biotech, Bloomera, FV Pharma, Hexo's 4th site, Maricann's 2nd site, Medican Organic's 2nd site and a small processing facility that belonged to Canopy Growth, the expired license of Evergreen Medicinals, two transferred licenses held formerly by James Wagner and the voluntarily cancelled license of Avalite Sciences. It also includes, for now, the FV Pharma license, which was relinquished and revoked.

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

Cannabis Sub-Sector Review - 11/27/20

Model Portfolio Composition 11/27/20

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

• APHA closed its acquisition of Sweetwater Brewing Company
• CCHWF completed the acquisition of Project Cannabis in California
• CRLBF launched its eighth proprietary brand, Wonder Wellness Company, with a focus on new cannabis consumers seeking low-dose products.
• FLOOF reported its Q3, with filings that revealed a severe liquidity challenge
• FFLWF closed the Friendly Stranger acquisition and also purchased College Street Cannabis Store in Toronto. The company filed a prospectus for a $15 million at-the-money shelf registration.
• OGI reported better than expected revenue in its fiscal Q4 but continued to write down inventory
• TLRY signed an agreement with a pain therapy group to promote its cannabis extracts in Germany
• VFF announced that its investee DutchCanGrow failed to win a license in the Netherlands lottery

The Global Cannabis Stock Index continued to ascend this week, increasing 6.4% to 45.00:

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 up 6.6% thus far in 2020. It currently includes 32 stocks and ended 2018 at 42.20:

Model Portfolios

420 Opportunity ended the week valued at $112,274, up 14.2%. The model portfolio has gained 44.5% year-to-date and has increased 124.6% since April 2014. 420 Quality ended the week at $174,730, up 13.3% for the week, and it has gained 54.5% 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 249.5% since inception compared to the 44.4% decrease in the index. Flying High ended the week valued at $279,199, up 16.8%. The year-to-date gain has been 69.0%, while the return since inception in late 2013 has been 2692%.

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 and market disruptions due to the COVID-19 pandemic. The sector saw capital available to fund expansion dry up, a situation that will leave companies operating with negative cash flow severely challenged, as the availability is limited to stronger operators.

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 and other international markets that have been slow to develop. The implementations in California and Massachusetts for adult-use have been disappointing but are beginning 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 Arizona, Montana, South Dakota and New Jersey all approved legalization in November. 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., potential federal regulatory reform (SAFE Banking Act and other more comprehensive legislation), 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 soon AZ, MT, NJ and SD, and the recent MMJ implementations in Arkansas, Louisiana, Michigan, Missouri, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, Utah and Virginia and soon Mississippi and West Virginia, possible legalization via the legislatures in CT, FL, MD, MN, NH, NM, NY, PA and RI and implementation of the VT commercial program in 2022.

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

American Cannabis Operator Index Soars 40% in November

An Exclusive Interview With a California Cannabis Colossus Going Public in an Unconventional Manner

Ayr Strategies to Issue $75 Million 4-Year Notes at 12.5%

Columbia Care Closes $69 Million California Acquisition

Curaleaf’s New CEO Talks Plans to Leverage the Company’s Platform to Build National Cannabis Brands

Global Cannabis Stocks Rally 51% to 2020 Monthly Closing High in November

Hydrofarm IPO Price Range Set at $14-16

Large LPs Nearly Double to Lead Canadian Cannabis Producer Stocks 24% Higher in November

Maryland Cannabis Operator to Expand Geographically by Funding Diverse Entrepreneurs with $30 Million Startup Capital

Organigram Fiscal Q4 Revenue Increases 13% Sequentially to $20.4 Million

The Uncertain Future of Distressed Cannabis Bankruptcies and the 2020 Elections

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