Capitalize On Cannabis Report - 01/16/21

Jan. 16, 2021 5:11 AM ETFFLWF, AYRWF, PLNHF, ACB, TLRY, CCHWF, CGC, CRLBF, CURLF, CWBHF, GNLN, GRWG, GWPH, KSHB, OGI, GRAMF, SMG, TCNNF, TRSSF, VFF1 Comment

Alan Brochstein, CFA's Blog

Investing Group Leader

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http://www.420investor.com

Cannabis stocks

Seeking Alpha Analyst Since 2006

Alan Brochstein, CFA, was one of the first investment professionals to focus exclusively on the cannabis industry. He has run 420 Investor, a subscription-based due diligence platform for investors interested in the publicly-traded cannabis stocks that he has moved to Seeking Alpha, since 2013, and he is also the managing partner of New Cannabis Ventures, a leading provider of relevant financial information in the cannabis industry since 2015. Alan is based in Houston. He and his wife have two adult children.

Before focusing exclusively on the cannabis industry in early 2014, Alan had worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment advisors. In addition to advising several different hedge funds and investment managers, including Friedberg Investment Management, where he participated as a member of its investment management committee, Alan was also a senior analyst for the independent research firm Management CV. In 2008, he began providing a first-of-its-kind subscription-based service for individual investors, Invest By Model, which offered two different portfolios that investors could replicate in their own accounts. Alan also offered The Analytical Trader at Marketfy, where he used fundamental and technical analysis in a disciplined process to offer specific trade ideas geared towards swing traders.

Summary

Capital raising and M&A remained on the front-burner.
Michigan December cannabis sales rebounded sharply.
Health Canada added 5 new licenses.
420 Investor model portfolios kept up with a roaring market.

Review

M&A continues to be a big theme as we start the year. Four large MSOs sold stock, three without warrants and all at small discounts to the recent closing prices. Michigan December cannabis sales bounced back from weak November results, with the state generating total cannabis sales of $985 million in the year.

Health Canada data suggested that the dried flower inventory overhang got a bit worse in October. Health Canada added 2 new licenses this week, leaving the total, including the expired license of Toronto Research Chemicals, the suspended license of Ten-10 Ventures and the revoked licenses of BC Tweed (2), FV Pharma and Zenalytics Laboratories, at 576, which excludes the revoked licenses of Agrima, Alberta Green Biotech, Bloomera, 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, a license previously held by Total Cannabis Solutions and the voluntarily cancelled license of Avalite Sciences.

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

Doubling Down on the California Thesis

Cannabis Sub-Sector Review - 01/08/21

Model Portfolio Composition 01/08/21

I also introduced a new resource tool:

Ancillary Companies Market Caps

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

ACB inked a deal for Great North Distributors (Southern Glazer's Wine & Spirits)to be its exclusive distributor for adult-use products in Canada
APHA reported revenue of C$160.5 million, with adjusted EBITDA of C$12.6 million. Cannabis revenue advanced 7% sequentially to C$67.9 million, with over C$5 million from exports to Europe and Israel.
CCHWF closed its C$150 million equity offering, with underwriters exercising the overallotment option. It received its provisional license for adult-use sales in downtown Boston
CGC upped its exposure to TerrAscend to 20% by acquiring an option for $10.5 million to acquire 1.07 million shares conditional on a "triggering event"
CRLBF filed a Form 40-F ahead of transitioning to SEC filing. The company sold US$125 million in shares (at C$16)after announcing a $213 million stock-based acquisition of publicly traded Florida operator Bluma Wellness.
CURLF closed a $50 million debt facility (three years, 10.25%). It closed its C$317 million equity sale, with the underwriters exercising the overallotment option.
CWBHF secured two U.S. utility patents for hemp strains
GNLN announced the dismissal of a shareholder class action lawsuit
GRWG pre-announced Q4 ahead of expectations at $57 million, with same-store sales up 63% and raised its 2021 outlook
GWPH pre-announced Q4 revenue ahead of expectations at $148 million, with Epidiolex accounting for $144 million.
KSHB slightly missed fiscal Q1 revenue expectations due to the timing of shipments to customers slipping from November to December, but it boosted its FY21 revenue forecast by $10 million to $130-160 million.
OGI named its first American director to its board. The company missed revenue and EBITDA expectations for its fiscal Q1, reporting sales of C$19.3 million.
SBVCF issued additional shares through a private placement, raising $34.5 million. It closed the deal, with about $150 million of redemptions, suggesting a closing cash balance of $381 million.
SMG saw its long-time CFO depart
TCNNF opened two dispensaries in Florida, giving it 72 in the state
TRSSF completed an expansion in New Jersey. The company raised C$224 million, with 80% from four institutional investors, including Wasatch Global.
VFF sold $135 million of shares at $12.40. It introduced a high-THC vape cartridge.

The Global Cannabis Stock Index continued its torrid rally, increasing 13.9% to 60.79:

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, was up 5.2% in 2020. The index has gained 36.9% in 2021 thus far. It currently includes 38 stocks and ended 2020 at 44.39:

Model Portfolios

420 Investor offers three model portfolios for subscribers, including two that are long-term focused and fully invested with a goal of beating the Global Cannabis Stock Index, 420 Opportunity and 420 Quality. 420 Opportunity ended the week valued at $145,179, up 17.6%. The model portfolio, up 37.8% in 2021, gained 35.6% in 2020 and has increased 190.4% since April 2014. 420 Quality ended the week at $217,087, up 12.3% for the week and now 34.4% in 2021, and it gained 42.8% 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 334.2% since inception compared to the 24.8% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $372,506, up 17.6%. The model portfolio gained 52.7% in 2020 and is up 47.6 in 2021, and the return since inception in late 2013 has been 3625%.

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 continues to leave companies operating with negative cash flow severely challenged, as the availability is limited to stronger operators.

After the stocks overreacted and put in a bottom in March, they are now benefiting from a perception that the industry offers strong growth prospects, 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. Access to capital is now improving quickly.

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 adult-use legalization in November.

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, which could eliminate 280E taxation and enable trading on higher exchanges for MSOs as well as the broad usage of credit cards for cannabis purchases), steps to enable cannabis research, the roll out of MMJ in Germany, Mexico and in Australia as well as continued advances in South America and potential adult-use legalization in Israel and Mexico, new legal cannabis implementations in AZ, MT, NJ and SD, and MMJ implementations in 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:

Aphria Cannabis Net Revenue Grows 7% Sequentially to C$68 Million in Fiscal Q2

AYR Closes Upsized C$158 Million Equity Offering

California-Based Papa & Barkley Eyes Expansion Plans for Its Solventless Cannabis Products

Cannabis Retailer Fire & Flower Continues to Leverage Couche-Tard Partnership as It Considers the U.S. Market

Cresco Labs Sells $125 Million of Stock to 7 Institutional Investors

Cresco Labs to Enter Florida with $213 Million Bluma Wellness Acquisition

Curaleaf Finalizes 3-Year Credit Facility at 10.25%

GrowGeneration Pre-Announces Q4 Above Expectations and Projects 2021 Revenue Will Exceed $335 Million

GW Pharma Pre-Announces Q4 Revenue of $148 Million Ahead of Expectations

Hydrobuilder Holdings Raises $70 Million and Combines West Coast Hydroponics Chain with Online Retailer

Institutional Investors Take Down 80% of TerrAscend C$224 Million Equity Private Placement

KushCo Holdings Q1 Revenue Advances 1% Sequentially to $26.8 Million

Michigan Cannabis Sales Surge in December to Reach $985 Million in 2020

Planet 13 Sells Units at C$7 to Raise C$50 Million

Village Farms Raises $135 Million Selling Shares at $12.40

Resources:

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

At New Cannabis Ventures, we work with several publicly-traded companies, including Ayr Strategies, Body and Mind, Charlotte's Web, Cresco Labs, Fire & Flower, Harborside, Indus Holdings, Jushi Holdings, KushCo Holdings, Plus Products, Schwazze (Medicine Man Technologies), TerrAscend, Trichome Financial and Vireo Health, providing each of them with Investor Dashboards. Please see our disclaimer for more detail: http://www.newcannabisventures.com/disclaimer/

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Summary

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