Capitalize On Cannabis Report - 03/06/21

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Summary

More states are legalizing or moving towards legalization.
BDSA data suggests strong cannabis growth, driven by flower demand, continued into January.
Illinois continued to see strong growth in adult-use sales in February.
Health Canada issued 3 licenses.
420 Investor model portfolios have gained 63.2-74.5% year-to-date, while the Global Cannabis Stock Index has gained 37.6%.

Review

BDSA data for January showed strong growth across 8 markets, especially for flower. California accelerated, and the mature markets in the West continued to suggest that the legal market is converting illicit market consumers. Illinois released data for February showing overall growth from a year ago of 85%, with adult-use expanding 132% and medical growing by 19%.

Virginia approved adult-use legalization, but the program won't commence until 2024 and requires additional approvals in 2022. In Florida, a Republican legislator proposed THC limits on medical cannabis products. Pennsylvania legislators are planning to introduce a bipartisan legalization initiative.

Health Canada data showed inventory levels remain high for not only flower but also edibles as of November. Health Canada added 3 licenses, leaving the total at 616, which includes 5 licenses that are expired, revoked or suspended.

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

Curaleaf Q4-20 Earnings Preview

Model Portfolio Composition 02/26/21

Cannabis Sub-Sector Review - 02/26/21

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

CCHWF pre-announced Q4 revenue at $76 million with adjusted EBITDA of $8 million and provided 2021 guidance for pro forma revenue of $500-530 million with adjusted EBITDA of $95-105 million.
CGC launched Quatreau CBD beverages in the U.S.
CRLBF filed a preliminary prospectus to raise up to $1 billion
CWBHF paid $8 million for an option to potentially acquire Stanley Brothers at a pre-determined valuation, a move that will allow them to enter federally legal markets with cannabis wellness products that include THC
FFLWF announced that it is converting C$28.5 million of its 8% convertible notes and C$23.6 million of the convertible debt held by Couche-Tard into stock, leaving Couche-Tard as now a 19.9% equity holder
FLOOF proposed additional debt restructuring that would extend the maturity, lower the price and allow for mandatory conversion, with the majority of holders agreeing thus far
GNLN acquired Eyce, a manufacturer of specialty silicone smoking products, for 426K shares
GTBIF partnered with Cann, a California cannabis beverage brand, to bring its micro-dosed social tonics to Illinois and then New Jersey
LOWLF reported that Q4 revenue fell 15% from a year ago to $9.2 million due to yield challenges and other issues and suggested that the challenges impacted Q1 as well
OGI launched two new products, including a 14-pack of pre-rolls and a milk chocolate bar
SHWZ raised additional capital through the sale of convertible preferred stock and closed on the purchase of the remaining Colorado Star Buds dispensaries.
SMG reported that it will boost its 2021 outlook for EPS of $8-8.40 when it reports its Q2 in May.
SPRWF announced a C$30 million At-the-Market equity program
TCNNF opened its 76th and 77th Florida dispensaries

The Global Cannabis Stock Index fell for the third consecutive week as the broad market weakness weighed upon it, decreasing 8.4% to 61.08:

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 37.6% 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 $178,724, down 8.4%. The model portfolio, up 69.6% in 2021, gained 35.6% in 2020 and has increased 257.5% since April 2014. 420 Quality ended the week at $263,557, down 7.7% for the week, and is now up 63.2% in 2021 after gaining 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 427.1% since inception compared to the 24.5% decrease in the index. Flying High, which is focused on swing trades, ended the week valued at $440,370, down 8.6%. The model portfolio gained 52.7% in 2020 and is up 74.5% in 2021, and the return since inception in late 2013 has been 4334%.

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.

Cannabis stocks overreacted and put in a bottom in March, and 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 that is beginning to include a broader set of products and the continued growth in German and Israeli MMJ and other international markets that have been slow to develop. The implementations in California and Massachusetts for adult-use were slow to roll out but are beginning to show great improvement. Michigan and Illinois legalized at the end of 2019, 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, DE, FL, MD, MN, NH, NM, NY, PA, RI and VA 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:

Charlotte’s Web Positions for American Cannabis Legalization With Option to Acquire Stanley Brothers

Columbia Care Pre-Announces Q4 Revenue at $76 Million and Sees Pro Forma 2021 Revenue in Excess of $500 Million

Couche-Tard to Boost Fire & Flower Equity Ownership to 19.9% Through Debt Conversion

Global Cannabis Stocks Post Another Big Gain in February

High Tide Q4 Revenue Increases 7% Sequentially to $24.9 Million

Illinois Cannabis Sales Increase 85% in February

Robust Flower Demand Fuels Strong Cannabis Sales Growth in January

Smaller Companies Lead Canadian Cannabis Producer Stock Index 19% Higher in February

Stocks of American Cannabis Operators Outpace Overall Market With 20.5% Gain in February

This California Cannabis Company Is Distributing $250 Million of Product Annually

Verano Leverages Its Recent Listing to Ramp Up M&A in Its Existing Cannabis Markets

WeedMD Slashes Recent Bought Deal Offering Price by 41%

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, Jushi Holdings, KushCo Holdings, Lowell Farms, Plus Products, Rubicon Organics, TerrAscend, TPCO Holding Corp,Trichome Financial, urban-gro, Valens Company and Vireo Health, providing each of them with Investor Dashboards. Please see our disclaimer for more detail: http://www.newcannabisventures.com/disclaimer/

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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