Navigate the fast-moving cannabis sector with 420 Investor, a premium service that sends real-time alerts and explanations of the news below and much more.

Summary

• Several states showed sharp slowdowns in cannabis sales during January compared to December
• 420 Investor model portfolios have returned 4.7% to 6.9% year-to-date, while the Global Cannabis Stock Index has lost 5.7%

Review

Illinois saw a sharp reversal in January after a very strong December, as overall cannabis sales fell 15% and rose 21% from the prior year. Michigan experienced a similar January, with sales declining 9% from December and increasing 41% from a year ago as flower prices plunged. Massachusetts also saw a sharp decline in January, with adult-use sales falling 11.5%, up 29% from a year ago, and medical declining 18%, down 11% from a year ago.

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

• This Canadian LP Is Set to Double
• Cannabis Sub-Sector Review – 02/04/22
• Model Portfolio Composition 02/04/22

Here are some of this week’s highlights for 420 Investor Focus List names:

• AAWH tapped Innovative Industrial Properties for a $35 million sale-leaseback in New Jersey
• AYRWF opened its 45th Florida dispensary. It entered a management services agreement with Tahoe Hydroponics while it waits to close that Nevada acquisition, allowing it access to its genetics and brands via license.
• CGC reported Q3 revenue of C$141 million, in line with expectations and down 8% from a year ago. Strength in Biosteel helped offset weakness in cannabis sales. Adjusted EBITDA of -C$67.4 million was also in line with expectations.
• CRLBF opened its 15th Florida dispensary.
• CWBHF revealed that clinical trials conducted by Radicle Science showed positive effects of its products on stress, sleep and well being.
• GTBIF opened its 3rd and 4th Virginia dispensaries.
• HBORF closed $45 million of its $77 million debt with Pelorus Equity Group and terminated its proposed equity raise announced in November. It expects to close the merger with Urbn Leaf and Loudpack in March.
• SHWZ closed its $42 million New Mexico acquisition as well as its $29 million purchase of two dispensaries in Colorado.
• TCNNF launched two new brands and several other product introductions in Florida. It also opened its 112th dispensary in Florida.
• TLLTF stated that none of its products were part of the Pennsylvania mandatory vape cartridge recalls announced last week. It also exercised a call option to purchase its cultivation facility in Massachusetts.
• TLRY launched Tilray Medical as its consolidated global medical offering
• VLNS hosted an investor day and shared financial targets for fiscal 2023 for revenue to exceed C$225 million and adjusted EBITDA margin greater than 10%. The company began manufacturing cannabis-infused beverages at its new facility in the Greater Toronto Area.

Market Performance

The Global Cannabis Stock Index posted its second consecutive big weekly gain, increasing 7.5% to 30.98:

The index, which lost 26% in 2021 following a 5.2% gain in 2020, is down 5.7% in 2022. It currently includes 38 stocks and ended 2021 at 32.85:

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 $97,108, up 16.6%.The model portfolio, down 13.8% in 2021 after a 35.6% gain in 2020, is up 6.9% in 2022 and has increased 94.2% since April 2014 despite the large loss in the index since then. 420 Quality ended the week at $133,782, up 16.3% for the week. It is up 5.9% in 2022 and was down 21.8% 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 167.6% since inception compared to the 64.41.7% decline in the index since then. Flying High, which is focused on swing trades, ended the week valued at $308,179, up 22.3%. The model portfolio gained 16.6% in 2021 and 52.7% in 2020 and is up 4.7% in 2022. The return since inception in late 2013 has been 2982%.

Outlook

The cannabis sector has continued to evolve through several ups and downs over the past few years. 2021 began by extending on massive gains in Q4 but hit a wall in mid-February, sliding the balance of the year after the market had gotten ahead of itself. Disappointment over the slow pace of federal reforms or the move towards legalization was a factor, but decreasing growth in cannabis sales, regulatory delays in several states and the implosion of the wholesale flower market in California played roles as well. In Canada, while the market has continued to grow, the evolution to derivative products has been slow. Additionally, the largest LPs have lost market share and have been unable to scale thus far.

The bull market that began in March 2020 after the pandemic and the capital crunch that followed the vaping crisis in 2019 appears to be intact for the American cannabis operators, which continue to trade sharply higher than where they traded in the summer of 2020 despite large declines from the peak in February. Looking forward, the outlook appears strong, with the leading companies moving to positive operating cash flow and having increasing access to non-dilutive capital, including debt, mortgages and sale-leasebacks. Several states will be moving from medical-only to adult-use, including New Jersey, New Mexico, Vermont and Connecticut in 2022, New York in 2023 and Virginia in 2024. Several other states could move to legalize for adult-use as well, including Delaware, Florida, Maryland, Minnesota, New Hampshire, Pennsylvania and Rhode Island. Several states are expanding programs as well, with additional dispensaries ahead for Illinois. Medical-only state Minnesota will be adding flower and edibles in 2022, and Ohio is expanding its program as well. Increasing competition within certain state markets that is weighing on profitability will likely remain a challenge. Further, while many see federal legalization as a positive, this remains a potential risk-factor in my view.

While the stocks of American cannabis companies continue to be held by mainly retail investors, 2021 saw an increase in institutional investment. Another big development has been the growth in AdvisorShares Pure US Cannabis ETF (MSOS), which has broadened the access to cannabis companies for investors that don’t trade OTC stocks. Additionally, a number of ancillary companies have gone public and trade on higher exchanges, offering institutional investors a way to invest in the industry. We have seen several investments into American cannabis companies, mainly by Canadian LPs, but, looking ahead, strategic investment through creative financial structures will likely extend to CPG companies in 2022.

At the federal level, the FDA (or Congress) could provide clarity on CBD regulation. With respect to THC, both Democrats (Cannabis Administration and Opportunity Act) and Republicans (States Reform Act) are advancing legislation to legalize cannabis. While this is going to be a long process in my view due to the complexity (varying state regulations, role of FDA, social equity, taxation), this is very different from what the developing cannabis sector faced just a few years ago: potential crackdowns against state legalization. I remain hopeful that Congress can advance small reforms, including expanded research and SAFE Banking. An enhanced financial reform that explicitly permitted companies operating in state-legal cannabis to trade on higher exchanges would be extremely positive.

Beyond America, cannabis legalization continues to proliferate. While Canada remains the largest federally legal cannabis market, many other countries have medical programs, including Argentina, Chile, Colombia, Ecuador, Peru and Uruguay (fully legal) in South America. Mexico has legalized for possession but doesn’t yet have a regulated program, and it could legalize for adult-use as well. Australia’s medical program was slow to start but has gained traction. New Zealand has a medical program as well. In Africa, several countries have legalized medical cannabis. Europe, of course, has seen widespread adoption of medical cannabis. Germany has been slow to develop but could move to legalize for adult-use. Other markets where there is medical cannabis include Denmark, Greece, Italy, Netherlands, Poland, and Portugal. The UK and Israel have medical cannabis, and Israel could move to legalize for adult-use. Of course, let’s not forget Jamaica!

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

Aurora Cannabis Q2 Revenue Decreases 10% to C$60.6 Million

Exclusive: California Cannabis Brand Garden Society Plans National Expansion Following Series A

CEA Industries Raises $24 Million Selling Units at $4.13

Exclusive: Glass House Brands Makes Progress on Ambitious Cultivation Footprint in California

Harborside Closes $45.4 Million Debt with Pelorus

Exclusive: Illinois Cannabis Sales Slide 15% Sequentially in January to $147 Million

Exclusive: Plunging Prices Push Michigan Cannabis Sales 9% Lower in January

Weak Cannabis Sales Drive Canopy Growth Q3 Revenue 8% Lower to C$141 Million

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