Cannabis Stocks Still Look at Risk

I shared an update here in August, written more than a week after the news came out about potential cannabis rescheduling , warning about really dangerous cannabis stocks. In that piece, I mentioned a few stocks that I don't follow closely but that I thought were too high, and I also discussed several specific stocks, all American cannabis producers, that worried me.

Since 8/20, cannabis stocks have gone higher, along with the overall stock market. The S&P 500 has gained 3.0% since then, and the Russell 2000, which measures small-cap stocks, has increased by 5.7%. The New Cannabis Ventures Global Cannabis Stock Index, now at 7.01 and up 1.9% year-to-date, has increased by 4.9%.

The stocks that I warned about included ETF MSOS and also two MSOs, Curaleaf (CURLF) and Trulieve (TCNNF). I also warned about two Canadian LPs, Canopy Growth (CGC) and Tilray Brands (TLRY) as well as ancillary Hydrofarm (HYFM). Here is the action since then:

The two Canadian LPs have gone up, but the rest have declined, especially Hydrofarm, which I still think is quite risky. I shared my updated views on Tilray on my blog at Seeking Alpha, which is available to all and free of charge, on 8/26 after the market closed, saying that the stock, which I had downgraded to Sell at Seeking Alpha recently, as now a Strong Sell at $1.45. I continue to expect that CGC and TLRY will decline, and I am also concerned about Village Farms (VFF), which is a good company.

Looking next at the MSOs, I continue to be very negative on MSOS and its two largest holdings that total almost 45% of the ETF Despite the continued rally in cannabis stocks, all of these are down. I continue to view them negatively. Looking at MSOS and these two and also at Green Thumb Industries (GTBIF) since 6/30, a couple of things stand out:

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Curaleaf has soared, and GTI, which is currently 22% of MSOS (3rd-largest position), has lagged. Since 6/30, MSOS has seen its share-count expand by 34.6% due to cash input. It has increased the number of CURLF shares it controls by 35.9%, which is slightly above its own share-count expansion. CURLF has moved from third-place to first-place at 22.7%. TCNNF exposure has increased by 28.5%, and it has remained the second largest position at 22.02% currently. GTI exposure has increased by 19.1%, and it is just below TCNNF now at 22.01%.

I upgraded GTI at Seeking Alpha to Hold from Sell in an article published before the market opened on 8/22, and it has declined since then by 15.1%. I have used this decline to build a pretty big position, currently at 13.3% of my model portfolio. It is the only MSO that I include in it. I think the stock could continue to fall, but I like it better than its peers.

Speaking of the model portfolio, it has changed a lot since that article on 8/20. I had no MSO exposure then for reasons I explained. I had a lot of ancillary stocks, including two cannabis REITs. I still own all four of the stocks in the model portfolio, but my exposure is lower today than it was then. Finally, I have boosted my exposure to Canadian LPs. Here is the current 420 Investor model portfolio exposure:

The one thing that has remained the same is the high level of cash. In the 12 years of providing a model portfolio to my subscribers, it has been rare to not be fully invested. My cash level on 8/8 was already up to this same level, and I had no MSOs. This was before the news hit about potential rescheduling! A week earlier, my cash was already at 13% but I still had 7% MSO exposure.

The model portfolio, currently up 9.5% year-to-date, which is far better than the Global Cannabis Stock Index despite my having so much cash ahead of a massive rally. I currently hold GTBIF as my only MSO, and view it as better than its peers, especially if 280E taxation remains. Will it? I don't know. Who does?

In the Canadian LPs, I own Organigram (OGI) and Cronos Group (CRON). They seem better to me than peers. Each has a strategic investor that could possibly buy them (not counting on it!), and they both have a lot of cash and no debt. CRON trades at tangible book value, while OGI, which is a better company in my view, trades at a slight premium.

I have reduced exposure to ancillaries, wiith still a massive position in WM Technology (MAPS). I have reduced GrowGeneration (GRWG) a lot on its recent rally. I have also reduced Innovative Industrial Properties (IIPR), but have a large position in Chicago Atlantic (REFI). I think that the cannabis REITs are a much better deal than the MSOs, though they are risky.

As I have been saying for almost three years now, 280E taxation is a big problem. Maybe rescheduling will happen in a way that ends it, but maybe not. There is a lot of work the federal government needs to do when it comes to the cannabis industry!