April 20, 2020
Today, we’re featuring a stellar essay from Thomas Carroll, who Fortune magazine calls the best health care analyst in the nation.
He details the new “essential” nature of cannabis in America… and shows why it may be time to own this sector. If you like what you read, please share it on Facebook by clicking here.
Is Now the Time to Own Cannabis?
By Thomas Carroll
Given the current coronavirus panic, global markets have sold off significantly. Daily trading is extremely volatile… The S&P 500 Index might be down 8% one day only to rise 7% the next day. We’ve witnessed this cycle a few times over the last four weeks.
You may have seen legendary hedge-fund manager Bill Ackman on CNBC recently. He called on the president to immediately shut down the borders and send all Americans on an extended spring break.
And famous investor Ray Dalio believes this crisis could cost the U.S. more than $4 trillion.
Feeling equally pressured are the already beaten-up cannabis stocks… Year-to-date, the North American Marijuana Index is down more than 50%.
However, cannabis stocks have been growing revenues and pushing toward profitability. But a number of new market challenges have dampened investor enthusiasm, such as continued bottlenecks in the Canadian distribution system, lack of federal cannabis policy in the U.S., and no U.S. Food and Drug Administration (“FDA”) guidance about CBD uses.
And now, the world is essentially shut down… The global COVID-19 outbreak is bringing consumer spending to its knees. How will consumers get their cannabis?
Fear not… A nuance in how cannabis found its way to legality is allowing most dispensaries to stay open.
Its legal status is grounded in medical use. As such, dispensaries offering products to cannabis patients have been deemed “essential” by regulatory bodies in both Canada and the U.S. This is the same status enjoyed by pharmacies and grocery stores.
So we set out to see what this means for the cannabis industry…
Will the most popular job in 29 states disappear?
Something big is quietly unfolding in America, and it’s being accelerated by the coronavirus pandemic. This is going to cause tens of millions of people to lose their jobs, and in fact, it’s been predicted that millions of people in a single industry will eventually have their jobs essentially eliminated. (Hint: It’s the most popular job–and a good-paying one–in 29 U.S. states.) Full story here…
The New ‘Essential’ Nature of Cannabis
In the midst of these volatile market conditions – before the quarantines – we reached out to a number of cannabis companies, both private and publicly traded. We wanted to get their thoughts on the pandemic and see if they expected to be knighted with “essential” status. Would they be allowed to remain open, or forced to shutter alongside restaurants and bars?
All of those early conversations confirmed our beliefs. E-mails, texts, and calls with these companies led us to three initial conclusions…
First, within medical cannabis programs (as opposed to recreational), dispensaries are deemed critical medical service providers.
There are 22 states with medical cannabis programs, and another 11 that have adult-use programs. But all of them were medical from the start and hold on to that history.
Just like pharmacies, hospitals, and urgent care centers, medical dispensaries are considered essential to patient safety. Therefore, they are NOT being forced to close by state and local municipalities.
Most of our Cannabis Capitalist portfolio holdings confirmed that their dispensaries are open and serving patients.
Second, voluntary social-distancing strategies have been put in place to limit person-to-person contact.
For example, privately held Curio Wellness, the largest cultivator in Maryland, is limiting the dispensary waiting room to three customers at a time. Others must remain outside or in their cars.
In some markets, like Florida, cannabis delivery is permitted with the necessary license. In a letter to analysts and investors, Trulieve Cannabis indicated that in-store and delivery options were being maximized.
Third, sales remain strong and consistent.
Sales have remained steady at all the large U.S. cannabis companies. Given that we are currently intra-quarter, management commentary has been limited. Most cannabis companies will be reporting their next quarters’ numbers in the following four to six weeks. That said, we believe the spirit of this messaging is related to current times, not the timing of the reported quarter.
For example, given the unprecedented market conditions, a number of companies have provided us some comfort that has matched their other publicly disclosed information.
One privately held dispensary indicated to us that sales were up 50% from the week before the quarantines were to be put in place. This is similar to what we’ve heard about other products like paper towels, toilet paper, and all types of food and essential consumer product goods… People are stocking up on their cannabis as well.
Green Thumb Industries said that every single dispensary it owns across multiple states is open for business with consistent sales strength through the crisis.
Multistate cannabis operator Curaleaf indicated that regulators are even beginning to ease requirements for delivery and curbside sales. In our opinion, this should support sales today and in coming weeks as the crisis evolves.
And companies Harvest Health & Recreation and Trulieve put out press releases on their operations that should offer some comfort to longer-term investors. We’ve heard similar commentary from a number of others cannabis companies, too…
Much like alcohol sales during times of stress and recession, cannabis sales are likely to remain robust.
Since these communications, a number of the large cannabis companies – both American and Canadian – have reported earnings or specifically published press releases indicating what we concluded above.
Curaleaf and Green Thumb, two of the largest U.S. cannabis companies, reported strong earnings for the year and quarter ended December 2019. In their press releases, they went on to make comments about current market conditions and what they are doing to keep sales going. HEXO, a Canadian cannabis company, indicated in late March that it remains fully operational because of its essential status.
Of course, all of them have protections in place for employees and customers to stop the spread of COVID-19, like Internet ordering, curbside pickup, and limited in-person sales.
Will cannabis sales continue to grow through the COVID-19 crisis?
As we think about investing across all sectors of the economy, we can categorize stocks into four buckets:
- Companies for which 2020 sales will be close to expected (although timing may be impacted).
- Companies for which 2020 sales will be hurt, but that will weather the storm because of healthy balance sheets.
- Financially unstable companies for which 2020 sales will be hurt. There is uncertainty about whether these companies will survive into 2021.
- Companies that may actually benefit from COVID-19.
In all likelihood, most stocks will fall into categories 2 and 3. Few companies will be spared a revenue hit this year, and few companies will benefit in real time. Some may benefit in the longer term but be pressured this year.
Where will cannabis stocks fit in this construct?
In my view, many of the cannabis companies may ultimately fit in buckets 1 or 4. Cannabis sales should continue to march on… And some may actually even benefit.
Think about this. There are two primary reasons people buy legal cannabis today… First, cannabis is used medicinally by many people to alleviate symptoms of a number of illnesses. Second, cannabis is used for recreation in much the same way as alcohol, cigarettes, and other forms of tobacco.
Now, you may not believe this… But even in states that only have medical programs, people sometimes stretch the truth about their back pain or anxiety. They do this to gain access to cannabis products legally. (Shhh… Don’t tell.)
Given these uses of cannabis, two good proxies might be recent alcohol sales and demand for prescription drugs. Both are seeing spiking demand.
Americans need their booze… For the third week of March, Nielson reported that alcohol sales grew 55% versus the same week last year. Even beer, which has been falling out of favor, saw sales rise 90% for larger packages (24 and 30 units per package).
And what about our meds? Pharmacies are seeing a spike in people trying to get larger supplies of their prescription drugs. Besides additional vigilance to get possession of medications, people are asking for 30-day supplies to be extended to 90 days.
Both of these data points are good proxies for continued cannabis sales despite the quarantines across the U.S. and Canada.
One other point… GrowGeneration – a multistate “big box” store that sells all the necessary supplies cannabis companies need to grow healthy plants – reported solid quarterly earnings on March 27.
GrowGeneration’s financial performance is a window into the health of the legal cannabis market. If cannabis products are not selling, neither are all the supplies that support the products.
Most importantly, management felt comfortable providing a full-year sales outlook in line with current expectations. And this happened well after the COVID-19 outbreak began… Supplies are still selling.
Find Liquidity and Buy Stocks
No one expected last year to be so difficult for cannabis investing… And the current market conditions starting this year are only adding fuel to the fire. At the end of the day, it’s all about being as rational as possible. And that’s extremely hard when your stock values are plummeting…
But cannabis stocks currently represent some of the most beaten-down investing choices we have. The industry isn’t going away… It’s just getting started. And sales right now may actually be stronger than we think.
Now is the time to do some homework and devote a small portion of your portfolio to cannabis. (A really small portion… These risky stocks are very volatile.)
As the current market conditions stabilize, these stocks will follow suit. And as the federal government moves incrementally toward legalization, these stocks will soar.
It’s impossible to pick the top or bottom in the current market. But we can do our research and get positioned for when the bottom finally arrives.
Ackman and Dalio believe we are getting close.
Thomas Carroll is one of the most respected and longest-serving health care analysts on Wall Street. He’s won award after award in the industry for his stock-picking prowess… including five top-five finishes from StarMine, the Wall Street Journal, and Forbes. Even more impressive, he was ranked by Fortune magazine as the No. 1 U.S. health care analyst. To find out more about Tom’s Cannabis Capitalistmonthly product, click here.
Now here are some of the stories we’re reading…
Whitney Tilson: Here’s A Tech Trend No One’s Talking About And My #1 Pick
There’s a huge new tech trend coming to your hometown – which could make you a small fortune over the next few years. And today we’re revealing the name and stock ticker symbol of Whitney’s favorite way to make money from this trend. You get his top pick for free, right here.
Here’s the Real Reason We Associate 420 With Weed
The most credible story traces 4/20 to Marin County, California. In 1971, five students at San Rafael High School would meet at 4:20 p.m. by the campus’s statue of chemist Louis Pasteur to partake. They chose that specific time because extracurricular activities had usually ended by then.
Here’s ‘Anonymous,’ Trump Aides Say. And Here’s How They Outed Her.
Ever since a “senior official in the Trump administration” penned an anonymous 2018 New York Times column attacking President Donald Trump as unfit for office, Washington has been engrossed in a high-stakes whodunit. After an exhaustive investigation, the White House believes it’s cracked the case, identifying Trump’s turncoat as his former deputy national security adviser, Victoria Coates, according to people familiar with the internal probe.
Thanks to COVID-19, Social Security’s day of reckoning may be even closer than we thought
Prior to the economic downturn – or collapse – that we’re now experiencing, the trust fund was projected to run out of money by 2035. This has, practically overnight, gotten worse. Why? Because some 22 million Americans have lost their jobs in the last four weeks. This means there are a lot fewer – millions fewer – people paying those payroll taxes into the Social Security system.
Socially Distance This: Carnival Executives Knew They Had a Virus Problem, But Kept the Party Going
Even after Carnival became aware of the potential coronavirus case, passengers say staff tried to keep the fun going. Guests continued eating and drinking at buffets and bars, hanging out in saunas, and attending shows… Now more than 1,500 people on the company’s cruise ships have been diagnosed with COVID-19, and dozens have died.
The Maine Farmer Saving the World’s Rarest Heirloom Seeds
Dusty sunlight fell through a window onto a wall of shelves, each one lined with rows of wooden cases the size of shoeboxes. Inside the cases were envelopes, many of them brown with age, and inside the envelopes were seeds – tens of thousands of them, the core of what was once among the country’s most prolific private seed collections.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
April 20, 2020