Chicago-based Green Thumb Industries Inc. is a vertically integrated cannabis producer that operates in 11 U.S. states. It will have 95 dispensary licences by year-end and has acquired firms that own the Essence brand in Nevada and the luxury Beboe brand in California. (AP Photo/John Locher)John Locher/The Associated Press
Investors seeking to profit from the cannabis boom might want to look to the United States, where legalization of marijuana is gaining momentum.
Canada legalized cannabis nationally this past fall, but marijuana still is an illicit substance federally in the U.S. Still, 33 U.S. states have legalized medical cannabis – and Illinois will be 11th state to legalize recreational pot on Jan. 1, 2020.
Last year, the U.S. Congress also passed the Agriculture Improvement Act of 2018 (a.k.a. the Farm Bill), which legalized production of hemp – a non-intoxicating form of cannabis containing cannabidiol, an active ingredient that can have therapeutic properties. And Congress is now considering other pro-cannabis bills. For example, the STATES Act would permit U.S. states to legalize pot without federal interference; and the SAFE Banking Act would allow banks to treat cannabis companies like other businesses, including the ability to issue loans to these firms.
Given the recent correction in U.S.-focused cannabis stocks, which now offer a better buying opportunity, we asked three fund managers for their top picks.
Greg Taylor, chief investment officer and portfolio manager at Purpose Investments Inc., Toronto
His fund: Purpose Marijuana Opportunities Fund (also listed as an exchange-traded fund on the NEO Exchange [MJJ-NEO])
The pick: Curaleaf Holdings Inc. (CURA-CSE)
Range since October, 2018: $5.12 to $15.75 a share
Wakefield, Mass.-based Curaleaf Holdings’ recent acquisition of Portland, Ore.-based Cura Partners Inc. in a US$950-million stock deal “puts [Curaleaf] in the driver’s seat to be one of the leaders [in the U.S. cannabis industry]‚” Mr. Taylor says. Cura Partners’ strong Select cannabis oils brand in the West Coast complements Curaleaf’s popular brand for cannabis and hemp products in the East Coast, so the combination could potentially be a winner nationally, he says. The acquisition closes later this year. Curaleaf, a vertically integrated cannabis operator, operates in 12 states with about 45 dispensaries. It has focused largely on the highly regulated states on the East Coast, which limit cannabis licences. The firm also struck an agreement this year to sell its hemp products through the CVS Pharmacy chain. Risks to Curaleaf’s stock are major delays in the legalization of cannabis or having any of its licences pulled, which is unlikely, he says.
The pick: Columbia Care Inc. (CCHW-NEO)
Range since April, 2019: $6.34 to $11.95 a share
Columbia Care is a U.S. medical cannabis producer that has been growing over the past seven years, but it’s not well known, so that creates an investment opportunity, Mr. Taylor says. The New York-based cultivator, manufacturer and dispensary operator went public in April by merging with a special purpose acquisition company created by investment firm Canaccord Genuity Group Inc. Columbia Care has licences in 15 jurisdictions in the U.S. and Europe. Its shares are also attractive because they trade at a discount to some U.S. peers, such as Curaleaf and Cresco Labs Inc., he notes. Nicolas Vita, a former investment banker at Goldman Sachs Group Inc., is the Columbia Care’s co-founder and chief executive officer (CEO). Although there is risk in how well the company executes its strategy, it’s “well financed and has a good management team,” says Mr. Taylor.
Bruce Campbell, founder and portfolio manager at StoneCastle Investment Management Inc., Kelowna, B.C.
His funds: StoneCastle Cannabis Growth Fund; Cannabis Growth Opportunity Corp. (CGOC-CSE)
The pick: Halo Labs Inc. (HALO-NEO)
Range since October, 2018: 26 cents to 82 cents a share
Cannabis oils producer Halo Labs is a potential high-growth story that is “very much under the radar,” Mr. Campbell says. And its shares are attractive because they trade at a discount to its peers, he adds. The Toronto-based company, which launched in Oregon in 2016, has expanded into Nevada and California. Halo struck a deal in late June to buy Bophelo Bioscience & Wellness (Pty) Ltd., a medical cannabis producer in the African nation of Lesotho. Some Halo managers have also been involved with Golden Leaf Holdings Ltd., a U.S. company listed in Canada, he notes. Unlike its Canadian peers, which have restrictions for extraction, Halo Labs can also turn to more volatile techniques using butane and propane, he says. These methods come with more safety risks but can produce higher-margin products such as shatter, a potent cannabis extract with a glass-like texture. The risk to this stock is whether management can execute its plans successfully, Mr. Campbell adds.
The pick: C21 Investments Inc. (CXXI-CSE)
52-week range: 62 cents to $3 a share
Shares of C21 Investments, the growth of which has been fuelled by acquisitions, are “super cheap compared with its peers,” Mr. Campbell says. The Vancouver-based company cultivates, manufactures and distributes cannabis and hemp-derived products in Nevada and Oregon. C21 Investments’ acquisition last year of the Silver State Relief LLC and Silver State Cultivation LLC dispensaries in Nevada is its biggest coup because of the attractive price it paid for those assets, he says. Its dispensary in Reno, Nevada, does comparable sales with Planet 13 Holdings Inc.’s splashy one in Las Vegas, but C21 Investments trades at a lower valuation, he notes. In Oregon, acquisitions have included Swell Companies Ltd., Phantom Farms and Eco Firma Farms. The risk stems from whether management can continue to execute on its growth strategy, he says. The challenge is whether it can continue to “buy stuff cheaply.”
Charles Taerk, president and CEO at Faircourt Asset Management Inc., Toronto
Fund: Ninepoint UIT Alternative Health Fund
The pick: Green Thumb Industries Inc. (GTII-CSE)
52-week range: $8.42 to $32.50 a share
Illinois’ move to allow adults to use recreational cannabis is among one of the potential catalysts for Chicago-based Green Thumb Industries’ shares, Mr. Taerk says. The vertically integrated cannabis producer operates in 11 states. It will have 95 dispensary licences by year-end, including the additional five granted due to Illinois legalizing recreational cannabis. Only 23 stores are open today, so there is earnings growth visibility, he notes. Although Green Thumb has yet to acquire a larger cannabis player, it’s still “poised to potentially make a significant acquisition,” he says. It has acquired firms that own the Essence brand in Nevada and luxury Beboe brand in California, though. Green Thumb’s shares are attractive because they trade at a steep discount to Canadian peers, but a risk is not moving fast enough to build a strong national presence, he says.
The pick: Indus Holdings Inc. (INDS-CSE)
Range since April, 2019: $5.80 to $16.15 a share
Salinas, Calif.-based Indus Holdings’ appeal is that it’s a brand business, Mr. Taerk says. The vertically integrated cannabis operator owns pot brands and distributes others, “but you get a higher [stock] multiple for brands that you own,” he notes. In January, Joe Bayern, a former executive with the company that sells the Voss premium brand of bottled water, was appointed as Indus’s president. The company expanded into Nevada and Oregon this year by buying the assets of W Vapes LLC. Indus’s shares are undervalued, Mr. Taerk suggests. Indus was valued at $600-million when it went public in April, while U.S.-based Cresco Labs paid $1.1-billion “for relatively the same business” when it bought Canada’s Origin House (formerly CannaRoyalty Corp.), he says. Indus’s challenge is “to make sure it continues to acquire quality brands.”