This week saw the effect of the Canopy-Constellation II deal that I wrote of last week. In the very same way the initial deal in October last year lit a fire under the cannabis market, so too has this one. Stocks have been climbing steadily this week, especially the Canadian LP's. Although the US-focussed stocks have not rallied as much, they have also been moving steadily upwards.
Given this, I have made some changes to the Portfolio in anticipation of the coming legalisation in Canada in October and taken advantage of a weakening Australian market to add to the portfolio.
What we're SELLING
The stock has gone hyperbolic since the announcement of the deal. As you can see from the chart below, it climbed nearly 38% on the day the news broke, and although it initially pulled back a bit, it has continued to climb. I have decided to take this opportunity to trim the position as I believe that Canopy will pull back from these levels and this is a good opportunity to pull some money off the table and reinvest into other growth areas.
Do not think for one minute that I am in any way bearish on Canopy, far from it. This is simply a small trim as we are extremely bullish on the global market leader. For those of you that have just joined the community, hang tight, there will be a better entry point and we'll keep you updated.
Innovative Industrial Properties
This stock just amazes me. It is a stock that, in my opinion, is reversely corrected with the legislation. Given their business model does not "touch the plant", they are the perfect haven for investors when the Jeff Session's of the world are pouring cold water on positive legislative changes. However, in the current environment (with legislative changes moving steadily towards the eventual lifting of prohibition) this stock should not be performing as well as it has.
Make no mistake, this is a great company, with a very experienced management team, who have run REIT's before (and very successfully at that). It has paid out a $0.25 dividend in each of the last 7 quarters, and their property portfolio is steadily increasing (and with solid triple-net tenants). However, having said all of that, I feel this is a great time to trim the position and take some gains off the table. I feel that the fair value for IIPR would be in the mid-twenties (say around $26) and so will take the profit, and wait for a better time to add to the portfolio in the future.
One of my favourite stocks. They have really set the bar on differentiation as it related to the Licensed Producers. I have said for some while now, that when the dust settles and supply starts to catch up with demand, then the only LP's that will remain standing will be those that have some sort of differentiation. Hiku's is retail. They are the only LP completely 100% retail focussed. They own and operate a number of stores that currently trade as both coffee shops and dispensaries (soon to offer marijuana post legalisation).
At the recent Benzinga conference in Toronto, the CEO stated that the reason they felt they were bought by Canopy (this deal will go through in the coming weeks) was their point of differentiation. This company has a great future, especially now that it plugs straight into the Canopy Ecosystem. Again, given it is linked to Canopy, the stock has also gone hyperbolic and given us a great opportunity to trim the gains.
What can I say? My pick of the year it would seem. I told our readers all about CV back in April when they were trading at $0.40. I mentioned the big catalysts were the fact that the Hemp industry is opening up in front of them (driven by Sen Mitch McConell who introduced the Hemp Farming Bill of 2018) and the fact that they had settled their long-standing SEC case against the former CEO.
This coupled with outstanding results, a booming CBD nutraceutical market and the fact that other big players (Charlotte's Web) are coming to the market has sent this stock hyper-hyper-hyper-bolic!!! We bought the stock in May at $.80 and are now over 700% up. Crazy, but that's what this industry can do for your portfolio right now. This is what we take on the high levels of volatility and risk – for these types of gains.
At this price, I believe we are nearing the very top of this run and am significantly cashing out. We are selling over 50% of the stock and will put this to work in other areas. We still have a significant holding and will continue to monitor it closely.
What we're BUYING
So with that, here is what we are doing to put those gains to work.
Listed on the ASX in 2017, Elixinol Global operates in the Hemp and CBD nutraceutical market. They have 3 operations, Elixinol USA (based in Colorado) manufactures and distributes industrial hemp-based dietary supplements and skincare products. Elixinol Australia (where the company HQ is located and the reason for their ASX listing) is a newly formed late-stage applicant that plans to leverage decades of expertise in: industrial hemp and its derivatives (whole plant CBD/THC extracts), product formulation and delivery systems to become a leading participant in the emerging Australian medical cannabis market. Finally, they have Hemp Foods Australia which is is the largest Australian Certified Organic Hemp Food Wholesaler, Retailer, Manufacturer and Exporter in the Southern Hemisphere.
The company is led by Paul Benheim, a doyen in the Hemp industry, who founded his first Hemp foods company in the UK in 1993. I believe this company has huge upside and having listed back in February at AUD$1, the stock quickly went to $1.75, before recently pulling back to under $1.40. I believe this is the right time to get in and we have taken a slightly underweight position in the company. The hemp space is really starting to open up and Elixinol are well positioned to take advantage of this – globally.
AusCann have been in the portfolio since it's inception. With Canopy Growth as their cornerstone shareholder and with the most developed strategy of any company in Australia, they are very well positioned for upside in the coming months. They announced last week that they were a step closer to releasing their proprietary cannabinoid capsules to world markets after a "successful" pilot study into its optimum final dose.
For the last 10 months, the company has been undertaking the study with the aim of launching the products to the global markets in 2019. The new dose form strengthens the stability of the active cannabinoids and has resulted in the development of stable, oral dose, that provides effective and consistent quantities of the active cannabinoids.
AusCann has lodged a global patent to protect this IP and hopes (on the back of this) to release its first cannabinoid pharmaceuticals by mid-2019. AusCann recently undertook a share purchase plan that raised the company about A$1.9 million. It is this recent raise that has weighed down on the stock and at these levels, we feel this is a good time to add to the portfolio. They have a strong management team, solid evidence of historical execution and with the backing of Canopy, there is more to come from this company.
We simply love this company. Since its inception in 2014, CannTrust has led the Canadian market in producing a pharmaceutically standardised product. As a federally regulated Licensed Producer, CannTrust brings more than 40 years of pharmacy and healthcare experience to the medical cannabis industry. CannTrust currently operates the recently completed 250,000 sq. ft. Phase One redevelopment of its 450,000 sq. ft. Niagara Perpetual Harvest Facility. The 200,000 sq. ft. Phase Two redevelopment is expected to be operational in the third quarter and the projected 600,000 sq. ft. greenhouse expansion has begun and is fully funded.
The industry's broadest product portfolio is prepared and packaged at the 60,000 sq. ft. manufacturing center of excellence in Vaughan, Ontario.
CannTrust is committed to research and innovation. Their product development teams along with their exclusive global pharma partner, Apotex Inc., continue to diligently innovate and develop products that will make it easier for customers to use medical cannabis.
They have one of the largest product portfolios of any of the LP's that spans both the medicinal market and has products ready to take advantage of the booming recreational market set to go live on October 17.
Future Product Development Pipeline
Just this week, they released their 2018 Q2 results and they were stellar to say the least. Highlights included:
- Record Revenues of $9M in Q2 2018, a 99% increase from the comparable prior year period
- Positive Net Income for the fifth consecutive quarter
- Active patients increased to more than 45,000, a 117% increase from the comparable prior year period
- Cannabis extracts were 60% of cannabis sales
- Officially opened Niagara Perpetual Harvest 450,000 sq. ft. hydroponic greenhouse facility
- Launched three new recreational brands: Liiv, Synr.g and Xscape
- Entered into three recreational supply agreements in Western Canada to supply 17,000 kg of cannabis annually
- Raised $100,395,000 through the issuance of common shares and warrants
- Entered into a joint venture with Grey Wolf Animal Health to focus on the development of medical cannabis products for the global pet market
They have an exceptional management team, strong product IP, and the most diverse range of products on the market. In addition, they are fully funded with over $90m on the balance sheet. We are extremely bullish on CannTrust and have bought in heavily overweight (7.62% of the portfolio) as evidence of this.
MPX Bioceuticals is a vertically integrated, multi-state cannabis operation which provides management, staffing, procurement, advisory, financial, real estate rental, logistics, and administrative services to medicinal cannabis enterprises across four US states.
In Arizona, the company has developed a large seed bank with high-demand strains, a reputation for exceptional customer service and strong brand awareness. It has also developed award-winning concentrates under the Melting Point Extracts (MPX) brand.
It will be leveraging this experience and its brands in Massachusetts, where it has completed the acquisition of a 51% interest in IMT, and Fall River Developments, Massachusetts registered companies active in the cannabis space.
The company has also completed the acquisition of GreenMart in Nevada and holds three dispensary licenses, one production license, and two supply contracts in Maryland.
One of it's biggest assets is its proven access to capital on the public markets. In addition, it is generating cash flow positive returns from its current operations. This positions MPX extremely well to continue to pursue their aggressive expansion and acquisition strategy. The Company intends to follow a multi-state strategy and leverage its brand strength and take advantage of its technical and operational expertise as it enters into new markets.
We have been bullish on MPX form the start and have regularly mentioned them in our newsletters and portfolio updates. If there is an issue, it could be the overhang on the stock as a result of a Nevada ruling that could potentially ban the sale of extracts (their primary source of revenue). This is being appealed and in our opinion should not be an issue. The stock is very well priced and with a current market cap of only $240 million, making them a great asset to the portfolio. At these prices, we will continue to add to our position.
And there you have, the Paper Portfolio trades as at 23 August.
We still strongly believe in the thesis that the US stocks have the most upside in the coming 12 months. Although the Canadian LP's are rallying string right now, they will most likely taper off in the new year and the focus will return to the blossoming and booming US market. I'll keep you posted every trade of the way.