Your Neighbors Are Stocking Up On Paper Towels, Toilet Paper... and Cannabis

An 'essential' nuance about cannabis stocks... Your neighbors are stocking up on paper towels, toilet paper – and cannabis... Dispensaries are open and sales should be strong... We need our booze... Find liquidity and buy stocks...

Much of the world is essentially shut down...

The global coronavirus outbreak is bringing consumer spending to its knees... We've got problems, big and small... and we've heard a lot about them over the last few weeks...

But we haven't heard this question in the news recently... How ever will consumers get their cannabis?!

I (Thomas Carroll) am not aiming to be flip. The coronavirus pandemic has cost thousands of lives and trillions of dollars, and changed the everyday lives of millions of people...

It has even hit close to home as several close friends have become very ill and some hospitalized. As a lifelong student of U.S. and global health care systems, I've been busy trying to follow as much of the breaking news details as possible.

But regular readers might know that one of the areas I cover closely here at Stansberry Research is cannabis. I write an entire newsletter dedicated to the space, Cannabis Capitalist.

And there are some interesting dynamics playing out in this sector right now, which I'll detail in today's Digest...

Year-to-date, the North American Cannabis Index is down about 53%...

And, as I write, the S&P 500 Index has declined by about 15%.

In general, many cannabis companies 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... and no FDA guidance about CBD uses.

And now, of course, the coronavirus has brought the economy to a screeching halt. How many people do you hear talking about CBD nowadays? You might think this emerging industry is hanging on by a thread...

But as I told my Cannabis Capitalist subscribers last month, fear not...

The way cannabis became 'legal' is allowing most of the industry to stay open today...

This is an "essential" nuance...

Cannabis' 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, grocery stores, and liquor stores here in Maryland.

As I shared with subscribers last month, we recently set out to see what this designation might mean for the cannabis industry.

In the midst of these volatile market conditions and even 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.

In other words, would they be allowed to remain open, or be forced to shut down with restaurants and bars? And what would that look like, either way.

E-mails, texts, and calls with these companies lead us to three initial conclusions...

1) Dispensaries that are part of medical cannabis programs (as opposed to recreational) are deemed critical medical service providers.

As I told subscribers back in March...

There are 22 states with medical cannabis programs, and another 11 have adult-use programs. But all of these programs were medically-driven 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.

Some of the biggest U.S. cannabis companies, like Curaleaf (CURLF) and Harvest Health & Recreation (HRVSF) confirmed to us that they are open for business.

2) Voluntary social-distancing strategies have been put in place to limit person-to-person contact in dispensaries.

For example, the largest Maryland cultivator is limiting the dispensary waiting room to a capacity of 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, Florida-based cannabis company Trulieve (TCNNF) indicated that in-store and delivery options were being maximized.

3) 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. However, some have reported recently... and their results and current market commentary align with the market checks we've made.

The neighbors are stocking up on paper towels, toilet paper, and cannabis...

One privately held dispensary indicated to us that sales were up 50% from the prior week just before the quarantines were to be put into place.

This is similar to what we've heard about for other products like paper towels, toilet paper, and all types of food and essential consumer product goods. People have been stocking up on their cannabis as well.

Green Thumb Industries (GTBIF) said that each of the 43 dispensaries it owns across multiple states is open for business with consistent sales strength through the crisis. The company is licensed to open 96 in total and will add several more in 2020.

Curaleaf (CURLF) 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.

Similar to alcohol sales and other "sin stocks" during times of stress and recession, cannabis sales are likely to remain robust.

What's happened since these conversations?...

A number of the large cannabis companies – both U.S. based and Canadian – have reported earnings or specifically published press releases indicating what we concluded above.

As I told subscribers last week, Curaleaf, for instance, reported fourth-quarter and full-year earnings for 2019 on March 24, and both numbers exceeded expectations.

The company also made comments about current market conditions and what they are doing to keep sales going. As we wrote...

This aligns with our view that cannabis sales have been strong and steady despite the volatile stock prices. Curaleaf confirmed that sales have remained strong into the global shutdown. And patients were stocking up on their cannabis products just like all consumers stocked up on household goods.

In medical markets, cannabis dispensaries can remain open but must put social-distancing safeguards in place to protect customers and employees. This means internet ordering, curbside pickup, and limited in-person sales.

Might 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:

1. Companies whose 2020 sales will be close to expected (although timing may be impacted).

2. Companies whose 2020 sales will be hurt, but they will weather the storm because of healthy balance sheets.

3. Financially unstable companies whose 2020 sales will be hurt. There is uncertainty whether they survive into 2021.

4. Lastly, companies that may actually benefit from COVID-19.

In all likelihood, most stocks will fall into categories two and three. Few companies will be spared a revenue hit this year, and few companies will benefit in real time. Some may benefit longer term but be pressured this year.

That said, where will cannabis stocks fit in this construct?

In my view, many of the cannabis companies may ultimately fit in bucket one or four? Cannabis sales may just continue to march on. And, some may actually benefit.

Think about it...

There are two primary reasons people by legal cannabis today...

First, many people use cannabis medicinally to alleviate symptoms for 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 only with a medical program, people sometimes stretch the truth about their back pain or anxiety... to gain access, legally, to the products.

Given the primary uses of cannabis, two good proxies might be recent alcohol sales and demand for prescription drugs. Both are seeing spiking demand.

We need our booze...

For the third week of March, market research company Nielsen reported that alcohol sales grew 55% in the third week of March versus the same week last year. Even beer, that has been falling out of favor, rose 90% for larger packages (24 and 30 units per package).

And 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 datapoints are good proxies for continued cannabis sales despite the quarantines across the U.S. and Canada.

One other point... A large supplier to the cannabis industry reported its quarterly earnings on March 27, and they were good.

This company is a multi-state "big box" store that sells all the necessary supplies cannabis companies need to grow healthy plants. As such, its 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 is happening well after the COVID-19 outbreak began. Supplies are selling.

So what to do? Find liquidity and buy stocks...

As I mentioned at the end of my most recent Cannabis Capitalist issue, it has been a much more difficult beginning for cannabis investing than anyone expected.

And the current market conditions are only adding fuel to the fire... and the critics.

At the end of the day, though, it's all about being as rational as possible. That, of course, is extremely hard to do when your stock values are plummeting...

But cannabis stocks currently represent some of the most beaten-down investing choices we have. The industry is just getting started. It's not going away. And, sales right now may actually be stronger than we think.

As I told subscribers last week...

The strikingly large and quick sell-off in the markets has given investors an opportunity to step back, evaluate their portfolios, and redeploy cash holdings across a wide selection of stocks on sale. In fact, Porter Stansberry believed the opportunity was significant enough that he held a special webinar to talk about his favorite "Forever Stocks."

Cannabis Capitalist has also taken a step back.

We've been looking across the large collection of companies that we like but for some reason didn't meet the hurdles at the time for inclusion in our portfolio. This was often because of a near-term operational risk or valuation that seemed stretched.

Now is the time to do some homework and devote a small portion of your portfolio to cannabis. A really small portion. These are risky stocks that are very volatile, so allocate accordingly.

But the point is, as the broader market begins to stabilize, cannabis stocks will follow suit, and maybe shoot higher before most other sectors. And, as the federal government moves incrementally toward legalization, as it has been, these stocks will soar.

That thesis hasn't changed. If you don't already subscribe to my Cannabis Capitalist service, click here to learn more about how to get access today.

New 52-week highs (as of 4/14/20): Amazon (AMZN), Dollar General (DG), DB Gold Double Long ETN (DGP), DocuSign (DOCU), Franco-Nevada (FNV), SPDR Gold Shares (GLD), Barrick Gold (GOLD), NovaGold Resources (NG), Sprott Physical Gold Trust (PHYS), and Polymetal International (POLY.L).

In today's mailbag, a keen observation regarding Stansberry's Credit Opportunities, which we wrote about in Tuesday's Digest. Click here to learn more about the service from our colleagues Mike DiBiase and Bill McGilton.

"Looks like someone has been reading Stansberry's Credit Opportunities... 'Best Buying Opportunity Of The Century For Corporate Bonds,' from Forbes." – Paid-up subscriber Jeff S.

Regards,

Thomas Carroll
Baltimore, Maryland
April 15, 2020