Investing in CBD

Subsequent to the passage of the Agricultural Improvement Act of 2018, signed into law December 21st, there has been a significant amount of speculation as to the rise of the market for CBD oils, edibles, supplements and derivatives. Migrating across the country are calls to create a system – or infrastructure – if you will, to enable this budding (pun intended) industry to grow and thrive. This bill clarified two gaps in prior legislation related to industrial hemp, namely removing hemp from the definition of marijuana and and creates an exception to the THC in hemp – essentially declassifying it as a Schedule I narcotic, as long as it has no more than 0.3 percent. Then the state has to enact processes – subject to USDA approval – before being legal. The most onerous of which is mandatory testing of the THC threshold.

In a role reversal of sorts, the new reality is that CBD is legal at a federal level with a hodge-podge of regulations at the state level with a degree of federal oversight. For the time being, one can assume differing laws depending on the state. This is also subject to change regularly. For purposes of this discussion, we’ll assume Texas is moderate – neither at the bleeding edge nor trailing the pack – as HB1325 was signed into law last month and retailers are already making an appearance – pending registration. Many – including myself – are attempting to identify ways to profit from these endeavors with no clear answers. DivHut (via a guest post) tackled this question and laid out a great foundation before withering away at the end. I do have to concur there may well be room to run in this space, the key being in what way – which we’ll explore a little further.

Retail is the obvious starting point with CVS and Walgreen are dipping their toes in the water while Amazon is marketing CBD-less hemp oil. The bad news, if any, is that any sales made by these giants would be negligible to earnings. This isn’t to ignore the mom-and-pop shops or franchise operations appearing, only that as a passive investor the options currently limited.

Manufacturing is the second area for research but winds up being the most convoluted depending on your interest, e.g., topical, edible, oil, prescription drug, THC or CBD, et.al. My approach is to categorize into two segments: Consumer and Cultivation. The consumer side being a product supplier to a retailer or consumer direct. Cultivation is a little trickier in that the Texas bill legalizes hemp farming and the sale and possession of hemp-derived CBD oil containing less than .3% of THC. Meanwhile growing hemp is not yet legal until the USDA provides guidelines and approves state applications. This could be considered a quagmire of sorts, but of a temporary nature.

Extraction and Testing is the final area to watch as this is where the heavy investment will take place. One piece of the Texas Law is, ” the laboratory must be accredited under ISO/IEC 17025 or other comparable standard. License holders may not use their own laboratories for state testing unless the license holder has no ownership in the laboratory or less than a ten (10) percent ownership interest if the laboratory is a publicly traded company.” Consider that most – if not all – of the law enforcement labs require upgrades to differentiate between now legal and still illegal products. Xabis, an independent lab, has forged a deal with Westleaf that includes equity based compensation.

So who currently has my eye?

  • Retail – Elixinol Global (ELLXF). Assuming this Aussie company can navigate through the FDA regs unscathed.
  • Manufacturing – Canopy Growth (CGC) – pursuing a license to process hemp in New York state
  • Testing – Eurofins Scientific (ERFSF)

All of which are highly speculative – so tread lightly and do your due diligence. Is this a space you too are looking at (additional suggestions are always welcome)!

Update 4 Aug 2019: On Aug 1 I initiated a position in Innovative Industrial Properties Inc. (IIPR), a REIT in the medical space.

Randomness For July

Typically I gain inspiration from the news or other bloggers – or a combination thereof. When a thought – or concept – materializes my research kicks in to validate (or invalidate) the idea. Unlike others, my approach doesn’t follow a given model nor does it lend itself to a generic screening process. This isn’t to imply I ignore PE ratios, Dividend Growth Rates, Dividend Coverage, et.al., because I don’t. It’s just that outside the core 36 holdings I want to see a story, a compelling reason or something that makes me scratch my head and think.

Hidden in plain sight this week were a few that fit this category, so without further introduction, I present these for your consideration.

Bottling/Snacks Skirmish?

Pepsi announced the acquisition of South Africa’s Pioneer Food Group. I believe this intensifies the battle between the two giants and provides Pepsi a leg up in the snack segment, adds some bottling and expands their distribution capabilities. Conversely, Coke has pretty much divested their bottlers with the exception of Africa. So the question becomes, “What’s up with Africa?” and which one holds the answer to this riddle. Category: scratching my head

Watch List Addition

A friend of mine sent me a link to the Australian version of 60 minutes with an interesting (but non-standard) treatment for stroke victims. There are many more questions than answers with this treatment, most notably sustainability, yet the initial findings hold some promise. Ever the sucker for a speculative play in the realm of strokes (remember my Nexeon investment – (currently tardy in their filings)), perhaps a small investment may bear fruit. The drug in question is Etanercept and the company is Amgen. Bonus points for AMGN paying a dividend. Category: Good Story

Political Thought

We’ll delve into the political arena a little as the Democrats have initiated an opening salvo illustrating to the world they might be able to walk and chew gum simultaneously. This effort is in the form of a Senate bill provocatively titled, “Stop Wall Street Looting Act of 2019“. This bill aims to stem some of the more egregious acts of private equity firms when they take companies private. Assuming this gets through the proverbial roadblock in Mitch McConnell and the unrelenting lobbyists, I have a one minor concern (outside the name) that should be addressed in order for bipartisan support to be obtained. Section 309 is applicable to workers and places a higher priority on pension funding, which is well and good. The issue I have is in the charge to bankruptcy judges to consider job retention in a liquidation (sale) event. If I thought I could profit via productivity gains (technology) at the expense of labor, I would have no incentive to prevent full on bankruptcy – waiting to buy the pieces after the fact. Category: Compelling Reason (probable GOP inaction to avoid debate)

With these thoughts, I hope the week ahead is good for you!

Things Making Me Go Hmm

Loose reference to a segment on The Arsenio Hall Show, 1989-1994

A handful of areas caught my attention this past week, some of which captured my whimsical thinking so much that it occurred to me that our president may actually have a game plan. Before I roll that scenario, let me start with the Boeing saga.

The Max Issue

As it will be awhile before the dust settles and the corner is turned, shareholders are likely in for choppy ride. My guess is the Jim Cramer Chipotle advice is applicable to this situation, “It takes 18 months from the last incident to get the American people to forget“. As Boeing previously had a solid reputation (outside supplier negotiations), there’s little doubt, given time, they’ll recover. The nagging question in my mind is, “What about their subs?”, the three largest being Spirit AeroSystems (SPR – ~50%), Triumph Group (TGI – 31%) and Hexcel (HXL – 25%) with several others dependent on Boeing for about 10% of their sales.

While some have pulled guidance, looking at Spirit shows a ‘sweetheart’ arrangement with a guaranteed production take threshold. Even so, Wichita, Kansas is feeling a little pain as SPR has cut hours by 20% and eliminated most contractors. The possible hmm counterpoint: Trump’s recent efforts to prod the Fed to reduce rates to weaken the USD.

Ongoing Farm Woes

A couple of weeks ago I touched on the plight of Wisconsin dairy farmers. This week, farming issues – specifically lending – crossed the wires. A Reuters study concluded farm lending declined 17.5% by the thirty largest banks between December 2015 and March 2019. Perhaps they’ve identified a bubble or perhaps diversifying risk. While keeping an eye on developments, my portfolio of community banks isn’t overly concerned as most of their loans are USDA carrying a 95% government guarantee. I think the current largest downside would be depressed merger premiums in this space. The possible hmm counterpoint: The federal debt limit may be reached sooner than anticipated, perhaps in part, due to increased credits to farmers to counteract tariff retribution?

Game Plan?

Low interest rates essentially delays the day of reckoning for out of control federal deficits. A weaker USD benefits exporters to the detriment of importers, but has the potential to reduce the trade deficit. These two issues, coupled with the fairly robust economy have the ability to provide a tailwind to the incumbent’s reelection prospects. The possible hmm counterpoints: Possible implementation of a surcharge based on the USD strength in the Petrodollar world, additional tariff retaliation.

Just some random thoughts to start your week!

June 2019 Update

The market went on a tear this month hitting new records. With several companies attempting to tamp down expectations for the second half, my belief is the inflow of money is due to the lack of relatively safe investment options available as long as the trade truce holds. With earnings season on the horizon, it will be interesting if we see a continuation in July. This month the S&P gained 6.45% (almost erasing last month’s loss) while my portfolio gained a meager 5.56%. For the year, I’m still ahead of the benchmark by 0.45%. You can call it neck-to-neck.


PORTFOLIO UPDATES

  • increased my CL position
  • increased my DGX position
  • increased my EBSB position
  • increased my GNTY position
  • increased my HTH position
  • increased my MSCI position
  • increased my JNJ position
  • increased my ETF positions (VGK, JPMV, EWA, EWW, CUT)

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis, I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio.

  • June delivered an increase of 15.42% Y/Y.
  • June delivered a 1.78% decrease over last quarter (Mar) due primarily to timing issues (a Japanese dividend arrives in July).
  • Dividend increases averaged 9.31% with 50.22% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980.
  • 2019 Dividends received were 55.35% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 107.27% of 2018, slightly under my 110.0% goal.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

SPINOFFs

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.


MERGERS

XRX merger with Fujifilm cancelled (still being litigated). Pending settlement expected in September.

TSS to merge into GPN (all stock, .8101 sh GPN for each TSS sh) estimated to complete in October – Upon the announcement, I was prepared to sell my TSS position to book almost a triple in just over 4 years as GPN currently pays only a penny per share dividend per quarter. However, page 14 of their slideshow states: Dividend – maintain TSYS’ dividend yield. This would appear to indicate an increase in GPN’s dividend, so for now I’ll hold.

PB to acquire LTXB for 0.528 shares and $6.28 cash for each LTXB share. I plan to vote in favor of the transaction (on both sides), pocket the cash and sell the new shares – retaining the old and perhaps use some of the cash to purchase additional PB shares post-merger.

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.

SUMMARY

Overall, no complaints. The performance isn’t stellar but being ahead – even a little – in this market is no mean feat. Looking forward into the second half sees a little consolidation by migrating to a slightly risk off stance.

Here’s hoping your month/quarter was successful!

 

Razzle Dazzle

Give ’em the old flim flam flummox

Fool and fracture ’em

How can they hear the truth above the roar?

Richard Gere performing Razzle Dazzle in the movie Chicago, 2001

One of the many stanzas from the song with which could apply to the theme of this holiday special edition. I decided to present this weeks’ activity as a special post since the number of transactions is greater in three days than my normal 4-5 per month. Also included are three sales which I will elaborate on in some detail.

Roadmap 2 Retire presented another cautionary view reinforcing my approach. While I’m beginning to feel a little like Chicken Little, there are conundrums aplenty from which to choose when attempting to make sense of the economy. Perhaps the best illustration is the fact that Wisconsin farmers are going bankrupt in record numbers. This is a good part of Trump’s base in which their downturn has been accelerated by his policies. And the theory of ‘trickle down’ hasn’t made it to these rural enclaves yet he still carries a 42% approval rating there. It seems that every positive in the economy (low unemployment, low inflation, lower taxes (in theory) carries an equal negative (slowing GDP growth, low wage growth, increasing deficits).

Give ’em the old three ring circus

Stun and stagger ’em

When you’re in trouble, go into your dance

Since I’m no fortune teller I can’t provide any timing, but I dare say this juggling act will come to an end. Hopefully it’ll be a prettier end than any of his four bankruptcies. Like R2R, I’m perusing my portfolio and trimming a little of the speculation. Although I’ve been musing on this for awhile, it was time to begin the execution. Following are the first moves of mine in the pivot from macro to micro.

SELLS

  • Owens & Minor (OMI)
    • Following not one but two dividend cuts. I probably had a bit more patience with this one as it was an IRA holding, but enough already. Sold July 1st – net loss 74.2%.
  • Uniti Group (UNIT)
    • This one has been in the cross-hairs of the Windstream bankruptcy. As a result, they cut their dividend to preserve cash and satisfy their lenders. One lesson I previously learned (Orchids Paper (TIS), anyone?) is to bail when lenders force a dividend cut. Sold July 2nd, net loss 59.2%.
      • After market close, UNIT announced the issuance of 8.68m common shares in conjunction with a preferred redemption. UNIT closed down July 3rd 2% from my sale price.
  • Lamar Advertising (LAMR)
    • This one I groused about all year with the shenanigans they were playing with their 2017/2018 year end pay date. At tax time, I confirmed the forms sent to me and the corporate IRS filing were out of sync. Not being an accountant, I can’t say there’s any illegality – but this is one that has questions – therefore it was booted off the team on July 2nd with a gain of 46.6%.

The proceeds from the LAMR and UNIT sales were used to rebalance a portion of the portfolio across thirteen stocks. I have a pending limit order in place to deploy the OMI proceeds into RY.

With any luck this run will continue, however the pessimist within says it would be unlikely (check back around earnings season …)