Grizzle’s Weekly PotStocks Review

Bottom Line: If you own even one pot stock, ignore this week’s episode at your own peril. Scott explains why recent pricing data from Colorado has absolutely massive implications for the entire Canadian cannabis market. Other topics include surprising upside potential in Aurora Cannabis, which CEO is next to get canned, and the extraction company we like best.

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Cannabis Extract Prices Vary ‘Wildly’ Between Provincially Run Stores

Bottom Line: A CBC News analysis showed that the same cannabis product sometimes cost two to three times more in one provincially run online store than another. The softgels below still have a 50% margin at $29.99 meaning the other prices are not sustainable and the products won’t sell. The government is just prolonging the black market by setting prices with no economic rationale.

Source: https://www-cbc-ca.cdn.ampproject.org/c/s/www.cbc.ca/amp/1.5459516

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San Francisco Sounds Alarm Bell: Social Equity Applicants Beware

Bottom Line: Regulations are making it very difficult for small applicants to compete for licenses against big corporations, even when they are given preferential treatment. The startup costs are often more than individual applications can bear and will likely ensure the winners in cannabis will be corporations, not mom and pop. The best long-term play in cannabis is to buy the largest U.S. MSOs for this very reason.

Source: Wikipedia

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Canopy Growth Knew About the THC Absorption Problem 10 Months Ago

Bottom Line: Reports from an article published last week suggested that the liner used in aluminum cans absorbs some of the THC out of cannabis-infused drinks. A new report this week says Canopy Growth knew about the problem back in April 2019, but didn’t alert the markets until November. LPs pay by weight to have others distribute their infused drinks so we are likely to see plastic bottles dominating shelf space until this problem is figured out.

canopy-growth-marijuana-02

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Pay to Play: Cannabis Brands Fork Over Cash for Retail Shelf Space

Bottom Line: Known as slotting fees, the practice requires brands to pay anywhere from $500 to $15,000 a month for premium space on marijuana retailers’ store shelves. The fees cut into producer profits and are just another hurdle to small license holders competing against the big U.S. guys who have the cash to lose money for years, not a few weeks.

Marijuana / Cannabis / Pot News

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Mike Bloomberg Pledges Federal Marijuana Decriminalization

Bottom Line: Former New York City Mayor and Democratic Presidential Candidate Michael Bloomberg has promised to federally decriminalize marijuana if elected. Bloomberg has been surging in the polls lately and some polls have put Bloomberg neck-in-neck with former Vice President Joe Biden. If this trend continues, Bloomberg could have a real shot at seizing the Democratic nomination.

Marijuana law mj

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South Africa Warned Of Cannabis Cultivation Risks

Bottom Line: An influential trade body has warned that South Africa’s decision to ramp up commercial cannabis and hemp production could jeopardize the country’s food safety and supply. The trade body argued that farmers may decide to switch to farming cannabis due to the cash incentives on offer, which could “negatively impact” the farming of commodities needed for food security. This may prove to be a major roadblock on South Africa’s cannabis farming business.

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Michigan Recreational Marijuana Sales Increased 30% in January

Bottom Line: Recreational cannabis sales in Michigan increased 40% to $9.8 million compared with $7 million for December 2019 in January, representing a tax revenue of $1.63 million for the state.

marijuana / cannabis / weed / pot / dagga - mj

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NFL Owners Agree to End Marijuana Suspensions

Bottom Line: The NFL has proposed dramatically reduced penalties for cannabis use among players in a new collective bargaining agreement (CBA) approved by all 32 team owners. Under the terms of the new CBA, players would no longer face possible suspensions for testing positive. The threshold for positive tests would also be increased from 35 nanograms to 150. This is further sign that marijuana use is becoming more socially accepted in the United States.

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Weekly Stock Performance

Overall, it’s been a slightly downwards trending week for the cannabis sector. Globally, cannabis stocks were down 0.82%. The U.S. cannabis market was down 3.52% and the Canadian sector was down 1.16% since the end of last week.

We’ve been watching the performance of U.S. and Canadian stocks closely and U.S. stocks are still where you want to be invested.

Since the end of September 2019, U.S. cannabis stocks are down 31.7% while the Canadian LPs are down 40.2%. Investors should begin building a long-term position in a basket of the top five U.S. operators, but save some extra cash to buy on any weakness in 2020.

An upcoming catalyst to watch is a UN meeting in March 2020 to potentially deschedule cannabis as a schedule 1 drug. If this goes through with America’s blessing it could set the wheels in motion for federal legalization sooner than later. Once the recent vaping crisis is resolved we should also see a bounceback in the U.S. MSOs.

YTD in 2020 the Global cannabis sector is underperforming the S&P 500 by 14.6% and the TSX by 15.9%.

GLOBAL CANNABIS INDEX PERFORMANCE THIS WEEK

Market Outlook

There are now question marks on whether increased sales from cannabis 2.0 products will lift the stocks. Capital markets are largely shut to cannabis companies right now, which is a problem when the business models are built on rapid expansion and big deficits. Canadian cannabis investors should not be putting more money into the sector until retail prices find a bottom.

Price compression has arrived and will drive cannabis stocks lower over the next 6-12 months in our view without a new regulatory catalyst.

U.S. stocks will continue to outperform Canadian LPs from here in our view with more catalysts potentially on the horizon. At the first whiff of nationwide U.S. legalization, investors should pile into the largest MSOs and hold for the long term.

Canadian LPs are still stuck in a legal market growing slower than investors expected, making it hard to show the revenue growth embedded in their trading multiples. LPs are showing slow growth in 2019 and even with the 2020 rollout of edibles, vapes, and topicals growth is unlikely to exceed 150% in 2020. U.S. operators in comparison are growing revenue 150%-300% in 2019 and at similar rates or better in 2020. With analyst consensus wildly too high for Canada LPs in 2020, there may still be downside in the sector.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.