Grizzle’s Weekly PotStocks Review

Bottom Line: This week we look at why there is no safe haven in potstocks. We also talk about why MedMen is a stock to avoid even if management raises the cash needed to become cashflow positive. Lastly, why equipment suppliers GrowGeneration (GRWG) and Scott’s Miracle-Gro (SMG) look interesting even with all the ugliness going on with licensed producers.

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A Special Video Episode on the Coronavirus

We outline the stocks to bet against to insulate your long portfolio from the bloodbath in the markets. Since this video was released on Monday our coronavirus stock basket is down more than twice as much as the S&P 500.

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GrowGeneration (GRWG) vs. Scott’s Miracle-Gro (SMG) – Finding Value in the Potstocks Graveyard

Bottom Line: With the cannabis industry getting hammered, there is maybe a less talked about way to play this growth market without exposing yourself to the risk of price wars and falling margins that has caused cannabis growers to suffer. That is, playing the cannabis growing equipment and supplies industry. Two of the most prominent companies in this space are GrowGeneration and Scott’s Miracle-Gro. We’ve compared the two in detail.

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Medmen On Its Last Legs With Disappointing Q2 Results

Bottom Line: We’ve extensively covered the troubles going on at MedMen. Earnings confirmed the company remains in a liquidity crisis, and recent cost-cutting will not be enough to avoid more stock issuance and more dilution for shareholders. There is minimal value left for anyone looking to bottom fish.

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Valens Reports Solid Q4 Results Driven By White Label Business

Bottom Line: Valens’ Q4 report exceeded expectations with revenue coming in 11% better than consensus estimates. Even with these good results, Valens was down an insane 31% this week. Check out the Grizzle Post-roll to see why we think it underperformed.

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Trump Administration Doubles Down on Anti-Marijuana Position

Bottom Line: The Trump administration has flipped to an anti-marijuana stance ahead of elections this fall. This tells us it is most likely legalization will take a state-by-state approach until a critical mass is reached if Trump is re-elected.

marijuana-politics-06 mj

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Village Farms JV Shipping to Alberta and Reports 13% Market Share in Ontario

Bottom Line: Village Farm confirmed it is gobbling up market share from larger LPs. The company comprised 13% of Ontario’s sales last quarter, up from almost nothing 6 months ago. Their combination of good quality flower and low prices is driving impressive sales growth.


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California to Fine Black Market Landlords and Suppliers up to $50,000 A Day

Bottom Line: California looks to be getting tough on the black market. If enforced, these fines are definitely high enough to discourage landlords and suppliers from working with black market companies. Fines would amount to $18 million a year, more than even the most profitable dispensary in the state could ever hope to generate.

Source: Wikipedia

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Is the SAFE Banking Act on the Ropes? + Other Federal Updates

Bottom Line: The Secure and Fair Enforcement (SAFE) Act aims to make it much easier for cannabis companies to acquire funding from banks. As we expected, The SAFE act is bogged down in red tape in the Senate and the timeline of when it moves forward, if at all, is uncertain.

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Coronavirus Threatens Cannabis Vaping Industry

Bottom Line: Chinese manufacturers produce almost all of the world’s cannabis vaporizers, cartridges, and batteries. Due to the outbreak of the COVID-19 virus, analysts and vape distribution companies have warned of major supply constraints that will be coming in the near term due to the economic shutdown in February.

mj - weed products vaporizer

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Weekly Stock Performance

Overall, it’s been a very rough week for the cannabis sector. Globally, cannabis stocks were down 16%. The U.S. cannabis market was down 15.42% and the Canadian sector was down 14.23% 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 42.2% while the Canadian LPs are down 48.7%. 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 17.0% and the TSX by 20.9%.


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.