United Nations Pushes Crucial Cannabis Vote Back To December

Bottom Line: The potential catalyst we’ve long been talking about at Grizzle has been pushed back to December 2020. The next potential federal legalization based catalyst will be the presidential election in November. State by state legalization, while positive, won’t lead to a big rebound in U.S. MSO’s in our opinion.

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Village Farms Is Turning Into Every Cannabis Grower’s Worst Nightmare

Bottom Line: Village Farms is emerging as the new juggernaut in Canadian cannabis in our opinion. A 40% lower growing cost than any other greenhouse and enough capacity to supply half of Canada’s demand. The stock will continue going down with the industry, but once cash coffers are refilled and weak growers go under, Village Farms is poised to outperform Canopy, Cronos, Aphria, Aurora and others.

marijuana-law-11 mj

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High Tide Reports a Dangerously Low Cash Balance in Q4 Earnings Report

Bottom Line: The problems that plague Hide Tide seem to follow the common theme of high cash burn coupled with decreasing margins and too much focus on growth at the expense of profitability. We think High Tide will have to dilute shareholders further before setting itself up for profitable growth. If you like the stock, wait until they raise more money or achieve break-even before buying in.

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Fire & Flower Announces Ontario Expansion But Do They Have the Cash to Execute

Bottom Line: Fire & Flower is emerging as a retail leader but they still don’t have enough cash to pay off debt maturities coming in June and July. As they did recently, we think the company will dilute shareholders to pay off the debt. Stay on the sidelines until they achieve breakeven or raise enough cash for at least a year of operations.

Source: Fire and Flower Inc.

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Psychedelics: Cures, Charlatans and MindMed (MMED)

Bottom Line: The mushroom IPO’s are coming! Is the psychedelics sector setting up to be the next potstock bubble, or are these company’s different? We try to answer that question in the first video in our series exploring this emerging industry.

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UK Government Looks To Ease Barriers On Bulk Importation Of Medicinal Cannabis

Bottom Line: The UK Government has announced that it is changing importation restrictions for medicinal cannabis. This was done to minimize patients’ wait times for cannabis medications. This is a positive catalyst for import demand. LP’s may be able to fill some of this demand and ramp up their exports from Canadian and European facilities.

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Canopy Growth to lay off 500 staff, shut down two B.C. facilities

Bottom Line: We correctly predicted that the new CEO would clean house in his first quarter on the job. The move by Canopy to shut 1.3mm sq ft of greenhouse space means the massive cannabis oversupply is starting to shrink, however we need to see growing capacity go away, not just be temporarily shut down for the market to truly be back in balance.

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Cannabis-infused Beverages Finally Arrive in Canada

Bottom Line: Valens GroWorks Corp. in collaboration with A1 Cannabis Company, will be the first to market in Ontario with CBD and THC beverages. Forecasters call for the cannabis drinks market to reach $500 million, but Grizzle remains highly skeptical of that number. Drinks remain an afterthought in the U.S. and we struggle to see why Canada will be different without the legalization of public places to consume said drinks.

Image Source: globalnews.ca

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Weekly Stock Performance

Overall, it’s been a very rough week for the cannabis sector. Globally, cannabis stocks were down 6.97%. The U.S. cannabis market was down 10.33% and the Canadian sector was down 4.98% 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 48.2% while the Canadian LPs are down 51.2%. 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.

The highly anticipated UN meeting to potentially deschedule cannabis as a schedule 1 drug has unfortunately been delayed until December 2020. With this major catalyst gone in 2020, we don’t see state by state legalization on its own driving the cannabis stocks higher.

Cannabis stocks will have to begin generating profits to bring investors back into the sector and break the downward trend.

YTD in 2020 the Global cannabis sector is underperforming the S&P 500 by 22.8% and the TSX by 25.6%.


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.