Bottom Line: The next investing frenzy will be in CBD, THCs non psychoactive cousin. Grizzle did a deep dive into the CBD market to illuminate the potential along with the three stocks best positioned to play the trend. Ignore this information at your own risk.
Bottom Line: Even though there are some questions around the company’s cost structure and declining patient numbers, nothing in the earnings report changes our view that Aurora is ready for legalization and remains one of the two best positioned targets, along with Aphria, for a beverage giant who wants to enter the market.
All-In Production Costs per Gram by Producer
Bottom Line: Ontario looks committed to fostering a free retail market in the province. If the government really wants to prevent big producers from owning more than 1 store they can structure the regulations to prevent loopholes. If we assume owning a retail store is profitable, these regulations have now decreased the amount of profit a licensed producer will generate, a negative for cannabis growers.
- The proposed cannabis retail store must be located on or within the site set out in the licence.
- The person and its affiliates, as defined by the regulations, may not between them hold more than one retail store.
Bottom Line: In the first six months of 2018, Germany imported 1,800 kg, 420 kg of which were from Canopy Growth. Tilray on the other hand likely provided less than 5% of cannabis oil exported to Germany according to financial filings.
Canopy makes $13.62 per gram in Germany compared to $7.20 per gram in Canada. Canada supplies 60% of Cannabis consumed in Germany.
Bottom Line: Aurora’s first massive greenhouse, Aurora Sky, is now 50% over budget and six months delayed from the original construction schedule provided by the company. This news from Aurora should remind investors that it is in their best interest to build a margin of safety into production and return expectations for licensed producer stocks. This is a brand new industry and the best operators have not yet been determined. Production and cost guidance from management should be taken as a best-case scenario.
Bottom Line: Even if a new US farm bill takes hemp off a list of controlled substances, it will still take 1-2 years for state-by-state regulations to be decided. In Washington, for example, manufacturing hemp oil, aka CBD oil, is forbidden, demonstrating there are still challenges hemp farmers have to face before they can expand at scale. US hemp acreage is exploding even in the face of strict regulations.
Hemp Acreage Planted by Region
Global marijuana stocks took a breather this week and were down 5% for the week. News out of Ontario that only one store would be allowed per licensed producer likely contributed to the stock price weakness. The group as a whole is still up 70% since the Constellation investment in Canopy Growth was announced last month.
There is a significant M&A premium built into most of the large-cap stocks as investors expect large corporations to enter the market through licensed producer buyouts. If these deals don’t occur in the next few months stocks could retrace recent highs.
The Canopy Constellation deal gave the market some new momentum starting in August which should carry stocks higher at least through the end of the year. Until we have 3 to 6 months of data from the legal market in Canada, investor enthusiasm should continue to push cannabis stocks higher.
Once the Canadian market opens we expect retail and wholesale price compression from a legal oversupply. Falling cannabis prices will pressure producer stocks in the second half of 2019.