Bottom Line: Trulieve Cannabis, a U.S. operator, generates $180 million in revenue, 1.8 times more than the entire Canadian cannabis industry, makes $120 million of profit compared to Canadian LP’s losing hundreds of millions, is growing at 100% a year while Canada stocks struggle to grow 20%, yet trades at the same price to sales multiple. There are specific value opportunities in Canada but as a whole, the most expensive stocks don’t stack up well next to fast-growing U.S. peers.
Bottom Line: U.S. operators are constantly trying to find legal loopholes in state regulations. Harvest Health is just the latest example. The company applied for PA licenses as seven different entities but is telling investors it directly owns all the licenses. Regulators are not happy. No state has cracked down on these practices yet, but the risk is real that at least one company loses a license over these practices.
Bottom Line: A study from Australia did not find that Terpenes had any effect on the two receptors in the body affected by Cannabis. If the entourage effect is found to be a myth, lab synthesized CBD and THC look much more attractive. Opponents of lab-grown cannabis can no longer point to the health benefits of the entourage effect in naturally grown whole plant extracts.
Bottom Line: The black market will only truly die when the absolute profit to selling illegal weed falls so low it isn’t worth the risk anymore. Until legal flower prices fall at least 50%, closer to the cost of growing, the black market will hang around.
Bottom Line: It’s no surprise that even though the government dragged their feet on permitting, they are still fining cannabis dispensaries for opening past the April 1st deadline. Of the 25 shops scheduled to open only 10 opened their doors on April 1st, the rest will presumably be fined from $12,500-$50,000 depending on the delay. Just another cost of doing business in Canada.
Bottom Line: Certain LP’s tout Uruguay as a world-class Cannabis center, when in reality the government there is severely dragging its feet, causing very slow growth in demand. It took three years from legalization for the first sale to happen and there are currently only 17 dispensaries open in a country of 3.5 million people. With U.S. banking restrictions and too many hoops for patients to jump through, Uruguay is not going to become a major legal consumer of cannabis anytime soon.
Bottom Line: Retail cannabis sales have basically flatlined in 2018. The government doubled retail permits in December which could juice sales slightly higher, but looking at where sales peaked in Colorado, Nevada likely has only 14% more upside to sales, hitting $58mm a month from the current $52mm. Retail sales historically peak three to four years after the market opens.
Bottom Line: A Unilever brand just released a CBD deodorant and will follow in the fall with a whole line of CBD products. Giant consumer brands present a major challenge to emerging CBD brands, but also could emerge as potential buyers of any successful brands not owned by the major CPG companies.
Weekly Marijuana Stock Performance
An important shift has begun in marijuana stock performance. Investors are shifting money out of Canadian stocks and into CSE traded U.S. operators. U.S. operators underperformed the Canadian large caps down 5.6% compared to a 3.4% decrease for the large Canadian growers. The overall marijuana index was down 4.2% this week, underperforming the S&P and the TSX by almost 5%.
So far this year the four largest Canadian LPs have outperformed both the cannabis index as a whole and the U.S. Multi-State Operators but the gap is shrinking. MSOs are up 44% while the 4 largest Canadian growers are up 66% year to date. Investors should begin rotating into U.S. MSO to take advantage of more positive news flow and regulatory change than what is happening in Canada.
Stocks were up big in the first quarter after a terrible end to 2018. A short term selloff seems to be ongoing making us cautious on the industry over the next few months. Investors should use this time as an opportunity to buy into their favorite name at a discount.
Distribution bottlenecks, slow legal demand growth and a government monopoly do not bode well for licensed producers’ ability to meet or exceed lofty earnings and revenue estimates over the next 9 months. Revenue growth could disappoint expectations starting this quarter.
Longer term, with the Canadian market legalized, we expect retail and wholesale price compression from a legal oversupply by the second half of 2019. Falling cannabis prices will pressure producer stocks later in 2019. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.