Bottom Line: Canopy is in talks to acquire an option from Acreage holdings to buy the company should cannabis become federally legal in the U.S. The deal is still on shaky ground with passage of the STATES act required for the option to come into effect according to the Acreage CEO. Don’t be surprised if Aurora, Tilray or Cronos create the same option to buy another U.S. MSO over the next few months.
Bottom Line: The legal market is not growing according to February government data. Legal sales peaked in the first month of legalization and are now running at only 93,000 kg a year, representing 10% market share of cannabis consumption in Canada.
Bottom Line: Canopy is setting some lofty goals for 2020. The company is on a $400mm revenue run rate but thinks they will hit $1 billion between April 2019 and April 2020. Still no profit until after April 2020. Canadian legal sales are only running at $650 million a year which makes us doubtful the company can meet this guidance.
Bottom Line: An inside look inside the C-suite, how management thinks about the cannabis business and what they want to achieve. The article also covers some of the potential risks facing investors. This weekend’s announcement of multiple people resigning from MedMen demonstrates that even a great business can be a terrible stock if you don’t pick the right management team.
Bottom Line: Wholesale CBD prices are likely falling already, but there is a reason everyone is racing to start a CBD business. No big brands exist in the market place making it a wide open playing field to capture consumer’s wallets.
Bottom Line: This is not good news for B.C. producers. Stricter odour regulations would force producers to spend money on expensive filtration systems and could deter cannabis investment in the province. It will be interesting to see if the potential lost tax revenue will be enough of a political deterrent to keep this regulation from passing.
Bottom Line: A helpful research report from CB Insights looking at all the ways Cannabis is disrupting established industries.
Bottom Line: With both bills failing at the last minute early this year, it looks unlikely that lawmakers will muster the support to introduce and pass new bills during the 2019 legislative sessions.
Weekly Marijuana Stock Performance
An important shift is underway in marijuana stock performance. Investors are moving money out of Canadian stocks and into CSE traded U.S. operators. Performance for the Canadian LPs is now worse than U.S operators. MSOs are up 51% while the 4 largest Canadian growers are up 49% year to date and we expect this trend to continue
U.S. operators outperformed the Canadian large caps down 1.6% compared to a 6.6% decrease for the large Canadian growers. The overall marijuana index was down 3.8% this week, underperforming the S&P and the TSX by almost 4-5%. Investors should continue rotating into U.S. MSO to take advantage of faster revenue growth, more positive news flow and regulatory catalysts.
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.
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