Bottom Line: Each lot is only worth about C$2 mm a year in revenue. This means Aphria and Aurora will see revenue increase by less than 5% and 3% respectively. Question marks remain around Wayland group’s true economic interest in the third tender winner. This tender win may mean Aphria and Aurora have stronger relationships with the government regulator than most other company’s, a positive factor as cannabis demand explodes in Germany.
Bottom Line: The CBD industry is already flooding store shelves with CBD creams and other topicals, but will have to wait for the FDA rules before CBD can be infused into edible products. Because CBD is in an FDA approved drug, Epidiolex, it will never be legally sold as an unregulated vitamin.
Bottom Line: Valuations in the space continue to imply perfect execution, while on the ground reports show scaling problems are rampant among legal growers. Investors need to be careful over the next 12 months.
Bottom Line: With the borrow on cannabis stocks 15%-100% a year, short sellers have been losing money for most of the last two years. One of the winners has been the pot ETFs who are making 7% a year lending out their shares to these same short sellers.
Bottom Line: California is likely to make permanent 6,900 growing licenses, a similar per capita number to Oregon and Washington, two states that have seen mass oversupply and falling prices. California is a highly competitive market making it less attractive than all the other medical only states with minimal licenses.
Bottom Line: This news makes it clear the STATEs act protecting cannabis banking still has a long road ahead of it. If the bill takes too long it may eventually be overshadowed by new legislation focusing on bigger goals such as federal legalization.
Bottom Line: This is a smart deal as it saves Cresco from having to send sales teams into every dispensary to put their products on the shelves. Cresco paid 41x last quarters revenue annualized which is expensive but par for the course in pot stocks. Cresco is increasing the share count by 30% with this transaction but the stock was up on the announcement, indicating investors think this deal will be a home run.
Bottom Line: 565 Farmers applied for a license to grow cannabis. 384 have already passed the first round of tests. With regulatory gridlock resolved, Israel is again emerging as the main competitor to Canada as the global cannabis supplier of choice.
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 slightly outperformed the Canadian large caps up 3.1% compared to a 2.6% increase for the large Canadian growers. The overall marijuana index was up 2.5% this week, outperforming the S&P and the TSX by about half a percent.
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 53% while the 4 largest Canadian growers are up 72% 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 are up big in the first quarter after a terrible end to 2018. We are growing more cautious on the industry over the next few months and think investors who are sitting on unrealized gains may want to move partially into cash and wait for a better entry point.
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.