Cronos Earnings Leave Little to Cheer About

Bottom Line: Every earnings is simply a reminder of how overvalued this stock is in our opinion. Cannabis cultivation is only worth $5/sh meaning the market is betting another ~$13/sh that growing cannabis from yeast will be a home run, or the company makes amazing investments with the remaining funds from Altria. Both could happen but investors should be aware they are making a biotech bet more than a bet on cannabis.cronos earnings

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14% of U.S. Citizens Use CBD

Bottom Line: According to a Gallup poll there are just as many CBD users as cannabis users in America. We expect CBD usage rates to at least double that of cannabis due to looser regulations and widespread availability in every convenience store, pharmacy, and gas station in America very soon. The largest CBD companies are Charlotte’s Web (CNSX:CWEB), Curaleaf (CNSX:CURA), iAnthus (CNSX:IAN), and CV Sciences (OTCMKTS: CVSI)

Source: Gallup

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New York Officially Bans CBD-Infused Food

Bottom Line: New York is taking a harder line than most states when it comes to cracking down on CBD foods before full FDA regulatory guidance is released next year. This could discourage CBD sales growth in NY until the FDA establishes regulatory guidelines.

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Florida Likely to Put Legalization on the Ballot in 2020

Bottom Line: Florida is already the largest medical cannabis market in the country and has big sales potential once cannabis is recreationally legal. The largest beneficiaries of legalization would be Trulieve (CNSX:TRUL), iAnthus (CNSX:IAN), Sol Global (CNSX:SOL), Liberty Health Sciences (CNSX:LHS), and Harvest Health (CNSX:HARV).

Source: Wikipedia

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Another Excellent Article Exploring the Potential and Challenges of Cannabis Beverages

Bottom Line: Because cannabis drinks can’t be consumed in a typical bar setting, consumers will create their own use case for these products. This article makes a strong case that companies should be moving slowly into drinks, not spending millions before they know how consumers will ultimately consume the product.

Heineken Cannabis Infused Beer

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Greece Likely to Greenlight Cannabis Sales in the First Half of 2020

Bottom Line: 26 producers have been approved for 2 of 3 licenses needed to grow and sell cannabis throughout Europe. Regulators do not expect to award the final license to any company until early 2020. So far companies have plans to invest USD$200 million in Greece to grow and sell cannabis. Greece will eventually compete with Canada to supply European customers.

Source: Wikipedia

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Good Article on Why Consumers Continue to Buy From the Black Market

Bottom Line: Until the legal market can match the variety and quality of black market cannabis while keeping pricing to within 50% of illegal supply, the legal market will not capture more than 50% of the total market in our view.

 

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Weekly Marijuana Stock Performance

Even Aphria’s blowout earnings last week couldn’t keep the positive momentum going for cannabis stocks. The global index declined slightly less than 1% this week. U.S. producers fell even more, down 4.2% compared to CDN stocks which only fell 1%. The CDN large cap index was up 7% this week driven by a last-minute spike in shares of CannTrust on no particular news.

We still expect U.S. MSOs to outperform Canadian peers over the next two quarters, but if we get into late September and they are still underperforming then we think its clear U.S. stocks are going to trade with the Canadian index until legislation like the STATES act passes.

The overall marijuana index underperformed the S&P and TSX by 0.1% and 1.0%, respectively.

Source: New Cannabis Ventures

Market Outlook

Aphria’s stellar earnings this week could be what the sector needs to break out of the recent four-month selloff. Investor excitement around edibles could also buoy the sector leading into edibles legalization and first sales in December.

With the sector down 32% since May and underperforming the broader market by 50%, we think a bottom is forming as long as the broader market continues to hold in.

Canadian LPs are still stuck in a stagnating legal market, making it hard to show the revenue growth investors are expecting. LPs are showing little 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.

Longer-term, with the Canadian market legalized, we expect retail and wholesale price compression or unsold inventory from a legal oversupply by the end of 2019. Falling cannabis prices or an inability to sell all of what is grown will pressure producer stocks in 2020. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.

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