Canopy Earnings Signal Growth is Gone Until 2020

Bottom Line: As a smart investor, you should be asking yourself why you are paying 30x sales for a single-digit growth, money-losing company like Canopy, when you can own high-tech stocks like Slack or Pinterest growing at 60% a year for only 17x-20x revenue?

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CannTrust On Its Last Leg

Bottom Line: Recent negative news makes it very apparent that the only lifeline left to CannTrust is if Health Canada allows management to sell the company to Aleafia without losing its licenses. This seems like a long shot due to the scope of the wrongdoing involved.


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The Netherlands Increasing Cannabis Exports to Germany 

Bottom Line: German import demand is currently being supplied equally by Canada and the Netherlands, but is only expected to be 5,000 kg this year (half from Canada). 2,500 kg is only 1% of cannabis harvested in Canada right now so will not yet make much of a difference to company earnings.

Source: Wikipedia

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Supreme Cannabis Issues Strong Guidance

Bottom Line: The cannabis Supreme grows is already a favorite across Canada and now the company is guiding to 100% quarterly growth and positive cash flow and net income in 2020. Management has already succeeded in creating a high-quality product and now looks to be moving into the cash harvesting phase.

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First of the New Cannabis Lounges Opening Soon

Bottom Line: Hollywood and Colorado recently approved consumption lounges in spaces like restaurants, art galleries and music halls. Cannabis lounges will be the first time customers can consume marijuana in a similar setting to where alcohol is consumed and could lead to even higher levels of cannabis consumption in these states. A positive catalyst for demand.

Source: Oriana Koren for the Washington Post

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A Visual Look at the State of Cannabis Research

Bottom Line: Cannabis patents are picking up and the large pharmaceutical giants are beginning to dip their toes into the space. A buyout of a cannabis research company by one of the larger pharmaceutical players will likely signal the medical community is confident the regulatory risks can be mitigated.

marijuana - mj medical 6

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Aurora No Longer Needs Cash

Bottom Line: The upsizing of Aurora’s credit facility from C$200 million to C$360 million now provides the company with liquidity until the middle of 2020. This cash runway lines up with the company’s guidance that they will break over the next few quarters. The cash crunch we saw coming has largely dissipated for now.  Read more»

Weekly Marijuana Stock Performance

Terrible earnings from Canopy Growth this week and macroeconomic fears of a recession dragged the cannabis market down 4.6%. U.S. producers outperformed Canadian companies for once with much better earnings results. U.S. stocks fell 4.3% while Canadian stocks were down 6.3%. The Canadian large-cap index was down almost 13% this week driven by the disappointing Canopy Growth earnings.

If U.S. MSOs do not start outperforming their Canadian peers after a terrible earnings season in Canada, nothing short of regulatory change will drive the U.S. stocks to new heights. The STATES act is the likely catalyst for U.S. Cannabis stocks.

The overall marijuana index underperformed the S&P and TSX by 3.5%.

Source: New Cannabis Ventures

Market Outlook

Aphria’s stellar earnings were overshadowed by disappointing earnings from Canopy Growth. We still think a stabilization in the global economy and the coming legalization of edibles could buoy the sector leading into first sales in December.

With the sector down 34% since May and underperforming the broader market by 35%, we think there is a good chance the sector rebounds into the end of the year as long as global economic data does not take a turn for the worse.

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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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.