Aphria Returns to Being Low-Cost Leader with Blowout Earnings

Bottom Line: The most important takeaway for us is that Aphria was able to double sales of cannabis when industry sales as a whole are up only 30%-40% over last quarter. There is no doubt Aphria gobbled up market share. These earnings could be what the sector needs to break out of the recent downtrend.

Aphria Green Growth Offer

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CannTrust Looking for a Buyer

Bottom Line: Any offer must have language that says it is contingent on Health Canada allowing CannTrust to keep its licenses. The smart move would be to buy the greenhouses out of bankruptcy after any lawsuit liabilities are wiped out.  We think CannTrust is worth at least $5 as a going concern, but lawsuits could add up to over $500 million or about $1 per share.

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Cannabis Ads on Twitter and Snapchat Could be Against the Rules

Bottom Line: With so many grey areas in cannabis advertising regulations we are not surprised growers are testing the rules. The fact that big platforms like Twitter and Snapchat are allowing cannabis ads on the platforms is a powerful tool companies can use for brand building. We don’t expect any fines will come from these ads based on the outcome from prior transgressions.

Source: Medmen

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Are Cannabis Drinks Really Going to Take Off?

Bottom Line: An excellent exposé on the questions that need to be asked before we assume cannabis drinks will be a home run. Product dosing, flavour profiles, activation time, and duration are just some of the issues that need to be addressed. Cannabis drinks are only 2-3% of sales in mature U.S. cannabis markets.

Heineken Cannabis Infused Beer Read more»

New U.K. Prime Minister May Support Cannabis Legalization

Bottom Line: One of the prime minister’s main policy advisers is a long-term advocate of cannabis reform. Some cross-party government officials are predicting cannabis will be legalized in Britain within 5 years. The tide is turning much quicker than we expected 12 months ago.

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Something Doesn’t Smell Right in Colombia

Bottom Line: There is a disconnect between what Colombian LPs say about Colombia compared to what is actually happening. We have a feeling regulations are making it virtually impossible for companies to scale sales domestically or export THC-rich cannabis. A bit of skepticism is warranted by investors.

Marijuana - Colombia - MJ

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Nova Scotia Renovating Cannabis Stores only 9 Months after Opening 

Bottom Line: This lack of planning by the government makes the case for why public ownership of retail dispensaries is most definitely not the most profitable option. We do think provincial retailers will eventually turn a decent profit once regulations mature.

Source: Green Flower Media

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DOJ Holding Up Recent U.S. Cannabis Mergers

Bottom Line: Acquisitions by MedMen, Cresco Labs, and 4 Front are all being held up by the Department of Justice as they seek more information about the proposed deals. The success or failure of these mergers will have important implications for future deal-making in U.S. cannabis.

marijuana - mj law 4

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NY Decriminalizes but Fails to Legalize Cannabis in 2019

Bottom Line: A delay in legalization is actually good news for MSOs like iAnthus, Acreage Holdings, Curaleaf, and Harvest Health. They have the market all to themselves for another year and can generate excess profits. We would hope NY and NJ can push legalization across the finish line in 2020 but it’s too hard to handicap at this early stage in the lobbying process.

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Weekly Marijuana Stock Performance

Cannabis stocks just managed to pull off a positive return this week thanks to the stellar earnings from Aphria. The index was up 0.3% with Canadian stocks up 1.2%, while U.S. peers were up 0.6%. We are still waiting for U.S. MSOs to begin outperforming their Canadian peers as they have much better growth prospects. Legislative change in Congress could be the catalyst.

From the peak in March, cannabis stocks are down 28%, but still 27% above the lows in December 2018. We expect U.S. stocks to begin outperforming Canadian names as we go through the year. Passage of the STATES act in congress would lead to a while new uptrend in the U.S. names in our opinion. MSOs are basically flat for the year while Canadian growers are up 17%, but this trend should reverse as we move through the rest of the year.

The overall marijuana index outperformed the S&P and TSX by 3.4% and 1.9% 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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