Bottom Line: The Ontario government is now only handing out licenses for 25 retail stores by April, not the unlimited amount they announced earlier. This is just another example of the government and industry’s inability to quickly meet customer demand.
A delayed retail rollout and continued supply shortages just mean licensed producers will grow revenue slower than the market expects, leading to a fall in stock prices as expectations adjust.
Bottom Line: Rep. Earl Blumenauer, a Democrat from Oregon is filling a bill that would protect Canadians who admit to working in the cannabis industry from being detained or banned from entering the U.S. The bill won’t be considered until Congress returns in January but this bill will likely be closely watched by anyone employed in the cannabis industry.
Bottom Line: The decriminalization of hemp is great for consumers as they will have no problem finding CBD extracts in their local drug store very soon. However, for CBD producers they now have a lot more competition. Charlotte’s Web Holdings (CWEB) likely grows hemp for less than $0.10/g and sells it retail for $160-$133 per gram. This is too good to last.
A flood of new CBD companies are listing on U.S. exchanges and supply of hemp from farmers will put downward pressure on the selling price of hemp. Companies will need to grow their volumes faster than the price of hemp is falling or else revenue will flatline for some.
Bottom Line: According to this Bloomberg article, licensed producers such as Cronos and CannTrust think they can bring their production costs down lower by hiring contract farmers to grow for them instead of doing it themselves.
What those comments are telling us is small-scale outdoor grows can be lower cost than massive 1 million sq. ft. indoor greenhouses. If cannabis is eventually grown outdoors, those $50-$100 million dollar greenhouses will be obsolete. Producers will likely turn them into processing packaging and shipping centers.
Bottom Line: Well that was fast! Only a few weeks ago we talked about how cannabis exports from Israel were stuck behind all sorts of red tape. Now some government ministers are saying the export bill could be ready for final approval by year-end.
Cannabis exports from Israel will directly compete with Canadian exports in the European market. The longer Israeli exports are delayed the better for Canadian LP profitability.
Bottom Line: Higher regulatory costs for retail cannabis stores will discourage some entrepreneurs from going through the process of opening a store. High store opening costs will be passed on to consumers making legal prices higher than they would otherwise be.
The final result is that the consumer transition from the black market to the legal market will take longer than expected, impacting licensed producer sales growth and cannabis retail store profitability.
Weekly Marijuana Stock Performance
Global marijuana stocks were down another 3% this week and are now down 43% from the peak in October. U.S. stocks were down 1% less than Canadian stocks down 4%. Large-cap stocks outperformed mid-cap and small-cap.
Stocks should languish through year-end unless a transformational deal takes place between a licensed producer and a major consumer packaged goods company like Coca-Cola or Pepsi.
Sentiment is very negative with the slow rollout of cannabis sales in Canada and it will take better than expected financial results or M&A news to lift the market
From a fundamental perspective, until we have up to 3 months of data from the legal market in Canada, stocks may struggle to find a direction and will continue to be volatile.
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.