Bottom Line: The question for investors should be if Aphria overpaid for its LATAM assets, not if a fraud charge will appear. Grizzle believes the Canadian assets alone are worth $20/sh presenting substantial upside to the shares once Aphria either refutes the current allegations or as management works to regain investor’s trust.
Bottom Line: The new government of Iván Duque Márquez has not made its stance on cannabis known. The government looks to be more conservative on drug policies than the last president. Cannabis companies are moving ahead with investments anyways, hoping Colombia’s softening stance on cannabis will endure.
Bottom Line: Though the UK is now handing out medical cannabis prescriptions for the first time, the national health service (NHS) is not yet footing the bill. Guidelines are still very strict and only allow a prescription if all other options for treatment have been exhausted. Demand growth in the UK will be slow until doctors are given more leeway and health insurance begins covering cannabis costs.
Bottom Line: Altria’s investment valued Cronos at a C$3.6 billion market cap or 38x 2020 EBITDA. This is a nosebleed multiple to pay, however, Altria got C$765 million of warrants which brings the deal price down to C$1.6 billion. If Cronos builds more greenhouse capacity with the C$2.4 billion of cash and is able to sell cannabis for $6 per gram, Altria will generate a 25% return on their investment at the end of the day. Not a bad return.
Bottom Line: Trump’s new attorney general pick looks only slightly less hostile to drug reform than previous attorney general Jeff Sessions. Looks like the path to nationwide legalization will still come from states legalizing one by one until a critical mass has been reached. At that point, senators and house members will have no choice but to support cannabis reform.
Weekly Marijuana Stock Performance
Global marijuana stocks were down another 7% this week and are now down 40% from the peak in October. Both U.S. and Canada operators were down around 10%-11% with mid-cap stocks performing better than large caps, though still down for the week. The Aphria short report sowed more doubt in the minds of investors about the true value of cannabis assets.
The Canopy Constellation deal gave the market some new momentum, though this has largely dissipated in the last month. Stocks should languish through year-end unless another consumer goods company buys into the space. If this happens stocks may be off to the races again.
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.
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