HEXO Is In a Tough Spot
Bottom Line: With 6 months of cash and at least 2 years to break even, we lay out what management has to do to save the stock and the company…
HEXO Gross Margin is the Worst in the Group
Source: SEDAR, Grizzle Estimates
Fire and Flower Has a Debt Problem
Bottom Line: With $47 million of debt coming due in June/July against $43 million of cash in the bank, should Fire & Flower investors expect a ballooning share count in 2020?
Debt Maturity Schedule and Illustrative Cash Balance
Source: SEDAR, Grizzle Estimates
Valens Guidance a Rare Bright Spot, But Will Results Last
Bottom Line: Valens is guiding to 70% rev growth next quarter and is wildly profitable. But at the end of the day, it comes down to analyst expectations vs reality. Analysts think margins are going up, we think margins have peaked. We should know who is right by August.
Analyst EBITDA Margin Estimates for Extraction Stocks
Source: S&P Capital IQ
Green Growth Brands May be On the Way Out
Bottom Line: Green Growth looks like the next casualty of the potstocks meltdown. We explore the company’s problems and how long they have before some difficult decisions need to be made by management.
Hemp Price Decline Slows in December
Bottom Line: Wholesale hemp prices slowed their decline a bit in December but are still down a whopping 67% in only 8 months. Refined CBD oil prices are down 15% in the last three months. It looks like the market is quickly adjusting to an explosion of hemp supply that is most definitely outpacing demand.
Source: https://www.hempbenchmarks.com/wp-content/uploads/2019/12/HempBenchmarksSpotPriceIndexReport-December2019.pdf
Vitamin E Acetate Likely to Blame for Majority of Vaping Illnesses
Bottom Line: The CDC has officially come out and said vitamin E acetate is likely to blame for the lung related vaping illnesses. It’s good they have a culprit and hopefully, this whole episode will lead to stricter testing requirements across North America because as it stands, legal consumers really can’t trust that what they are buying won’t harm them. 
Cannabis Vapes to be Fully Tested by Health Canada
Bottom Line: The government’s commitment to testing not just the vape oil but also the vapour itself is good news for consumers and for trust in the legal market. Proving legal market vapes are conclusively safer than black market alternatives will be an important driver of legal market share in our opinion.
Germany Cannabis Sales Losing Some Steam
Bottom Line: As long as we see accelerating growth in the fourth quarter, slowing sales growth in Germany isn’t something investors should worry too much about. Exporters to Germany should be worried as new suppliers are popping up by the day and prices are falling. Canopy, Aurora, and Cronos will likely see stagnating or declining revenue from Germany in the coming quarters.
Source: MJBiz Daily
Alberta Making it Hard on Micro-Cultivators
Bottom Line: Alberta won’t buy directly from micro-cultivators, making them go through a larger license holder. This decreases margins, increases startup costs and makes it harder for micro-cultivators to thrive. Hopefully, other provinces don’t follow suit.
Source: Alberta Government
Weekly Marijuana Stock Performance
The cannabis sector was down this week. Globally, stocks were down 3.2% while in the U.S. and Canada stocks were both down 2.8%. U.S. names are underperforming by only 3% year to date.
We’ve been watching the performance of the U.S. and Canadian stocks closely and U.S. stocks are definitely where you want to be invested. Since the end of September, U.S. stocks are down 20% while the Canadian LPs are down 34%. Investors should begin building a long-term position in a basket of the top five U.S. operators, but save some extra cash to buy on any weakness in 2020.
An upcoming catalyst to watch is a UN meeting in March 2020 to potentially deschedule cannabis as a schedule 1 drug. If this goes through with America’s blessing it could set the wheels in motion for federal legalization sooner than later. Once the recent vaping crisis is resolved we should also see a bounceback in the U.S MSOs.
The overall marijuana index underperformed the S&P by 4.8% and the TSX by 3.9% this week and has underperformed by 67% and 58% YTD.
Source: Yahoo Finance
Market Outlook
There are now question marks on whether increased sales from cannabis 2.0 products will lift the stocks. Capital markets are largely shut to cannabis companies right now, which is a problem when the business models are built on rapid expansion and big deficits.
Price compression has arrived and will drive cannabis stocks lower over the next 6-12 months in our view without a new regulatory catalyst. Canadian cannabis investors should not be putting more money into the sector until retail prices find a bottom.
U.S. stocks will continue to outperform Canadian LPs from here in our view with more catalysts potentially on the horizon. At the first whiff of nationwide U.S. legalization, investors should pile into the largest MSOs and hold for the long term.
United States
- Kentucky Lawmaker Proposes Marijuana Legalization Bill
- Green Growth Deal to Buy Moxie Falls Apart in Sign of Further Cannabis Carnage
- Michigan Marijuana Sales Hit $3.1M After Two Weeks
- Oklahoma Residents Launch Marijuana Legalization Petition
Canada
- Fire & Flower Earnings Leave Unanswered Questions Around Maturing Debt
- Alberta Cannabis Stores Can Open on Christmas Day
- Hexo About to Learn What it Means to Sink or Swim After Scary Earnings Report
- Valens Groworks Guidance a Rare Bright Spot in Cannabis, But Will the Good Times Last?
International
- New Zealand Unveils Medical Cannabis Regulations
- London Police Chief Voices Interest in Canadian Cannabis “Experiment”
About Author
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.