Bottom Line: Will Canopy Growth’s earnings drive the industry to new highs, or will disappointing results throw cold water on this early 2019 rally. Read on to find out…
Bottom Line: Aurora has arrived as a major player in the recreational market capturing ~20% market share of rec volumes in the quarter ending December.
However, the rapid ramp in revenue and most importantly profit that investors have been waiting patiently for is on track to take much longer than expected. It’s now looking likely that investors will have to wait until 2020 for positive earnings and EBITDA. Management originally said they would be profitable by the end of 2017.
The special committee findings confirm that the Quintessential Capital Management short report was nothing more than an accusation Aphria overpaid for its Latin American (LATAM) assets disguised as an investigative report on a global web of fraud.
As Grizzle argued, and third parties have confirmed, Aphria (NYSE: APHA, TSE: APH) paid the going market rate for the assets it acquired.
Bottom Line: Some banking analysts are finally coming to the realization that their rosy estimates need to come down to reality. Scotia cut next quarters revenue estimate for Canopy by 30% and like us thinks the black market will retain at least 70% of the cannabis market in 2019. Be prepared for a bumpy rollout of the recreational market throughout the rest of the year.
Bottom Line: The most interesting part of this story is that hemp with below 0.3% THC can mature during storage and transport and end up having above the legal limit of THC. This creates serious problems for CBD manufacturers and hemp shippers under the current nationwide ban on products with THC content above 0.3%.
Bottom Line: The UK, like Europe, considers any product with a cannabinoid to fall under “novel ingredient” regulations. CBD based foods could be off the market in the UK and other parts of Europe for up to three years until they gain “Novel Food” status meaning they can be sold with little regulation. You will likely find CBD products in stores regardless as the grey market usually develops while waiting for regulations to catch up.
Bottom Line: On January 19th Canada approved the first import of cannabis from Colombia. The dried flower was only for research purposes and must be sold to medical patients only according to Colombian regulations.
The real milestone to look for is when Colombia approves recreational exports and a company successfully imports that product into Canada. Then we can say Colombia has arrived as a global competitor to Canadian LP’s.
Weekly Marijuana Stock Performance
Marijuana stocks outperformed the broader market this week up 3.5% compared to the S&P 500 up 2.5% and the TSX up 1.3%. For the second week in a row, Canadian names outperformed U.S. multi-state operators (MSO).
Interestingly, so far this year the four largest Canadian LP’s have outperformed both the cannabis index as a whole and the U.S. MSOs by 11% and 24% respectively. We think the U.S. MSO’s will start to outperform if the STATEs act allowing cannabis banking is passed, possibly in 2019.
Stocks are seeing a bounce back in the first quarter after selling off so heavily in November and December. Sentiment is getting more positive with the overall market so it is hard to see stocks going through another 20%+ selloff in the first quarter without additional negative earnings news or a global recession. A full buyout of a cannabis company by a consumer packaged good or pharmaceutical company would be a strong positive catalyst for the entire industry.
From a fundamental perspective, be careful owning cannabis stocks into the next two-quarters of earnings. Distribution bottlenecks and a government monopoly do not bode well for licensed producers’ ability to meet or exceed lofty earnings estimates, however, so far the market has been happy with
Longer term, 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.