Bottom Line: Potential mark to market losses on investments in other pot stocks could negatively impact earnings from Aurora Cannabis, Canopy Growth and others. Distribution bottlenecks in the first three months of legalization may also cause producers to report lower sales and profitability than investors expect. Expectations from investors are high.
Bottom Line: New York City’s Department of Health has forbidden the sale of CBD in restaurants and bars. In addition, Ohio, Maine and California recently reinforced their bans on CBD products. Until the government makes it clear that CBD from hemp is legal while CBD from cannabis is not, retailers are operating in a risky grey area.
We still expect an explosion in CBD sales channels regardless, as most companies are choosing to stock CBD now expecting regulations to catch up shortly.
Bottom Line: Thailand sent senior health department and government figures to Israel to learn more about the legal regulation of cannabis. This is a sign the country may be serious about expanding the export and study of medical cannabis.
Surprisingly, Thailand has recently become one of the most progressive countries in Asia when it comes to cannabis reform, potentially rubbing off on neighbouring countries.
Bottom Line: The most popular stocks over the past week on Robinhood, a millennial trading platform, were marijuana producers, including Aurora, Cronos, and Aphria. Robinhood is a purely retail trading platform so this data is another confirmation that retail investors are starting to dive back into pot stocks, explaining much of the significant increase in stocks we’ve seen so far in 2019. Pot stocks are very volatile so be careful buying when stocks have already run up 20%-30% or more as they are often closer to a selloff than additional gains.
Bottom Line: So far this year at least three different deals have been inked to fund research into converting sugar into the active ingredients in cannabis. If this research ends with a commercially viable product it will likely be cheaper to produce than the THC and CBD that comes from cannabis grown in a greenhouse.
It is still early days so we will likely have to wait 2+ years before viability of this research will be known.
Weekly Marijuana Stock Performance
Marijuana stocks took a breather this week after some big gains in January. The global index was down 5% while interestingly, U.S. stocks outperformed Canadian names for the first time in months. Canadian large caps were down 4%, mid-caps down 11% and small caps decreased 3%. Stocks are still well off their October highs but have rebounded 52% off the lows reached in December.
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.
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.