Is Aurora Cannabis Headed for a Technical Bankruptcy?

Bottom Line: Aurora Cannabis borrowed more secured debt than any other potstock to fund its breakneck growth. That was a mistake. With big writedowns on deck, $ACB is at risk of a technical default. Read on to see why the bottom is not yet in…

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Cannabis Vape Sales Slid 26% in Two Months Following Health crisis

Bottom Line: Cannabis vape sales plunged 26% in the two months following the first public cases of vaping related lung disease. Vaping used to be the hot new trend so investors should watch ongoing sales numbers closely to make sure this category is still popular with consumers.

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Another Cannabis Deal Bites the Dust as Harvest Puts the Brakes on Planned Acquisition of Falcon International

Bottom Line: Harvest is smart to get out of the deal to buy Falcon. The business environment for cannabis is looking challenged in California. It’s prudent for Harvest to revisit the state and buy someone for a discount down the road. The market is rewarding profits over growth right now anyway. 

Image result for california flag

Image Source: Wikipedia

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Origin House is Officially Part of Cresco Labs

Bottom Line: With Cresco officially closing the purchase of Origin House, investors who bought Origin House on our recommendation would be up 30% since we published Nov 13th. Merger arbitrage is a risky game, but if you put in the work to understand the incentives of both sides, the strategy can pay dividends.

Source: SEDAR, Grizzle Estimates

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Illinois Recreational Cannabis Sales Break $10m Barrier in 5 Days

Bottom Line: The news media is talking about how successful Illinois’ rec rollout has been but Massachusetts did far better considering the state had only 2 dispensaries in the first week compared to 37 in Illinois. Illinois has twice the population of Massachusetts and should become an attractive cannabis market longer term in our view.

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The CBD Market Consumer Research

Bottom Line: An excellent report looking at CBD prices in the U.S. The first of its kind that we’ve seen, shedding some much-needed light on how your favorite CBD brand is priced vs peers.

Leafreport.com

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New York Governor Pledges to Legalize Marijuana in 2020

Bottom Line: The Governor was more reserves about legalization in 2019 so maybe this is a sign a legalization bill has more support in 2020. If New York and New Jersey legalize the drug this year, an additional 9% of the U.S. population would have access to legal marijuana.

New York Governor Andrew Cuomo.

Andrew Cuomo. Source: New York State Government

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Long-Time Cannabis Legalization Opponent in Congress Changes His Stance

Bottom Line: Congressman Joe Kennedy III (D-MA) has agreed to co-sponsor a bill that seeks to federally legalize marijuana in the US. Kennedy has previously (and unsuccessfully) campaigned against legalization in his home state of Massachusetts. One by one politicians are coming around to Federal legalization. It will take time, but we think its possible countrywide legalization could arrive as early as 2021.

https://www.marijuanamoment.net/formerly-anti-marijuana-congressman-cosponsors-comprehensive-legalization-bill/

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Israeli Gov’t Making Their Own Mistakes with Cannabis Legalization

Bottom Line: Shortages of cannabis have continued in Israel as the government created high hurdles for legacy growers to participate in the medical market. Export limits also are making it hard for the Israeli cannabis industry to compete. This is good news for Canadian exports to Europe as they face less competition for the moment. 

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Saskatchewan First Nation Planning Major Cannabis Cultivation Facility

Bottom Line: New greenhouse projects continue even with an acute oversupply. 2020 will be the year of supply rationalization.

Image result for saskatchewan first nations kettle

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South Dakota Recreational Marijuana Referendum Qualifies for November Ballot

Bottom Line: South Dakota will vote on whether or not to legalize adult recreational use of marijuana when they go to the polls this November. It is unlikely that marijuana will be legalized on a federal level in the US but this referendum is a further signal of the changing attitudes towards marijuana in the US.

Image result for south dakota marijuana referendum

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Thailand Opens Full-Time Cannabis Clinics in Bangkok

Bottom Line: The Thai government opened its first medical marijuana clinic in Bangkok, which is now one of 25 clinics in operation in the country. Thailand continues to lead Asia in relaxing cannabis restrictions.

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Should Bengals Fans Qualify For Medical Marijuana?

Bottom Line: The Cincinnati Bengals had their worst record in the NFL ever after losing 14 out 16 games, and fans have submitted a petition to the State Board for “being a Bengals fan” to be included in the list of conditions that qualify to be treated by medical marijuana. Although this petition is unlikely to be approved, it raises some questions as to whether or not the state should expand the list of approved conditions which currently excludes anxiety and depression.

Image result for cincinnati bengals

Source: cincinnati.com

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Weekly Stock Performance

The cannabis sector was mixed this week. Globally, cannabis stocks were up 1.3% while in the U.S. the stocks traded relatively flat and were down only by 0.7%. The Canadian cannabis sector suffered the biggest losses, down 4.3% since last week.

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. This is reaffirmed by troubles we’ve seen brewing at major Canadian cannabis companies like Aurora and Canopy Growth. Since the end of September, U.S. stocks are down 20.8% while the Canadian LPs are down 37.0%. 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.

YTD in 2020 the Global cannabis sector is underperforming the S&P500 by 7.0% and the TSX by 6.9%.

Global Cannabis Index Performance This Week

Source: New Cannabis Ventures

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.

Canadian LPs are still stuck in a legal market growing slower than investors expected, making it hard to show the revenue growth embedded in their trading multiples. LPs are showing slow growth in 2019 and even with the 2020 rollout of edibles, vapes, and topicals growth is unlikely to exceed 150% in 2020. U.S. operators in comparison are growing revenue 150%-300% in 2019 and at similar rates or better in 2020. With analyst consensus wildly too high for Canada LP’s in 2020, there may still be downside in the sector

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