Bottom Line: If at the end of the day, no offer comes along that management and shareholders believe is realistic, Aphria can still go it alone and investors will be handily rewarded. Starting in 2020 Aphria’s capacity should generate enough cash flow for investors to realize a juicy 10%-20% free cash flow yield. At this point, Aphria’s stock should trade for at least C$15/share or the company becomes an extremely attractive takeout target.
Bottom Line: If retail sales of cannabis from October and November are annualized, Canada is on pace to sell only $24 of cannabis per person in 2019. A well-functioning legal market should have sales of at least $200 per person. U.S. states that have legalized saw on average $85 per person of retail cannabis sales in the first year.
First Year Cannabis Sales per Person
Bottom Line: Kudos to Tilray for becoming the first LP to avoid overpaying for new capacity. They are paying at most $4.70/gram for Natura Natural’s 15,000kg of capacity. Most deals done at $20-$50/gram. Tilray now has 50% more capacity. Well done.
Bottom Line: Cannabis research will create a designer high. Scientists are deconstructing the plant down to individual compounds to create the exact type of high consumers want. Raw flower demand will fall to less than 10% of the market in 10 years. Think of pain medicine, no doctors are prescribing the raw poppy plant for those in need of pain relief. The cannabis market is rapidly approaching the same makeup as the modern pharmaceutical industry.
Bottom Line: 2019 could be a year of significant cannabis reform. 68% of members of the House of Representatives come from states that have legalized at least medical marijuana use. Pushing marijuana reform through the Senate is the real challenge and this article does a great job laying out the roadblocks standing in the way of full federal legalization.
Bottom Line: Israeli growers are finally able to compete with Canadian growers to supply the lucrative European market. Eight companies currently grow cannabis in Israel.
Bottom Line: The legalization of recreational pot in Massachusetts has kicked off a race to be next among other east coast states. The governor of New York could legalize recreational marijuana in the next three months with New Jersey not far behind. Up for grabs is a region that could potentially spend $15 billion a year on marijuana.
Weekly Marijuana Stock Performance
Marijuana stocks had another strong week up 6%. U.S. and Canadian operators both were up 4% with large-cap stocks outperforming smaller stocks which has been typical for this market. The market believes larger is better and that smaller operators lack scale or any special intellectual property. Stocks are still well off their October highs but have rebounded 41% 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 goods 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. A supply shortage and a government monopoly do not bode well for licensed producers’ ability to meet or exceed 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.