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First, An Outlook for the Year Ahead

Bottom Line: The problems the cannabis market now faces were foreshadowed in-depth nearly 2 years ago by Grizzle (“Up in Smoke: The Overvalued Haze of Marijuana Stocks“, Feb. 4, 2018). In this report, we analyze if the rollout of new cannabis products in 2020 will rescue the industry from the problems of its own making.

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JANUARY

CBD Will Be the Cannabis Investing Theme of 2019

Bottom Line: With CBD now effectively legal in North America, consumer brands are going to rush to incorporate it into many new products. Demand and prices for hemp-grown CBD will be strong this year before farmers ramp up plantings and drive the price of CBD down longer-term.

Beer Sales Fall After Cannabis Legalization

Bottom Line: Keep in mind this study was done by an alcohol industry trade group, but it confirms what marijuana analysts expected: beer sales decline after cannabis legalization. Interestingly, wine and liquor sales are still growing, even in states that fully legalized cannabis.

Aphria Poised to Outperform

Bottom Line: Though many of our predictions in this report did not pan out, the most important one did. Aphria’s deep valuation discount and lack of a real smoking gun in the short-seller report led to Aphria outperforming everyone in 2019. It was still a tough year for all cannabis investors with even Aphria losing you 17% unless you had the ability to short certain stocks and go long others.

Source: Yahoo Finance

FEBRUARY

 

Analysts Start to Realize Cannabis Rollout Will be Rocky

Bottom Line: Some banking analysts are finally coming to the realization that their rosy estimates need to come down to reality. Scotia cut next quarter’s 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.

MARCH

 

Cannabis Mania Sucked All the Capital Away from Miners

Bottom Line: Mining IPOs in Canada raised C$52 million in 2018, down sharply from C$830 million the previous year. With Cannabis raising C$490 million from IPOs and billions more from stock issuance, we can definitely say risk-hungry investors have a new favourite sector.

Outdoor Cannabis is Coming

Bottom Line: Health Canada has 172 cultivation licenses in the queue that include an outdoor area. Greenhouse growing will never be as cheap as outdoor, especially in Canada’s colder climate. For now, most of this outdoor supply will go into edibles and vape pens pushing down wholesale and retail prices of the those products.

*Outdoor supply is now being sold as flower as well. We think outdoor will be the investment theme of 2020*

2019 Outdoor Harvest Results

Some of the Regulatory Problems Facing Cannabis 2.0

Bottom Line: We are starting to get worried that government regulations meant to protect youth consumption and accidental overconsumption of cannabis could be unnecessarily putting Canadian growers at a global disadvantage. The government will end up empowering the black market and losing potential tax revenue that could go to policing and much-needed social programs.

APRIL

 

U.S. Banks Begin to Open up to Cannabis

Bottom Line: BNY Mellon is holding the assets of a U.S. focused ETF, a first in the banking industry. This could open up the floodgates for other big custody banks like State Street and Northern Trust to allow more cannabis ETFs to enter the market. These new ETFs are giving U.S. investors a way to invest in a still federally illegal industry, providing more growth capital for U.S. MSOs.

MAY

 

Cannabis CEOs Playing a Game of Monopoly

Bottom Line: CEOs are betting they will be bought out before they have to figure out how to operate unwieldy multi-state enterprises, according to Forbes.

Nanoemulsions are the Future of Cannabis Beverages

Bottom Line: Cannabis beverages are coming this winter and nanoemulsions will be a key technological component. The drinks need to taste good and work quickly or else sales may fall flat just like they have in legal states on the U.S. west coast.

China is Rushing to Supply the West with CBD

Bottom Line: Any business China enters sees price deflation and we doubt CBD will be any different. Chinese firms are already purchasing U.S. and Canadian assets to help them import and sell Chinese-grown CBD.

JUNE

 

Changes at the FDA Could Have a Big Impact on Vape Pens

Bottom Line:The FDA may begin requiring huge expensive studies for any vape product to gain federal approval. These regulations, if passed, could extend to cannabis vapes once legalized and would put smaller companies without big budgets at a disadvantage.

Thailand Emerges as Cannabis Leader in Asia

Bottom Line: To the surprise of many, Thailand is emerging as a cannabis legalization leader in Asia. The government is distributing 30,000 bottles a month of THC and CBD oil to 100 hospitals throughout the country. This is impressive supply growth, but far less than the 10 million bottles equivalent we estimate a medical market would consume each month.

Bruce Linton Out at Canopy Growth

Bottom Line: With Linton’s track record of overpaying for assets that support the promotional story he wanted to tell, we expect the new management team will be quick to write off legacy assets to make sure they have a low bar to jump over to please investors going forward.

JULY

 

The First Micro-Cultivation License has been Granted

Bottom Line: According to the first licensee, the whole process cost him C$700,000, including the greenhouse and took 55 days from application to approval. He should be able to output at least 315 kg a year making him about C$1 million a year in gross profit. It looks like braving the Health Canada approval process will be worth it for micro-cultivators.

Quebec Won’t Legalize Edibles

Bottom Line: This decision means 23% of the Canadian population can’t buy legal cannabis edibles come December 2019. The government also will limit vape pens to 30% THC, forcing consumers to ingest even more carrier oil (coconut oil, MCT oil, etc.) which could have its own unintended health implications. This decision means lower countrywide sales growth all things equal.

50% of U.S. Cannabis Sales Still Come from the Black Market

Bottom Line: A recent BDS Analytics study found that 50% of cannabis sales in Oregon and Washington still come from the black market even though prices have fallen more than 50% since legalization in those states 4-5 years ago. The legal markets need price competition, better product formats, and no diversion to other illegal states to totally get rid of the black market in our opinion.

AUGUST

 

Are Cannabis Drinks Really Going to Take Off?

Bottom Line: An excellent exposé on the questions that need to be asked before we assume cannabis drinks will be a home run. Product dosing, flavour profiles, activation time, and duration are just some of the issues that need to be addressed. Cannabis drinks are only 2-3% of sales in mature U.S. cannabis markets.

Something Doesn’t Smell Right in Colombia

Bottom Line: Press articles over the last few weeks are making it clear, Colombia is still a ways away from having a functioning cannabis market. Companies tell you they are fully licensed but according to the government, cannabis isn’t even regulated for consumption, not to mention 3/4 of Colombians oppose legalizing the consumption of drugs in the country.

First of New Cannabis Lounges Coming to Market

Bottom Line: California and Colorado recently approved consumption lounges in spaces like restaurants, art galleries, and music halls. Cannabis lounges will be the first time customers can consume marijuana in a similar setting to where alcohol is consumed and could lead to even higher levels of cannabis consumption in these states. A positive catalyst for demand.

A Big Data Look at the Industry’s “Cheap Paper Problem”

Bottom Line: Grizzle provides an industry-first big data visualization of all the options/warrants and convertible debt of the 40 largest cannabis stocks. We also map the cost of founder’s shares across the industry. Make sure to check our guide before buying to fully understand the technical fund flows that could impact the stock price.

DEA Finally Approving Cannabis Research Permits

Bottom Line: Political pressure finally forced some action at the DEA. Research is important because as the number of studies showing positive medical outcomes grows, the argument for legalizing the drug nationwide becomes much stronger. A U.N. vote to potentially deschedule cannabis in March 2020 could jumpstart federal legalization, at least for medical cannabis.

SEPTEMBER

 

Mexico Likely to Beat the U.S. to Full Legalization

Bottom Line: With the president and the head of the justice committee on board for recreational legalization, there is a good chance Mexico beats the U.S. to full legalization of cannabis.

U.S. Hemp Output to Quadruple in 2019

Bottom Line: 230,000 acres is expected to be planted this year, up from 78,000 last year. This much hemp will yield at least 1.8 million kg of concentrated CBD oil worth $90 billion! at current retail prices of ~$50/gram. For reference, CBD sales are estimated to be only $1 billion in 2019 and $2 billion by 2020. Get ready for pricing to fall.

*Since this article was published new data shows CBD prices are in freefall*

Source: Hemp Benchmarks

 

Big Pharma Making Moves into Cannabis

Bottom Line: For now, a Teva Pharmaceuticals subsidiary will be distributing an Israeli producer’s cannabis only in Israel. Once exporting is allowed, Teva will handle international exports out of Israel as well. Little by little big pharma is dipping a toe into cannabis. Once federal legalization is on the ballot in the U.S., expect a gold rush by big pharma to buy up the best-positioned cannabis companies.

An Organic Cannabis Market Deep Dive

Bottom Line: A thorough report on how the strong demand trends for organic products will likely apply to cannabis as well. With only three certified organic growers operating globally today, the upside from growing organic cannabis is substantial.

SAFE Banking Act Passes the House

Bottom Line: The SAFE Act would allow cannabis businesses to use traditional banks leading to more mergers and acquisitions and more efficient operations in our view. The chances of this bill passing the Senate appear to be very low so U.S. MSO investors will have to look for another catalyst for now.

October

 

Is Colorado about to see a Dealmaking Frenzy?’

Bottom Line: On Nov. 1, non-residents and publicly traded businesses can now own cannabis licenses in Colorado. Bill H.B.19-1090 opens the door to large multi-state operators if they want to move into the Colorado market. Colorado companies now have five-plus years of experience operating in the legal cannabis market and likely have some pearls of wisdom and useful market data to offer to newer entrants.

Grizzle Explains the Vape Crisis

Bottom Line: A thorough report looking at the potential cause of vaping illnesses, how the news flow will impact sales and consumer behaviour not to mention who we think are the stock market winners and losers.

Number of Banks Working with Cannabis Companies at all Time High

Bottom Line: The number of U.S. banks willing to work with the cannabis industry is spiking in 2019 hitting 550 in June from 350 a year ago. Close to 10% of commercial banks now service cannabis businesses, however the industry needs much more than just a business banking account. Large-scale bank lending will be extremely positive for the U.S. Cannabis industry in our view.

Source: FinCen

Cannabis Market Trends Explored

Bottom Line: If you are curious how popular edibles, vapes, drinks, and topicals will be in Canada, the U.S. consumption trends are a great place to start. This article has lots of good charts and data.

Source: Cannabis Intelligence Briefing

HEXO Fires First Shot in Coming Cannabis Price War

Bottom Line: HEXO is making waves as the first LP to offer dry flower at a price that competes with the black market. We think this is just the beginning and HEXO has kicked off a cannabis price war in Canada.

Is MedMen Effectively Bankrupt?

Bottom Line: With a balance sheet that looks like MedMen ran out of cash in August, investors need to be asking themselves, is MedMen effectively bankrupt?

We went digging and discovered the truth. It’s not pretty….

November

 

U.S. Public Opinion of Cannabis at a Tipping Point

Bottom Line: Slightly less than 50% of Republicans support cannabis legalization. Once a majority of Republican voters join the rest of the country in supporting legalization we will see opposition to legalization in the Senate fall away. We still think legalization is likely in the first year of the next Presidential term (2021).

Source: Gallup

The Top 5 Ways to Invest in the Florida Marijuana Market

Bottom Line: The Florida marijuana market is 2/3rds the size of Canada’s, growing at ~300% and offers investors huge upside — if you just know where to look. We went digging into state-level data to help you understand the demand trends in the Florida market and identify who the best-positioned companies are.

Cronos Signaling a Major Pivot Away from Growing Cannabis

Bottom Line: While the rest of the industry focuses on low growing costs and ramping up supply, Cronos no longer cares about growing at all. Cronos investors should be aware they now effectively own a biotech stock. We explain what this pivot means for the path to profitability.

Canopy Growth Earnings Were Ugly, More Downside Is Ahead 

Bottom Line: Grizzle nailed how Canopy’s stock price was going to go ever since Linton left (down -61%). Now we are outlining the detailed scenario of where the stock goes from here (Hint…. DOWN). The bottom is not yet in.

Aurora Needs to Come Clean Before it can Rebound

Bottom Line: Aurora bought MedReleaf and CanniMed for more than $50 per gram of capacity and is already idling certain assets of MedReleaf, yet we still have no write-downs in sight. This is a management team in denial. We outline the downside from here and what management needs to do to reset expectations.

Report Shows It’s Buyer Beware in the CBD Market

Bottom Line: A new independent test of online CBD products shows us it’s still the wild wild west in CBD land. 50% of products wildly mislabeled with one missing CBD entirely. The industry is failing on gaining the trust of consumers and reports like this certainly don’t help.

December

 

Canopy Growth Finally Appoints New CEO

Bottom Line: Constellation Brands ultimately chose to put their current CFO and board Chairman of Canopy into Canopy’s CEO seat. We outline the moves investors should expect from this new leader and what it could mean for Canopy’s stock price.

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, however, 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

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About Author

Scott Willis

Scott has over 15 years of institutional investment management experience analyzing both debt and equity securities. He has held senior investment research roles at Credit Suisse, and TD Asset Management. His core areas of investment coverage at Grizzle include marijuana, energy and technology. Scott is a CFA charterholder and has been featured on Bloomberg, CBC, CNBC and Macleans.

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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.