CannTrust Fires CEO and Chairman, What Next?

Bottom Line: The departure of the CEO and Chairman is a no-brainer with evidence emerging they knew about illegal grow rooms at the company. Unfortunately, these executive departures won’t resolve the company’s continuing issues with their Health Canada licenses, the class action lawsuits or suspended sales to consumers. This recent analysis is helpful to see how much downside could be left.

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Quebec Decides not to 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.

Source: Wikipedia

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Black Market Is Still Thriving in the U.S. 

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.

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Diageo Says it is “Just Tracking” the Cannabis Industry 

Bottom Line: Earnings call comments from the CEO make it sound like Diageo is not close to making a big move into the cannabis industry. With sentiment in the industry so poor, an external investment from a giant like Diageo could lead to a strong reversal similar to the stock outperformance we saw last year after Constellation invested billions in Canopy Growth.

“On cannabis we’re just tracking it, it’s at a very early stage, We’re looking at the sector, it’s nascent and we just want to understand the consumer behaviour.”.Ivan Menezes, Diageo CEO

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States Looking at Workaround to Banking Issue

Bottom Line: States worked around federal laws to ultimately legalize cannabis and it looks like they may do the same again to provide much-needed banking services to the cannabis industry. If the SAFE banking act is held up in the Senate, states are likely to pass workaround legislation until the issue is resolved.

Source: Tom Sydow

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Canopy Sells Unfinished Greenhouse for Only $3.60 per gram

Bottom Line: We have a feeling Canopy’s willingness to sell an almost complete greenhouse for only $3.65 per gram has negative implications for the goodwill created from expensive purchases made when the market was hot in 2018. For example, Aurora Cannabis paid $85/gram or more than $3 billion for MedReleaf in 2018.

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Thai Government Begins Manufacturing Cannabis Oil

Bottom Line: To the suprise 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.mj

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Another Legalization Bill Introduced in U.S. House

Bottom Line: Numerous cannabis legalization bills have been introduced in the House of Representatives this year, but support in the Senate is still lacking. The STATES act has the best chance of passing through the Senate but a 2019 passage looks unlikely at this point.marijuana-law-11 mj

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Weekly Marijuana Stock Performance

Cannabis stocks continued their downward slide this week. The index was down 4.5% with Canadian stocks down 2.7%, less than U.S. peers who were down 4.2%. We are still waiting for U.S. MSOs to begin outperforming their Canadian peers as they have much better growth prospects. Legislative change in Congress could be the catalyst.

From the peak in March, cannabis stocks are down 31%, but still 21% above the lows in December 2018. We expect U.S. stocks to outperform Canadian names the rest of the year with better regulatory catalysts and growth prospects. MSOs are now flat for the year while Canadian growers are up 16%, but this trend should reverse as we move through the rest of the year.

The overall marijuana index underperformed the S&P and TSX by 6.1% and 5.6% respectively.

Source: New Cannabis Ventures

Market Outlook

Stocks will remain seasonally weak as we go into the fall, but U.S. stocks have the benefit of some big regulatory catalysts potentially on the horizon this year and Canadian stocks should rebound as excitement around the legalization of edibles hits a fever pitch around October-November.

Canadian LPs are still stuck in a stagnating legal market, making it hard to show the revenue growth investors are expecting. LPs are showing zero 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.

Longer-term, with the Canadian market legalized, we expect retail and wholesale price compression or unsold inventory from a legal oversupply by the end of 2019. Falling cannabis prices or an inability to sell all of what is grown will pressure producer stocks later in 2019 or early 2020. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.

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