Bottom Line: Restrictive rules around infused beverage bottling and edible manufacturing are only going to increase costs for producers and prices for consumers, not to mention limiting the ability of growers to establish brand awareness. Canada is at risk of being relegated to a contracted grower/processor role while big cannabis brands from the U.S. take all the profit.
Bottom Line: Currently cannabis brands are banned from advertising on Google, Instagram, and Facebook, platforms that make up more than 60% of the digital advertising market. Facebook may allow cannabis to be mentioned on the site even though advertising will still be prohibited. This would be a huge step forward for the ability of cannabis brands to reach consumers online.
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.
Bottom Line: There are only a few lounges, but the U.S. is starting to allow social consumption of cannabis. Lounges like Moe Greens that both sells cannabis and allows consumption on premises is likely the future of the industry. Social consumption would be positive for cannabis demand and will likely cut into sales of alcoholic beverages.
Bottom Line: Oklahoma’s medical marijuana patient count is growing at an unprecedented rate. Oklahoma has more patients than much larger states like New Jersey and New York only three months after the program started. This is a result of the state having some of the least restrictive medical laws in the country. Any ailment can qualify a patient for a medical prescription. Oklahoma is an interesting test case of how quickly a cannabis market can grow when unencumbered by strict regulations.
Bottom Line: Health Canada has 172 cultivation licenses in the queue that include an outdoor area. Grower 48North is even hoping to obtain an outdoor license in time for a spring planting. Companies with big indoor facilities will eventually have to open their own outdoor facilities to compete on costs. 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.
Weekly Marijuana Stock Performance
Marijuana stocks underperformed the broader market as they often due when global markets are selling off. Marijuana stocks were down 4% while the S&P was down 2% and the TSX was flat. U.S. operators led the decline falling 5%, while the large cap Canadian names only fell 2%.
Interestingly, so far this year the four largest Canadian LPs have outperformed both the cannabis index as a whole and the U.S. MSOs by 20% and 38% respectively. We think the U.S. MSOs will start to outperform if the STATEs act allowing cannabis banking is passed, possibly in 2019.
Stocks are up big in the first quarter after a terrible end to 2018. We are growing more cautious on the industry over the next few months and think investors who are sitting on unrealized gains may want to move partially into cash and wait for a better entry point.
Distribution bottlenecks and a government monopoly do not bode well for licensed producers’ ability to meet or exceed lofty earnings and revenue estimates over the next 9 months, however, so far the market has been happy with any revenue growth even if profitability is nowhere in sight.
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.
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