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.
Bottom Line: What makes Acreage intriguing to us is that the current valuation doesn’t require investors to pay a premium for a piece of this market leader. Acreage trades at a 2019 price to sales of 6.8x, a 20% discount to the group average, even though it is a market leader.
Bottom Line: If expensive companies keep burning cash while the cheap companies turn a profit, we think there will be a wholesale re-rating of the sector. This would benefit names like HEXO, Organigram, Supreme, Canntrust and Aphria.
Bottom Line: Aurora has hired well known activist investor Nelson Peltz as a strategic advisor. Aurora must really need advice as they were willing to hand out C$175 million of options to Peltz in the hopes he can find a consumer goods company willing to make an investment in Aurora. The stock was up over $1 billion on the news making this well worth the investment in the short term for Aurora.
Bottom Line: Unlike New York where a recreational cannabis bill is running into roadblocks, New Jersey looks like it will likely legalize adult cannabis use in 2019.
Bottom Line: A recent study by Leafly and DataTrek found that the cannabis industry in America added 64,000 jobs in 2018, up 44% from the year before. This job growth is likely to accelerate as more states legalize some form of marijuana use, increasing the power of the marijuana lobby in Washington.
Weekly Marijuana Stock Performance
Marijuana stocks outperformed the S&P and TSX by 3% and 5% respectively this week, up 6%. U.S. operators underperformed the Canadian names by 1%.
Interestingly, so far this year the four largest Canadian LPs have outperformed both the cannabis index as a whole and the U.S. Multi-State Operators, MSOs, by 25% and 44% 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.
Aurora Cannabis Sells Cannabis Oils to German Pharmacies (Updated with Scott’s Take)