Bottom Line: Even if the TSX drops U.S. investing restrictions there is no way U.S. exchanges will let listed companies operate cannabis assets in the U.S. However, if the TSX and TSX venture allow U.S. investments many of the CSE listed stocks could move to the TSX for added liquidity.
Bottom Line: California issued temporary licenses for cannabis operators in 2018 and with these licenses expiring in months, there is a real risk that a legislative band-aid could come too late, causing supply issues and temporary shutdown for cannabis businesses. Medmen has the highest exposure to California of any other multi-state operator, generating 80% of revenue from the state.
Bottom Line: The United Nations Commission on Narcotic Drugs (CND) was originally scheduled to vote on changes to the international scheduling of Cannabis at it’s March meeting. The vote has now been postponed with no new date set. The most important changes from the vote would be to remove cannabis from the schedule 1 list of drugs and to deregulate CBD that comes from hemp.
Bottom Line: Canada’s Parliamentary Budget Office previously estimated 12% of Canadian’s tried cannabis in 2015 and this usage rate would increase to 14% by 2021. Early data from the first 3 months of legalization show that 15.4% of Canadians tried cannabis. Better than expected market penetration is good for demand, but planned supply will still far exceed even the best demand estimates.
Bottom Line: A recent study by the University of New Mexico found that THC was much more effective than CBD in treating 27 different patient symptoms studied. If more research comes out challenging the true medical benefits of CBD on its own, it could have a negative effect on consumers’ perceptions of CBD and their demand for it.
Bottom Line: The current ban on most cannabis ads in North America is the main impediment to national brand building. The lack of standardized quality control is another problem. When the U.S. legalizes cannabis, advertising will be legalized as well, giving the U.S. a significant leg up on Canada where regulators have banned most forms of advertising.
Bottom Line: Grizzle interviewed the CEO of a large, cannabis-focused private equity fund and asked him whether Canada is ahead of the U.S. and why U.S. legalization is taking so long.
Weekly Marijuana Stock Performance
Marijuana stocks were flat this week with significant volatility and performed in line with the broader market. U.S. multi-state operators (MSO) underperformed Canadian names by 7%.
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 17% and 35% respectively. We think the U.S. MSO’s will start to outperform if the STATEs act allowing cannabis banking is passed, possibly in 2019.
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 good or pharmaceutical 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. Distribution bottlenecks and a government monopoly do not bode well for licensed producers’ ability to meet or exceed lofty earnings estimates, however, so far the market has been happy with strong revenue growth even if profitability is nowhere to be found.
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.