Bottom Line: The SAFE act would open up the banking system to cannabis companies and would be a big deal. It passed the House financial services committee and now will have to make it through a vote from all members of the house before going to the Senate. It is still a long shot to pass in the Senate which is controlled by Republicans and run by Mitch McConnell who is against cannabis legalization.
Bottom Line: Overall what the earnings release makes clear is Cronos will need to do a big transformative deal with their pile of cash to support the current stock price. We think Cronos is a “show me” story for the rest of 2019.
Bottom Line: The number of illegal dispensaries in Toronto declined from 36 to 12 after countrywide legalization, but is back on the rise hitting 29 in March. The black market is still standing in the way of the legal market becoming a runaway success.
Bottom Line: Many of the retail outlets in Ontario look like they will fail to open by April 1st. Only 5 out of 25 have their authorization from the province. Even if the delays are caused by the government it looks like these operators are still on the hook for C$12,000-C$24,000 in penalties.
Bottom Line: Walgreens is following in the footsteps of CVS. CBD topicals will now be in 1,700 Walgreens stores and at least 600 CVS locations. This is bullish news for CBD brands who are able to win shelf space. So far Harvest (CSE:HARV) is ahead of the group with its deal to supply CVS.
Bottom Line: Industry forecasts think legal dispensaries in Ontario will pull in at least C$1.25 million a month which would be $15 million a year. For perspective, the 12 dispensaries in Massachusetts are currently pulling in $20 million a year in sales each.
Bottom Line: The last-minute collapse of the New Jersey legalization bill along with the failure of New York to bring legalization to a vote in 2019 demonstrates that it won’t always be smooth sailing for cannabis reform. Legalization delays will benefit medical license holders such as Ianthus, Curaleaf, Acreage, MedMen, Harvest and Green Thumb.
Bottom Line: It will be important to see which exchange the ETF trades on. If it trades on a Canadian exchange it will be incrementally positive. The holy grail is an ETF that allows U.S. investors to invest in U.S. multi-state operators. This would provide a huge demand boost for these stocks.
Weekly Marijuana Stock Performance
An important shift has begun in marijuana stock performance. Investors are shifting money out of Canadian stocks and into CSE traded U.S. operators. U.S. operators again outperformed the Canadian large caps up 2% compared to a 5% decline for the large Canadian growers. The overall marijuana index fell 2% this week, underperforming the S&P and the TSX by 3% and 2% respectively.
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 but the gap is shrinking. MSO’s are up 48% while the 4 largest Canadian growers are up 68% year to date. Investors should begin rotating into U.S. MSO to take advantage of a more positive news flow and regulatory change than what is happening in Canada.
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.