Bottom Line: Aurora surprised us in a good way this quarter but the larger market is still in a holding pattern. Investors need a few very important things to go right to see a higher stock price. For more see the full note.
Bottom Line: TGOD is now a stock to watch as the company has resolved a very important licensing issues and will be the largest organic cannabis grower globally by next year. Organic cannabis sells at a significant premium to non-organic and has very strong consumer demand trends behind it.
Bottom Line: Drugstores are leading the charge with shelves already stocked with CBD topicals. Now it looks like large retailers are preparing to stock CBD edibles as soon as the FDA is finished setting rules around how the ingredient will be regulated. The CBD gold rush continues.
Bottom Line: Overnight, 48north is the lowest cost producer in Canada. The big question for us is will all the outdoor supply go into extracts or will some be sold as flower? Retail flower sales would be a huge vindication for the quality of outdoor cannabis.
Bottom Line: Aurora doesn’t see much demand for THC infused drinks compared to the potential for CBD infused drinks for sports and wellness. We tend to agree. Consumption in illegal in bars and restaurants plus the product is effective with only 1-2 drinks. Neither speak to much demand for THC infused drinks. THC drinks haven’t caught on in any U.S. market so far either.
Bottom Line: Oregon lawmakers have already cleared the way for out of state exports, hoping they can clear the huge excess supply of marijuana in the state. This move was largely unnecessary as federal legalization down the road will make it easy for states to sign import and export agreements with each other. Oregon can’t export until federal legalization so this bill is largely symbolic.
Bottom Line: A long but well-researched look into the science around CBD so far. If you are wondering if it really does anything this is a must-read article.
Bottom Line: It is still illegal to sell CBD in food or drinks. The first FDA hearing to determine how CBD foods will be regulated is being held May 31st. The FDA is the only thing keeping CBD out of drinks and food items sold in your local convenience store, gas station or pharmacy.
Bottom Line: Surprisingly, while the U.S. government looks the other way, the Italian government has decided to crack down on grey market CBD retailers. This is a setback for the cannabis market in Italy and demonstrates the long road ahead for cannabis legalization in Italy.
Bottom Line: Canadian growers point to Europe as a huge market opportunity, but the reality is that demand in this region is growing slowly and could take years to become a meaningful export market for Canadian supply. Canadian supply will be over 1,000,000 kg by the end of 2020.
Weekly Marijuana Stock Performance
The euphoria from the Canopy/Acreage deal has been short-lived with cannabis stocks declining another 0.8% this week, giving up all the gains since the merger was announced and more. U.S. stocks declined another 3.5% and are down 7% in two weeks, underperforming the big 4 Canadian LPs by 6.6%. We still expect U.S. stocks to outperform this year with better regulatory catalysts and growth prospects. MSOs are up 31% year to date while Canadian growers are up 48%, but this trend should reverse as we move through the year.
The overall marijuana index was down 0.8% this week, underperforming the S&P and the TSX by almost 0% and 1.5% respectively.
Stocks were up big in the first quarter after a terrible end to 2018. Stocks will remain choppy as we go into the fall, but U.S. stocks have the benefit of some big regulatory catalysts potentially on the horizon this year. Canadian LPs are still stuck in a stagnating legal market, making it hard to show the revenue growth investors are expecting.
We remain cautious on Canadian LPs due to distribution bottlenecks, slow legal demand growth, and a government monopoly that all do not bode well for licensed producers’ ability to meet or exceed lofty earnings and revenue estimates over the next 9 months. Revenue growth could disappoint expectations starting this quarter.
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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