Bottom Line: Some very interesting information came out in this interview on what TGOD’s economics will look like longer-term compared to non-organic peers. The CFO also talks about the expected production timeline and what products they plan to roll out when edibles and vape pens are legalized.
Bottom Line: Vireo trades at a ~40% discount to the group based on 2019 estimated revenue of $80 million, and a 60% discount to the top 8 companies and try as we might we can’t find a good reason why. Our full thoughts on the company are inside.
Bottom Line: The government has not explained why home delivery was scrapped only three months after it was proposed as well as the timeline for their upcoming rollout of just slow expansion of the legal market in Ontario. We think the government probably decided the retail store roll-out made it unnecessary to also add home delivery. Read more»
Bottom Line: This deal looks somewhat limiting for Moosehead. Sproutly will provide the cannabis and Moosehead will brew the non-alcoholic cannabis beer, but the partnership is only for Canada and potentially Europe and only applies to cannabis beverages, not hemp-based CBD drinks. Cannabis drinks are looking like a crowded field so this JV will have to get the taste, onset time, and branding correct if it wants to compete in a crowded field come 2020. Read more»
Bottom Line: The most popular trend in vape pen technology looks to be dose control. With vaping representing 19% of cannabis demand in Colorado, up from 6% in 2017, this is one of the fastest growing cannabis categories. Companies are racing to invest in new technologies and build a winning brand among consumers. Read more»
Bottom Line: A great article on why big licensed producers are buying out cannabis testing labs. Hint: It’s for the research capabilities. Read more»
Bottom Line: The CBD market is officially on fire with the big CPG (consumer packaged goods) players now looking to enter the space. With flatlining revenue, they are desperate to join the fast-growing health and wellness trend. Mondelez can easily get access to wholesale CBD oil and has world-class product development capabilities making a JV or purchase of a U.S. MSO or CBD pure play unnecessary in our view.
Bottom Line: Canopy likely bought this German cannabis supplier merely for access to German consumers, but it will be interesting to see if they continue pushing sales of synthetic THC which longtime cannabis consumers hate. C3 sold to 19,500 patients last year representing 25% of the cannabis patient population in Germany, showing us the company is a major player in the market. Read more»
Bottom Line: In early 2019 47% of Canadian’s surveyed told the government they bought “legal” cannabis, even though the actual amount of legal cannabis sold is only 10%-12% of total demand. The likely explanation is citizens are not too keen on admitting illegal activity to the government. At least the trend is towards legal cannabis, though we know legal demand growth is in the single digits per quarter.
Weekly Marijuana Stock Performance
The euphoria from the Canopy/Acreage deal has been short-lived with cannabis stocks declining 2.1% this week, giving up all the gains since the merger was announced. U.S. stocks declined 6.3%, underperforming the big 4 Canadian LPs who were actually up slightly for the week. We still expect U.S. stocks to outperform this year with better regulatory catalysts and growth prospects. MSOs are up 41% year to date while Canadian growers are up 51%, but this trend should reverse as we move through the year.
The overall marijuana index was down 2.1% this week, underperforming the S&P and the TSX by almost 3.5% and 1.4% 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.