Trulieve Posts Impressive Q3 Results – But Are They Just Growing With the Market?

Bottom Line: Florida is the second most populous state in the U.S. and has potentially the most attractive medical marijuana market in the U.S. While Trulieve’s growth is impressive, it doesn’t mean much if they are only growing with the market. This analysis looks at their performance relative to the market and whether it’s truly sustainable in the long-term.

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Landmark MORE Act Passes House Judiciary Committee Vote

Bottom Line: The U.S. House Judiciary Committee voted 24-10 to send a bill, named the MORE Act, to the House floor for a vote. The bill still has a long road ahead to make it through the House, let alone the anti-cannabis Senate. Retail investor confusion around what this bill really means likely contributed to the huge bounce in pot stocks this week.

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Canadian Retail Sales Flash a Warning

Bottom Line: A decline in sales so early in the rollout of legal cannabis tells us demand for legal flower and diluted oil has largely been met. If legal demand was still growing rapidly we wouldn’t be seeing any level of seasonality (September is usually the weakest sales month). New products being rolled out in December should give growth rates a boost, but stocks are still too expensive based on the industry headwinds of oversupply and slower than expected growth.

Source:Statistics Canada

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Curaleaf Releases Earnings and an Update on Acquisitions and Financing

Bottom Line: Similar to Trulieve, Curaleaf beat analyst estimates with solid revenues and an improving bottom line. Curaleaf looks attractive as one of the largest cannabis companies in the world, but they still need additional funding to reach their 2020 financial targets. When money is so hard to come by, going to markets with hat in hand usually leads to further share price weakness in the short term.

Marijuana stocks / cannabis stocks - mj

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Amid A Solid Week for PotStocks, MedMen Continues t0 Fall with a 35% Drop 

Bottom Line: As our analysis previously pointed out, it’s dire straits for MedMen — investors now seem to be catching on. The company’s stock plummeted 35% this week amid continued concerns about their liquidity in a time when capital markets are closed. With ballooning costs and stagnant revenues at a time when the U.S. cannabis market is surging, MedMen may not be able to cut costs fast enough to stay afloat.

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Harvest Setting Consumers’ Minds at Ease

Bottom Line: One cannabis company is finally getting it. Consumers want to see assurances that the vape equipment and oils they are buying won’t kill them. The rest of the industry thinks it’s fine to say “we meet our state’s testing standards so everything is fine here” even though the vaping epidemic shows that maybe these state regulations aren’t effective enough. Harvest is going beyond and created a new testing protocol to proactively address consumer’s safety concerns. This is a smart business decision.

Source: Harvest Health and Recreation

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Canadian Government Shooting Themselves in the Foot

Bottom Line: First there was Alberta’s 20% vaping tax and now Quebec will not sell vapes, which are currently legal, for the foreseeable future. Canada says it favours public safety above all when setting cannabis regulations, but what it is really doing is keeping consumers in the black market where they are smoking illegal pesticides, dangerous chemicals and heavy metals (This has been proven in recent testing of illegal vape cartridges). Political rhetoric vs real-world consequences. 

Source: Wikipedia

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Ontario Looking at Big Dispensary Rollout in 2020

Bottom Line: Next year Ontario may get rid of the lottery system and allow online applications for dispensaries. The number of dispensaries allowed has not been decided. Ontario would need at least 1,000 stores (25 currently) to reach the saturation of legal cannabis markets in the United States. A big store rollout would be very positive for retail revenue growth in the province.

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Greenhouse Closings are Just the Beginning

Bottom Line: Aurora Cannabis is not the first and will not be the last cannabis company to delay or close a greenhouse. We see the oversupply in the Canadian legal cannabis market continuing unless a significant amount of in-construction supply is cancelled. Grizzle is currently writing a full report on the supply/demand situation in Canada which should help investors prepare for what comes next.

cannabis / marijuana supply / greenhouses - mj

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Weekly Marijuana Stock Performance

The cannabis sector bounced back this week driven by confusion on U.S. legalization and retail investor FOMO (fear of missing out). Even with a huge 9.5% bounceback for the large-cap CDN LPs, the U.S. names continue to outperform, rising 7% this week, compared to 1.8% for Canadian names. U.S. stocks are now clearly outperforming their Canadian peers.

We’ve been watching the performance of the U.S. and Canadian stocks closely and U.S. stocks are definitely where you want to be invested. Since the end of September, U.S. stocks are down 10% while the Canadian LPs are down 26%. Investors should begin building a long-term position in a basket of the top five U.S. operators, but save some extra cash to buy on any weakness in 2020.

An upcoming catalyst to watch is a UN meeting in March 2020 to potentially deschedule cannabis as a schedule 1 drug. If this goes through with America’s blessing it could set the wheels in motion for federal legalization sooner than later. Once the recent vaping crisis is resolved we should also see a bounceback in the U.S MSOs.

The overall marijuana index outperformed the S&P by 3.7% and the TSX by 3.8% this week but has underperformed by 56% and 51% YTD.

Source: Yahoo Finance

Market Outlook

There are now question marks on whether increased sales from cannabis 2.0 products will lift the stocks. Capital markets are largely shut to cannabis companies right now, which is a problem when the business models are built on rapid expansion and big deficits.

Price compression has arrived and will drive cannabis stocks lower over the next 6-12 months in our view without a new regulatory catalyst. Canada cannabis investors should not be putting more money into the sector until retail prices find a bottom.

U.S. stocks will continue to outperform Canadian LPs from here in our view with more catalysts potentially on the horizon. At the first whiff of nationwide U.S. legalization, investors should pile into the largest MSOs and hold for the long term.

Canadian LPs are still stuck in a legal market growing slower than investors expected, making it hard to show the revenue growth embedded in their trading multiples. LPs are showing slow growth in 2019 and even with the 2020 rollout of edibles, vapes, and topicals growth is unlikely to exceed 150% in 2020. U.S. operators in comparison are growing revenue 150%-300% in 2019 and at similar rates or better in 2020. With analyst consensus wildly too high for Canada LP’s in 2020, there may still be downside in the sector

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