Bottom Line: If Canada sees wholesale pricing weakness similar to what is happening in the U.S. it is likely government taxes may change from a price based system to one based on weight. This would lead to new incentives to process cannabis as much as possible so producers are only paying tax on the active ingredient.
The big question is will tax changes increase the ultimate price consumers have to pay for their legal cannabis.
Bottom Line: Licensed Producers are blaming the government for excise stamp issues while the government and retail stores are blaming producers for not providing promised volumes. Investors may never know who is really to blame but what is clear is the first earnings quarter with legal sales will likely disappoint estimates.
Bottom Line: Even though only two stores were open statewide, consumers purchased $440,000 of cannabis on the first day of recreational sales. This data shows the huge potential of U.S. cannabis demand. U.S. sales from only two stores were 20% as large as sales in all of Canada in the first 24 hours of legalization. The US is going to be a massive market for cannabis.
Bottom Line: Mexico filed a bill last week to legalize medical and recreational cannabis use. Mexico has been moving quickly to legalize and the incoming cabinet looks to have a relatively easy road ahead to move the bill along. The bill is expected to pass in the first half of 2019, but it could take until the end of 2019 for licenses to be granted.
Mexico has 3.5x the population of Canada and could become a major exporter of cannabis to North America. Mexico plans to ban advertising like Canada which could handicap the country’s ability to compete with U.S. growers who do not have similar restrictions.
Bottom Line: Cannabis amendments are likely to pass the House of Representatives this election cycle, however, the big unknown is if these bills can make it through the Republican-controlled Senate. Only time will tell.
Weekly Marijuana Stock Performance
Global marijuana stocks were down another 5% this week and are now down 31% from the peak in October. Both U.S. and Canada operators were down around 6.5% this week with small-cap stocks performing worse than large caps.
The Canopy Constellation deal gave the market some new momentum, though this has largely dissipated in the last month. Stocks should languish through year-end unless another consumer goods company buys into the space. If this happens stocks may be off to the races again.
From a fundamental perspective, until we have 1 to 3 months of data from the legal market in Canada, stocks may struggle to find a direction and will continue to be volatile.
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.