Bottom Line: Grizzle was first to lay out the true scale of the problems facing MedMen and warned investors in October that the company was in a debt-fuelled death spiral with very few ways to escape.
A debt maturity in October 2020 could be the end of the line for shareholders.
Bottom Line: So far the 2019 harvest has been a disappointment for almost every producer licensed to grow outdoors. 48North, in particular, may not have met their yield goals, but they are making decisions around pricing and products that could have big implications for the entire industry, indoor and outdoor alike.
Bottom Line: Cannabis 2.0 will definitely improve sales and margins at Canadian producers, but will the bump be temporary? With 750 options for consumers to choose from, it may be hard for vape pens to maintain their launch day price points. For some history, vape prices fell ~45% in 2 years in Colorado and Oregon after legalization.
Price per Serving in Colorado Over Time
Bottom Line: In 2020 the German government will begin supplying the market with cannabis purchased for only C$3.70/gram compared to LP’s exporting Canadian supply today for C$20-C$40. Though demand will exceed what the government can provide, government supply will provide an anchor pulling private pricing lower as well.
Bottom Line: California is raising cannabis taxes before the legal industry has even gained a foothold. Similar to what is happening in Canada, the government seems to be making regulatory decisions without taking into account how they will impact the industry they are regulating.
Bottom Line: Wholesale price may be in freefall but we haven’t yet seen this fully feed through into lower retail prices. Could explain why industry leader Charlotte’s Web is about to put up 6 months of no revenue growth. We would be cautious on owning CBD focused names like CWEB,GGB,ELXXF,CVSI, etc until we see how this all plays out.
Bottom Line: Depending on the level of media coverage this FDA warning about CBD receives, we could see weaker growth in CBD retail sales as a result. There is now confusion in the market with the World Health Organization saying CBD is generally safe while the FDA is more cautious.
The cannabis sector was down this week, falling by 4%. U.S. names continue to outperform, falling 3.3% while the Canadian LP’s fell 6.5%. 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 13% while the Canadian LPs are down 29%. 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 underperformed the S&P by 5.0% and the TSX by 4.5% this week but has underperformed by 61% and 56% YTD.
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.
- Iowa Urged to Expand Medical Marijuana Program
- MedMen Still in a Slow-Motion Meltdown
- New Jersey Governor Backs Marijuana Decriminalization
- FDA Signals Hard-Line Shift Against CBD in Consumer Update
- Lawmaker Asks California to Justify Tax Hike
- Green Growth Posts High Liabilities and Loss for Fiscal Q1 2020
- Boston Sets Up Cannabis Council to Help Minority Businesses
- Ontario Cannabis Store Offering Same-Day Delivery
- 48North Demonstrates An Outdoor Harvest is Not a Sure Thing
- Aurora Lives to Fight Another Day with Conversion of Debt to Shares