Hexo Fires First Shot in Coming Cannabis Price War

Bottom Line: HEXO is making waves as the first LP to offer dry flower at a price that competes with the black market. We think this is just the beginning and HEXO has kicked off a cannabis price war in Canada.

Source: StatsCan

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Aphria Earnings Review – The Best of an Uninspiring Bunch

Bottom Line: Recent earnings results may have been uninspiring, but because Aphria is still priced like there are skeletons in the closet, we think the huge valuation gap to peers will continue to close. Operationally Aphria is one of the best, but priced like one of the worst, an opportunity in our view.Aphria Green Growth Offer

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Is the Profitability of Aurora Cannabis Overstated?

Bottom Line: Craig Wiggins of the Cannalysts did some solid financial sleuthing that raises questions about Aurora’s revenue practices. If Aurora eventually buys back wholesale dry flower once it has been turned into oil by extraction partner Radient Technologies, the company could potentially show more revenue than they should have from seed to sale. More details over at the Cannalyst’s website.

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CannTrust Trying to Win Back Its License, We Remain Skeptical

Bottom Line: CannTrust wrote this press release like it is making progress towards regaining its cannabis licenses, but in reality we think they are in only the first inning. We’ve seen Health Canada suspend licenses before and leave the door open to regaining them in theory, but in reality Health Canada drags their feet until the company runs out of money. CannTrust has at least two years of cash to spare so expect this saga to drag on for a long time.

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Retail Locations May be the Key to Strong Legal Cannabis Sales

Bottom Line: One of the key determinants of success for cannabis 2.0 will be the rollout of additional retail stores in Canada. Consumers are still wary of purchasing cannabis online demonstrated by sales per capita tripling in Ontario only one month after brick-and-mortar stores started to roll out. We think the country needs double or triple the store count to reach its full potential.

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New Hemp Forecast Released

Bottom Line: A new forecast from The Hemp Industry Daily thinks CBD sales will be at least $1.1 billion in 2019 and $5.6 billion by 2022. This estimate is an increase from a prior forecast done by the Brightfield Group and Hemp Industry Daily. The new estimate is 10% higher for 2019 and 27% higher for 2022. Keep in mind CBD supply will exceed 2019 sales by 80x based on the expected 2019 hemp harvest.

Souorce: Hemp Business Factbook

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A Reminder Why Trulieve is Setting an Example in the U.S. 

Bottom Line: Trulieve has similar store numbers to Surterra in Florida yet generates much higher sales per store. If Trulieve can export this special sauce to their new markets, the company will continue to set profitability and operational benchmarks for the entire U.S. cannabis industry.  Read more»

Mexico Set to Vote on Cannabis Legalization Next Week

Bottom Line: If the law passes in the Senate it will then head to the lower chamber of congress for a vote before it becomes law. The law would legalize recreational use and the ability to grow cannabis in private, but the country will still be far away from creating a regulated system of growers and retailers. As we’ve seen in other countries, cannabis can be legal for years before consumers can actually buy it.Is marijuana legal in Mexico?

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Weekly Marijuana Stock Performance

The cannabis sector bounced back this week, rising 5%. The U.S. MSOs outperformed Canadian names slightly, up 5.5% compared to the LPs up 5%.

We’ve been watching the performance of the U.S. and Canadian stocks closely and it looks like U.S. stocks have taken over market leadership from the Canadian LPs. Since the end of September, U.S. stocks are down 5% while the Canadian LPs are down 14%. We expect this outperformance to continue with more catalysts on the horizon for the U.S.

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. The recent vaping crisis will also turn out to be positive for the legal industry as it will scare consumers away from black market vaping products.

The overall marijuana index outperformed the S&P and TSX by 4.4% and 5.2% this week yet has underperformed by 40% and 35% YTD.

Source: New Cannabis Ventures

Market Outlook

There are now question marks 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 build on rapid expansion and big deficits.

We think a bounce-back could happen leading to December when new products arrive, but price compression will be a headwind pulling stocks lower without a brand new catalyst.

U.S. stocks will continue to outperform Canadian LPs from here in our view with more catalysts potentially on the horizon.

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.

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