Bottom Line: We believe that if this weak global market dynamic continues to play out, cannabis equities will continue to trade like risk assets — i.e. they will fall greater than the market.
Owning high-quality blue-chip cannabis equities that are positioned as M&A targets is in our view the optimal risk/reward strategy for investors. Our preferred name in Canada is Aphria.
Bottom Line: A scientific forecast based on the past history of 170 other policies found that legalization is likely to happen by 2023, and could possibly happen by the end of 2021.
Researchers at the University of Colorado, Boulder, and the Santa Fe Institute put together a data set based on the trajectories of 170 other policies that started at the state level and eventually became federal law. They then used predictive models to forecast when cannabis could become legal based on how quickly states were saying yes to legalization.
The Probability of Legalization by Year Using First 5 or First 12 Legal States
Bottom Line: The government-owned cannabis stores will now be closed indefinitely from Monday to Wednesday each week to allow the stores to restock. The closures make sense for the stores but basically means some consumers will be pushed back to the black market if they want immediate access to product.
The rocky start to legalization is just prolonging the life of the black market.
Bottom Line: The official cannabis website in B.C. only made 9,137 sales in the first 24 hours, compared to over 100,000 in Ontario, 30,000 in Quebec, 12,810 in Nova Scotia and an estimated 13,000 in Alberta.
As a percentage of the population B.C. sales were 60% below the average in Canada. Alberta, another black market hotbed of cannabis cultivation, saw the second lowest sell through. These provinces need to do more to entice black market consumers to switch over to the legal market.
Bottom Line: This article from Forbes provides an interesting look into what the future of cannabis tourism could look like. Cannabis resorts with on-site greenhouses is just one of the ideas mentioned in the article.
Global marijuana stocks were hit hard this week as the euphoria from legalization wore off and global markets went into risk-off mode. Even with the bright future of cannabis as a selling point, investors will likely abandon cannabis stocks if the larger market is going down. Cashflow in 2020 doesn’t look so good anymore when the sky is falling. The global index fell 17% this week and is now down 26% from the peak before legalization. Canadian stocks were down 13% with large caps falling more than mid or small caps.
Much of the M&A premium that drove the stocks higher in October has now come out of the sector. For investors who still have the capital to invest, the returns from a consumer goods company buying into the sector now look better than ever.
The Canopy Constellation deal gave the market some new momentum, though this has largely dissipated in the last two weeks. 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, investor enthusiasm could continue to push cannabis stocks higher.
Once the Canadian market opens we expect retail and wholesale price compression from a legal oversupply by the middle of 2019. Falling cannabis prices will pressure producer stocks in 2019.
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