Vape Deaths Now Bad for Legal as Well as Black Market

Bottom Line: The legal market absolutely has to convince consumers they can trust legal products to be thoroughly tested and approved for human consumption. National attention of this issue will no doubt hurt sales this fall, but could paradoxically speed up federal legalization if the government believes they have to protect the public by more closely regulating cannabis .

mj - weed vaporizer

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Department of Justice Approves Cannabis Merger After Long Delay

Bottom Line: MedMen’s successful path through the U.S. antitrust process is a catalyst for other deals in a holding pattern such as Cresco Labs’ pending acquisition of Origin House. We now can handicap both the probability of success and the time lag for future U.S. cannabis mergers.

marijuana - mj law 8

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Wildfire Collective is a Window Into What’s Next for Cannabis

Bottom Line: The WildFire Collective, a group of small farms growing organic, craft cannabis provides us with a window into how recreational cannabis will be grown and supplied in the future. Similar to heirloom produce and small-batch consumer goods, Wildfire is going to offer a unique product where quality is the end goal over volume. We think high-end cannabis will increasingly be grown this way and will end up as the most profitable segment of the market based on current consumer trends.

Source: WildFire Collective

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STATES Act Unlikely to Pass in 2019

Bottom Line: Based on the below quote by the Chairman of the Senate banking committee, a vote to open banking up to the cannabis industry (STATES Act) is a long shot in 2019. Legislators have a poor record of “threading the needle”. 2020 is likely the year the U.S. operators get the catalyst they have been waiting for.

“We’re working to try to get a bill ready,” the senator said. “I’m looking to see whether we can thread the needle.”Chairman Mike Crapo (R-ID)

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Teva Pharmaceuticals the Next Pharma Company to Enter the Cannabis Space

Bottom Line: For now a Teva subsidiary will be distributing an Israeli producer’s cannabis only in Israel. Once exporting is allowed, Teva will handle international exports out of Israel as well. Little by little big pharma is dipping a toe into cannabis. Once federal legalization is on the ballot in the U.S. expect a gold rush by big pharma to buy up the best-positioned cannabis companies.

Source: Teva

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Slow Permitting and Restrictive Regulations Hitting Israeli Cannabis Stocks

Bottom Line: Cannabis stocks in Israel have fallen even more out of favour than in Canada. Regulations in Israel both limit profitability and are leading to permitting bottlenecks that increase costs. We think the most profitable cannabis investment is to remain focused on U.S. operators for the next few years heading into federal legalization.

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Jamaica is Stuck Waiting for U.S. Law Change on Cannabis Banking

Bottom Line: Cannabis remains a cash business in Jamaica until the U.S. legalizes cannabis banking. Doing business across borders could be very difficult and will likely slow the growth in exports out of Jamaica until new regulation similar to the STATES act can make its way through Congress.

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Study Explores all the Reasons the Black Market Won’t Go Away

Bottom Line: A study of interviews with growers and other industry people provides insight into why the black market continues to flourish years after recreational legalization. State government officials need to read this carefully if they really want to get rid of the black market. 

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Weekly Marijuana Stock Performance

The cannabis sector gave up almost half the gains from last week, falling by 3%. The U.S. MSOs outperformed Canada falling 2.2% while Canadian stocks were down 5.8%

The global cannabis index has rebounded slightly and is now up 3% for the year, while the U.S. producers are still down 17%. We will be watching closely the next few weeks to see if U.S. stocks continue outperforming Canadian peers as this could signal a shift in investor dollars and attention.

A potential catalyst to watch is a U.N. 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 overall marijuana index underperformed the S&P and TSX by 3.8% and 3.7% this week but has underperformed by 17% YTD.

Source: New Cannabis Ventures

Market Outlook

We still think a stabilization in the global economy and the coming legalization of edibles in Canada could buoy the sector leading into first sales in December.

With the sector down 41% since May and underperforming the broader market by 42%, we think there is a good chance the sector rebounds into the end of the year as long as global economic data does not take a turn for the worse.

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.

Longer-term, with the Canadian market legalized, we expect retail and wholesale price compression or unsold inventory from a legal oversupply by the end of 2019. Falling cannabis prices or an inability to sell all of what is grown will pressure producer stocks in 2020. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.