Ontario Looking to Privatize Cannabis Distribution

Bottom Line: Privatization is almost always a good thing for businesses. The margin the government currently makes on distribution will go to the producers and retailers. The decision then becomes do producers and retailers lower their prices or do they try to take all the of extra profit for themselves. It’s still unclear if the government will continue running distribution for online orders.

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NBC Finds 10/10 Illegal Vapes Contain Banned Pesticides

Bottom Line: The more the public knows about the health risks of buying from the black market the better for the legal market. If the legal market can prove the vape equipment and oils it uses are free of heavy metals and banned pesticides it will come out of this crisis stronger than ever. mj - weed vaporizer

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Australian Territory Legalizes Recreational Cannabis

Bottom Line: Australia looks to be following in the footsteps of U.S. states. One of the ten territories has now legalized recreational cannabis in defiance of national laws. The question now becomes if the federal government will reverse the ruling or let the territory-by-territory legalization drive continue.

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The Journey of a Tainted Vape Cartridge

Bottom Line: Excellent expose exposing pieces of how the illegal vape supply chain works in North America.

Marijuana products - vape - mj

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SAFE Banking Act Passes, But Long Road Ahead

Bottom Line: The SAFE act would allow cannabis businesses to use traditional banks leading to more mergers and acquisitions and more efficient operations in our view. The chances of this bill passing the Senate appear to be very low so U.S. MSO investors will have to look for another catalyst for now.

marijuana - mj law 4

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How Legal Vape Manufacturers are Trying to Differentiate Themselves from the Black market  

Bottom Line: Security labels, barcodes, and microchips are a good start, but we still think the industry has to prove that the vape cartridges themselves, not just the oil in the cartridge, are free of heavy metals and other toxic chemicals.marijuana - mj law 6 arrested

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Mexico Likely to Legalize Cannabis by Mid-2020 

Bottom Line: Industry consultants who are close to this issue think legislation will be drawn up in October and passed before June 2020. We think Mexico will legalize as long as the World Health Organization de-schedules cannabis at their meeting in early 2020.Marijuana - Mexico

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Weekly Marijuana Stock Performance

The cannabis sector is still stuck in a six-month selloff that has seen the index fall by 47%. The global cannabis index was down 11% this week which may be the worst weekly performance in more than two years. The U.S. MSOs did even worse, down 14%, while Canadian producers were down 8%.

The global cannabis index is now down 13% for the year, while the U.S. producers are down 32%. We will be watching closely the next few months 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 10.1% and 9.9% this week and has underperformed by 32% YTD.

Source: Yahoo Finance

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 48% since March and underperforming the broader market by 51%, 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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