U.S. Hemp Output to Quadruple in 2019

Bottom Line: 230,000 acres is expected to be planted this year, up from 78,000 last year. This much hemp will yield at least 1.8 million kg of concentrated CBD oil worth $90 billion! at current retail prices of ~$50/gram. For reference, CBD sales are estimated to be only $1 billion in 2019 and $2 billion by 2020. Get ready for pricing to fall.

Source: Brightfield Group, Hemp Business Journal

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The State of the South American Cannabis Industry

Bottom Line: An excellent report from Marijuana Business Daily looking at the dysfunctional regulatory policies in South America. Colombia, for example, does not even have a functioning medical marijuana market yet. Investors in Colombia LPs need to make sure they are comparing reality against the future promised by management teams.Marijuana - Colombia - MJ

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Illegal Vape Illnesses are a Blessing for the Legal Market

Bottom Line: The use of dangerous thickeners in black market vapes is a serious issue, however from a market share perspective the widespread media coverage of this problem should drive the consumer into the legal market. The legal market should be spending more time educating consumers on the serious health risks from consuming unregulated cannabis as it is the single biggest selling point of buying legal cannabis in our opinion.

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Trump Reiterates He Will Not Stand in the Way of State Level Cannabis Legalization

Bottom Line: We think federal legalization has a good chance of happening during Donald Trump’s second term (assuming he serves a second term). A critical mass of state politicians will eventually push a legalization bill through the Senate by 2022, in our opinion.

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CannTrust Hits Keep on Coming

Bottom Line: The math on CannTrust works like this. As a going concern, the stock is worth at least C$5/sh. The liquidation value is around C$2.40/sh excluding lawsuit liability. We are hearing there is a chance, however small, that Health Canada allows the company to sell itself with licenses intact or would provide a route for an acquirer to win back licenses on the facilities. The possibility of upside explains why the stock is not trading below C$1/sh.

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Thailand Takes Hemp and Cannabis off the Narcotics List 

Bottom Line: Thailand surprisingly is now leading Asia in cannabis reform. 334 permits have been issued so far but to protect the industry the government is only allowing local license holders to grow and sell cannabis for the first five years of legalization.mj

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Mexico Files the Bill that Could Legalize Cannabis

Bottom Line: With the president and the head of the justice committee on board for recreational legalization, there is a good chance Mexico beats the U.S. to full legalization of cannabis. Marijuana - Mexico

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Weekly Marijuana Stock Performance

The cannabis sector had its first week in the green in months, rising by 7.4%. The U.S. MSOs were up 7%, outperforming the Canadian LPs by 2.6%, however, within Canada, the six largest LPs rose 11% outperforming the group.

The global cannabis index has rebounded and is now up 6% for the year, while the U.S. producers are still down 15%. 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 outperformed the S&P and TSX by 5.6 and 6.8% this week but has underperformed by 12% 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 36% since May and underperforming the broader market by 37%, 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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