Marijuana stocks weekly investor roundup: Analysis of the week's most important events in the cannabis industry (April 6)

Apr 10, 2019
PotNetwork is pleased to bring you our Marijuana Stock Weekend from our partner publication Grizzle. Grizzle journalist and Head of Research Scott Willis covers the marijuana stock market in-depth, with over 12 years of institutional investment management experience in analyzing both debt and equity securities. He has held senior investment research roles at Credit Suisse and TD Asset Management. He’s also a Chartered Financial Analyst and has been featured on BNN Bloomberg and CBC. For more of Scott’s writing check out Grizzle - the language of new money.

Grizzle

German cultivation bid finally awarded

Bottom Line: Each lot is only worth about C$2 mm a year in revenue. This means Aphria and Aurora will see revenue increase by less than 5 percent and 3 percent respectively. Question marks remain around Wayland group's true economic interest in the third tender winner.  This tender win may mean Aphria and Aurora have stronger relationships with the government regulator than most other company's, a positive factor as cannabis demand explodes in Germany.

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Grizzle

FDA hearing on CBD happening in May

Bottom Line: The CBD industry is already flooding store shelves with CBD creams and other topicals, but will have to wait for the FDA rules before CBD can be infused into edible products. Because CBD is in an FDA approved drug, Epidiolex, it will never be legally sold as an unregulated vitamin.

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Grizzle

Legal cannabis rollout is not going smoothly

Bottom Line: Valuations in the space continue to imply perfect execution, while on the ground reports show scaling problems are rampant among legal growers. Investors need to be careful over the next 12 months.

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Grizzle

Betting against pot stocks has been costly so far

Bottom Line: With the borrow on cannabis stocks 15 percent-100 percent a year, short sellers have been losing money for most of the last two years. One of the winners has been the pot etf's who are making 7 percent a year lending out their shares to these same short sellers. 

Grizzle

(Source: S3 Partners)

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Grizzle

California looking like Oregon or Washington

Bottom Line: California is likely to make permanent 6,900 growing licenses, a similar per capita number to Oregon and Washington, two states that have seen mass oversupply and falling prices. California is a highly competitive market making it less attractive than all the other medical only states with minimal licenses.

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Grizzle

Important Democrat pulls out as sponsor of STATES Act

Bottom Line: This news makes it clear the STATEs act protecting cannabis banking still has a long road ahead of it. If the bill takes too long it may eventually be overshadowed by new legislation focusing on bigger goals such as federal legalization.

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Grizzle

Cresco Labs buying Origin House for CA$1.1 Billion

Bottom Line: This is a smart deal as it saves Cresco from having to send sales teams into every dispensary to put their products on the shelves. Cresco paid 41x last quarters revenue annualized which is expensive but par for the course in pot stocks. Cresco is increasing the share count by 30 percent with this transaction but the stock was up on the announcement, indicating investors think this deal will be a home run.

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Grizzle

Here comes Israel

Bottom Line: 565 Farmers applied for a license to grow cannabis. 384 have already passed the first round of tests. With regulatory gridlock resolved, Israel is again emerging as the main competitor to Canada as the global cannabis supplier of choice.

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Grizzle

Weekly marijuana stock performance 

An important shift has begun in marijuana stock performance. Investors are shifting money out of Canadian stocks and into CSE traded U.S. operators. U.S. operators slightly outperformed the Canadian large caps up 3.1 percent compared to a 2.6 percent increase for the large Canadian growers. The overall marijuana index was up 2.5 percent this week, outperforming the S&P and the TSX by about half a percent.

So far this year the four largest Canadian LPs have outperformed both the cannabis index as a whole and the U.S. Multi-State Operators but the gap is shrinking. MSO's are up 53 percent while the 4 largest Canadian growers are up 72 percent year to date. Investors should begin rotating into U.S. MSO to take advantage of more positive news flow and regulatory change than what is happening in Canada.

Grizzle

(Source: New Cannabis Ventures)

Market outlook

Stocks are up big in the first quarter after a terrible end to 2018. We are growing more cautious on the industry over the next few months and think investors who are sitting on unrealized gains may want to move partially into cash and wait for a better entry point.

Distribution bottlenecks, slow legal demand growth and a government monopoly do not bode well for licensed producers' ability to meet or exceed lofty earnings and revenue estimates over the next 9 months. Revenue growth could disappoint expectations starting this quarter.

Longer term, with the Canadian market legalized, we expect retail and wholesale price compression from a legal oversupply by the second half of 2019. Falling cannabis prices will pressure producer stocks later in 2019. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.

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Grizzle

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