GGBXF - Marijuana stocks weekend investor roundup: Analysis of the week's most important events in the cannabis industry (January 26)
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.
Bottom Line: If at the end of the day, no offer comes along that management and shareholders believe is realistic, Aphria can still go it alone and investors will be handily rewarded. Starting in 2020 Aphria’s capacity should generate enough cash flow for investors to realize a juicy 10 percent to 20 percent free cash flow yield. At this point, Aphria’s stock should trade for at least C$15/share or the company becomes an extremely attractive takeout target.
Bottom Line: If retail sales of cannabis from October and November are annualized, Canada is on pace to sell only $24 of cannabis per person in 2019. A well-functioning legal market should have sales of at least $200 per person. U.S. states that have legalized saw on average $85 per person of retail cannabis sales in the first year.
First Year Cannabis Sales per Person
Source: StatsCan, BDS Analytics, Washington Liquor & Cannabis Board, Colorado Department of Revenue, Oregon.Gov, Washington State Liquor and Cannabis Board. *Canada and Massachusetts numbers are less than a year of data that has been annualized.
Bottom Line: Kudos to Tilray for becoming the first LP to avoid overpaying for new capacity. They are paying at most $4.70/gram for Natura Natural's 15,000kg of capacity. Most deals done at $20-$50/gram. Tilray now has 50 percent more capacity. Well done.
Bottom Line: Cannabis research will create a designer high. Scientists are deconstructing the plant down to individual compounds to create the exact type of high consumers want. Raw flower demand will fall to less than 10 percent of the market in 10 years. Think of pain medicine; no doctors are prescribing the raw poppy plant for those in need of pain relief. The cannabis market is rapidly approaching the same makeup as the modern pharmaceutical industry.
Bottom Line: 2019 could be a year of significant cannabis reform. Sixty-eight percent of members of the House of Representatives come from states that have legalized at least medical marijuana use. Pushing marijuana reform through the Senate is the real challenge and this article does a great job laying out the roadblocks standing in the way of full federal legalization.
Bottom Line: Israeli growers are finally able to compete with Canadian growers to supply the lucrative European market. Eight companies currently grow cannabis in Israel.
Bottom Line: The legalization of recreational pot in Massachusetts has kicked off a race to be next among other east coast states. The governor of New York could legalize recreational marijuana in the next three months with New Jersey not far behind. Up for grabs is a region that could potentially spend $15 billion a year on marijuana.
Weekly marijuana stock performance
Marijuana stocks had another strong week up 6 percent. U.S. and Canadian operators both were up 4 percent with large-cap stocks outperforming smaller stocks which has been typical for this market. The market believes larger is better and that smaller operators lack scale or any special intellectual property. Stocks are still well off their October highs but have rebounded 41 percent off the lows reached in December.
Market outlook
Stocks are seeing a bounce back in the first quarter after selling off so heavily in November and December. The sentiment is getting more positive with the overall market so it is hard to see stocks going through another 20 percent+ selloff in the first quarter without additional negative earnings news or a global recession. A full buyout of a cannabis company by a consumer packaged goods company would be a strong positive catalyst for the entire industry.
From a fundamental perspective, be careful owning cannabis stocks into the next two-quarters of earnings. A supply shortage and a government monopoly do not bode well for licensed producers' ability to meet or exceed earnings estimates.
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.