Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.
Trading Summary
Last week, the widely-tracked Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF) traded down 1.9% and ended the week at C$15.68. We recently published our quarterly update on this ETF here.
The Horizons Emerging Marijuana Growers Index ETF (OTCPK:HZEMF) which tracks smaller growers ended the week flat at C$6.93. Check out our 2018 1H update on this ETF here.
U.S.-listed marijuana ETF, ETFMG Alternative Harvest ETF (MJ), ended the week at US$26.82, up 0.1% from last week. Check out our most recent update on the ETF’s 2018 1H performance here.
This week we are adding a new cannabis fund here, Purpose Marijuana Opportunities (OTC:MRJOF). We had first discussed this ETF in detail here and highlighted its status as the first actively managed marijuana ETF.
The cannabis sector continues to trade sideways this week as the sector is experiencing a period of relative stability and lack of news. The next catalyst will likely be the start of legal sales in Canada as investors wait for data to gauge the state of the legalized market. The Canadian market continues to evolve as Ontario becomes the last major province yet to announce its supply deals. The shift to private retail operators shows that the current system in Canada is subject to future changes and tweaks. In the coming weeks, we expect key catalyst for cannabis stocks to remain centered around Ontario RFP results, partnerships or investments from other traditional industries (liquor, tobacco, pharma), and M&A.
Sector Update
Molson Coors Selects HEXO as its JV Partner
This past week we learned about Molson Coors (TAP) has officially selected Hydropothecary (OTCPK:HYYDF) as its joint venture partner. We had speculated in ” Aphria: A Molson Coors Investment Could Be The Catalyst It Needs” that Aphria (OTCQB:APHQF) is the most likely partner for Molson, given its competitive positioning, significant scale, and market leadership. However, we are not surprised by Molson’s choice given our favorable view of HEXO. We have reiterated HEXO as one of our top picks, so we are happy to see this announcement and would like to congratulate HEXO on this milestone.
The partnership will result in a jointly-owned new company that will carry out the research and business activities. The investment result is in contrast with the direct investment that Constellation (STZ) made into Canopy (CGC). The share price of HEXO reacted positively on the news, logging double-digit gains in a generally down market. However, due to the lack of direct investment from Molson, we think some investors might have been slightly disappointed. We think HEXO will benefit from this transaction in several ways, including the credibility of Molson and upside potential from the cannabis-infused beverages market. In our view, this news is a lot more tangible than the licensing deal announced by Green Organic Dutchman.
Manulife and Shoppers to Offer Cannabis Coverage
In yet another step towards mainstream adoption of medical cannabis, Manulife (MFC) and Shoppers (OTCPK:LBLCF) announced that they will partner in a medical cannabis program that aims to make it much easier for medical patients to access medical cannabis through their health insurance. Previously, medical cannabis patients had to contact licensed producers directly and had to file onerous paperwork in order to claim expenses under their “healthcare spending account”, which only exists for some health plans. In this new system, Manulife hopes to make it a lot easier and smoother for patients to buy cannabis and Shoppers will provide consultation and support along the way. Shoppers has announced several supply agreements with various cannabis suppliers. As we reported earlier, the company has also applied for licenses to operate retail stores in Newfoundland. We think this announcement marks another milestone in the right direction for medical cannabis to gain mainstream recognition among traditional industries.
ABcann Rallied after Acquisition of Canna Farms
One of the breakout stocks in the last month has been ABcann (OTCQB:ABCCF) which has rebounded more than 20% since its recent low. The stock traded up significantly in the past few weeks as the company announced a slew of developments, including its acquisition of B.C. licensed producer Canna Farms. The $133 million acquisition will greatly enhance its national presence by adding a significant production base in Western Canada. Canna Farms has fully funded capacity of 57,000 kg which includes 32,500 kg in Ontario and 24,500 kg in B.C. ABcann also announced a name change to VIVO, copying after Hydropothecary’s name change to HEXO. Despite the recent rally, ABcann still trades well below when we first wrote about the company in April. We think the company is making progress, but the lack of scale still haunts the stock in the near term. We would prefer other stocks that have better market positions and competitive advantages.
Canopy Shareholders Approve Potential Stock Split
Canopy has asked shareholders to approve a potential stock split of 2-to-1 or 3-to-1, to the discretion of the directors. While no stock split has been announced yet and it is guaranteed that a split will be pursued, we think investors should not overthink this announcement. A stock split would result in share count increase based on the ratio of the split. A 2-to-1 split would double the share count whereas a 3-to-1 split would triple the split. However, the split won’t change the company fundamentally and often times it is a sign of management confidence. If a split were to happen, investors should feel confident that management holds a positive outlook for the company.
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Stock Analysis
Here are our latest 3 best long and 3 short ideas in the sector. During last week, we published discussions on CannTrust (OTC:CNTTF) and discussed its progress made so far. We encourage you to check out the discussions as our readers have shared some very insightful comments.
Best long Ideas
- Hydropothecary is the dominant cannabis player in the Canadian province of Quebec. The company secured the largest contract in the Quebec RFP which will include 20,000 kg in year one and will include up to 200,000 over the five-year period. The company has also recently won a contract with the British Columbia government, a great sign that the company is expanding outside its home province. We think Hydropothecary combines a solid financial position with a large secured contract base which has largely de-risked the revenue in the next five years. See our comprehensive analysis on Hydropothecary here.
- Canopy has been our long-time favorite in the cannabis sector. Our first call in the sector was Canopy when we said this company is the Best Way To Play The Cannabis Sector. We continue to like this story as Canopy put out a flawless scorecard by securing supply deals with all provinces so far, a feat achieved by no one else. We continue to believe that Canopy will dominate the domestic market in Canada and is well-positioned to become a force in the international cannabis market.
- Aphria was once one of the hottest cannabis stock in Canada. The stock has since fallen big time after a scandalous acquisition of Nuuvera (OTC:NUUVF) and allegations of insider trading. The stock also suffered from the announcement of divestment of its U.S. assets amid TSX listing rules. However, we think the company still stands to benefit from the upcoming legalization as it holds the third largest capacity in the industry with one of the lowest cost per gram. See our latest analysis on Aphria here.
Best short ideas
- Cronos (CRON) became a billion-dollar cannabis company after it became the first Canadian cannabis company to list on the Nasdaq. However, we have expressed significant doubts over the company’s near-term outlook due to its tragic execution domestically with no provincial contract secured to date. The company’s international efforts are unlikely to produce any substantial revenue in the near term. We see a very high risk of the company facing a difficult situation where its billion-dollar market capitalization no longer makes sense as other cannabis companies start to report millions of sales. Read our latest concerns on Cronos here.
- Green Organic Dutchman (OTCQX:TGODF) is a newly-listed Canadian cannabis company trading on the TSX. We saw the company as an early-stage start-up without any moat at the moment. Investors lost their mind when the company announced a licensing deal with Stillwater, and we think it is an example of irrational exuberance. We expect the shares to reverse its gains post its licensing announcement and see a substantial downside in the near term. Read our detailed analysis on TGOD here.
- TerrAscend (OTC:TRSSF) is a small-cap cannabis company with a confusing corporate strategy. We think the share price of this company has been inflated by its affiliation with Canopy through a financing deal from Canopy Rivers. The company has announced a dubious strategy that includes leasing out its facility for same-day cannabis delivery which does not make any sense. Read our concerns on TerrAscend here.
Pairs Trade
- Long Horizons Marijuana Life Sciences Index ETF and short Horizons Emerging Marijuana Growers Index ETF, as we continue to favor large caps over smaller pure-play growers. We believe the market will become oversupplied starting at 2020 and cannabis prices will be compressed significantly as provinces compete with the black market on pricing. The pure growers will become the least profitable group and they will likely trade at 5.0-6.0x EBITDA, similar to other agriculture companies. Larger companies will maintain their dominance in the domestic market and capture the largest share of the provincial supply deals. They will also be able to invest in branding, technology, and international operations to move towards value-added services and products that could enhance their growth prospect, profitability, and competitive positioning.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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