Bottom Line: With a balance sheet that looks like MedMen ran out of cash in August, investors need to be asking themselves, is MedMen effectively bankrupt?
We went digging and discovered the truth. It’s not pretty….
Bottom Line: We think the terms of this deal are now a benchmark other company’s will be looking at closely as they decide if deals signed earlier in 2019 will go through and at what price.
Bottom Line: Similar to the precarious situation MedMen finds itself in, Green Growth has borrowed too much and is struggling to find the cash to pay back loans coming due November 15th and May 17th. We lay out the challenges ahead and why the stock is worth 75% less than where it trades today, at best.
Bottom Line: When the largest vape manufacturer in North America is allegedly willing to ship tainted products to consumers, should the industry be surprised customer trust is low. The industry has an image problem that needs fixing if it wants to see continued growth in higher margin cannabis oils.
Bottom Line: This article is a great example of how fluid consumer demand is. Regulations fail time and time again to change consumer’s behavior (think prohibition). In the case of the black market, only free market forces will convert the majority of consumers to legal buyers.
Bottom Line: Conflicting business and religious interests have pushed off the expected vote to legalize recreational cannabis in Mexico a bit longer. These delays are typical of what we will see in Europe and elsewhere as cannabis legalization marches forward.
Bottom Line: AgraFlora’s purchase of German distributor Farmako now make it a top 5 supplier to the German market. With the Canadian market oversupplied, having a distribution channel outside Canada is going to be crucial in 2020. The other major Canadian distributors are Aphria, Aurora and Canopy Growth.
Bottom Line: Slightly less than 50% of Republicans support cannabis legalization. Once a majority of Republican voters join the rest of the country in supporting legalization we will see opposition to legalization in the Senate fall away. We still think legalization is likely in the first year of the next Presidential term (2021).
Bottom Line: The Canadian cannabis market is about to get interesting. Aphria can now legally grow 255,000 kg a year at a cost below $2/gram all in putting it in the bottom 50% of cost structures across the industry. Growing costs are all important when judging potential profitability in the near term as wholesale prices adjust to compete with the black market.
Production Cost per Gram (as of October)
The cannabis sector gave back gains from the last few weeks falling by 6.7%. The U.S. MSOs outperformed Canadian names again, falling 4.5% compared to the LPs down 6.1%.
We’ve been watching the performance of the U.S. and Canadian stocks closely and U.S. stocks are definitely beginning to outperform their Canadian peers. Since the end of September, U.S. stocks are down 6.1% while the Canadian LPs are down 18%. Investors should begin building a long-term position in a basket of the top five U.S. operators.
An upcoming catalyst to watch is a UN 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 recent vaping crisis will also turn out to be positive for the legal industry as it will scare consumers away from black market vaping products.
The overall marijuana index underperformed the S&P and TSX by 8% and 7.8% this week and has underperformed by 49% and 43% YTD.
There are now question marks whether increased sales from cannabis 2.0 products will lift the stocks. Capital markets are largely shut to cannabis companies right now which is a problem when the business models are built on rapid expansion and big deficits.
Price compression has arrived and will drive cannabis stocks lower over the next 6-12 months in our view without a new regulatory catalyst.
U.S. stocks will continue to outperform Canadian LPs from here in our view with more catalysts potentially on the horizon. At the first whiff of nationwide U.S. legalization, investors should pile into the largest MSO’s and hold for the long term.