You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Last year, the Washington Nationals won the World Series for the first time in the 50-year history of the franchise. It was a truly miraculous season, as the club had fallen to 19-31 in late May, ten games out of first place in the National League East Division. Statisticians calculated at the time a 1 in a 1000 chance that they would be the champions that year. Yet they were, after finishing strong and winning the Wild Card game before taking down three opponents, including the Houston Astros in the World Series Game 7 in Houston.
Like the Nationals, cannabis stocks were written off for dead earlier this year, with the New Cannabis Ventures Global Cannabis Stock Index closing on March 18th down 59.8% year-to-date. Today, while the index has rallied 73.2% since the lows, it is still down more than 30% year-to-date. To close up in 2020, it must rally by more than 44%, and we think the chances of doing so are reasonably good.
At the market’s bottom, which took place a few days before the broad stock market finally bounced, it was quite easy to fear for the worst. An obvious conclusion that we shared in this newsletter was that the meltdown would lead to the extinction of many poorly capitalized companies, and this has already begun to play out. We also recognized that those that were able to weather the storm would have a more prosperous future, and, just days after the low, we discussed the opportunity investors had to reposition from the weak companies to the stronger ones financially, as the market had been indiscriminate in its selling. In April, we pointed to several silver linings that were emerging, including the likelihood of more legalization by states and the expansion to delivery and curbside pickup, which would put the legal industry in a better position to compete with the illicit market. We began discussing the concept of the “third wave” in cannabis investing in May, recognizing that the market is likely in the early days of a bull market, a view in which we have even more confidence five weeks later.
One reason we are optimistic is that sentiment seems to be cautious still. Many traders and investors view the rebound as a bear-market bounce in our view. A popular refrain we hear is that there is no major catalyst ahead. Historically, of course, many of the rallies have been driven by events, such as Canadian or California legalization or elections. Of course, these events have always proven to be times to sell. We expect a different outcome, and this is mainly because it is fundamentals and valuation that will drive interest in the sector. If we are correct that cannabis companies can show robust growth ahead when many other companies will not be able to do so, investors will likely be drawn to the sector. Historically, cannabis stocks haven’t offered attributes like substantial revenue or profits, but the sector has evolved.
As we think about Canada, opening more stores in Ontario should provide additional fuel to market growth and potentially reverse negative sentiment. We want to note that the market is growing robustly and that we have seen data suggesting that May retail sales, which will be reported in mid-July, will show substantial gains, and we believe that the new product introductions are finally kicking in as well as value pricing for flower, which is drawing in illicit market consumers apparently. In addition to that mid-July overall market report, Organigram will report its May quarter in mid-July, while Aphria will do so in early August. While the balance sheet repair for the LPs has been painful and remains an overhang, we expect investors to have a more optimistic view as growth in the market accelerates more rapidly than operating expenses.
The outlook in the U.S. appears more favorable than in Canada, but we will have to wait until August to see financial reports from the leading MSOs to illustrate this point. We note that most markets are showing growth again after surging in March but declining in April, and we point to the Florida market, which is dominated by public companies, as an example of a state that has been exceptionally strong. Unit volumes of extracted THC products have grown approximately 20% sequentially in Q2, while flower has soared 47%. Many of the fastest growing new markets, like medical in Pennsylvania and adult-use in Illinois and Michigan, have been supply-constrained, and supply is coming on line. We expect solid revenue growth for many of the MSOs over the balance of the year and note that many are already profitable. We point to the elections as likely to draw interest as well. First, we will see adult-use ballot initiatives in New Jersey and also likely in Arizona and Montana. New Jersey and Arizona both have substantial public company exposure, unlike any other ballot initiative states previously. Additionally, the national elections could yield a Democrat-controlled Congress, which we think would be viewed as being quite favorable for the sector.
So, after two years of extremely negative returns for cannabis stocks, we think the wheels are in motion for more gains ahead. With sentiment muted but fundamentals quietly improving, we recognize that our view is a bit contrarian. We expect it to become more mainstream by the end of August, when the data will be more visible.
We wish all of our Canadian readers a great celebration of Canada Day and our American readers a happy 4th of July.
As Canada has moved to introduce new and innovative forms of cannabis to its adult-use market, Organigram has gained early traction by focusing on the popular categories of chocolates and vapes. With distribution in all 10 Canadian provinces and a low cost of production, Organigram is well positioned to be able to offer access to a wide variety of edibles and derivative products.
Get up to speed by visiting the OrganiGram Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
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Alan & Joel