Waiting for license to close PP ? The cannabis sector had its first week in the green in months, rising by 7.4%. The U.S. MSO’s were up 7%, outperforming the Canadian LP’s by 2.6%, however, within Canada, the six largest LP’s rose 11% outperforming the group.
The global cannabis index has rebounded and is now up 6% for the year, while the U.S. producers are still down 15%. We will be watching closely the next few weeks to see if U.S. stocks continue outperforming Canadian peers as this could signal a shift in investor dollars and attention.
A potential catalyst to watch is a U.N. 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 overall marijuana index outperformed the S&P and TSX by 5.6 and 6.8% this week but has underperformed by 12% YTD.
Source: New Cannabis Ventures
MARKET OUTLOOK
We still think a stabilization in the global economy and the coming legalization of edibles in Canada could buoy the sector leading into first sales in December.
With the sector down 36% since May and underperforming the broader market by 37%, we think there is a good chance the sector rebounds into the end of the year as long as global economic data does not take a turn for the worse.
Canadian LPs are still stuck in a legal market growing slower than investors expected, making it hard to show the revenue growth embedded in their trading multiples. LPs are showing slow growth in 2019 and even with the 2020 rollout of edibles, vapes, and topicals growth is unlikely to exceed 150% in 2020. U.S. operators in comparison are growing revenue 150%-300% in 2019 and at similar rates or better in 2020.
Longer-term, with the Canadian market legalized, we expect retail and wholesale price compression or unsold inventory from a legal oversupply by the end of 2019. Falling cannabis prices or an inability to sell all of what is grown will pressure producer stocks in 2020. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.
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