Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.
Trading Summary
It was another short week due to holidays. The Horizons Marijuana Life Sciences Index ETF (HMLSF) declined 0.8%, the ETFMG Alternative Harvest ETF (MJ) rose 0.2%, and the Horizons U.S. Marijuana Index ETF jumped 5.9%.
(Source: Bloomberg)
Canada: Most stocks went up as 2020 began on a positive note. Aurora Cannabis (ACB) rose 5% after it listed the MedReleaf Exeter facility for C$17 million for sale, less than its original purchase price in 2018. HEXO (HEXO) dropped 2% after closing the equity raise. CannTrust (CTST) jumped 32% without news, providing relief given its risk of delisting by the NYSE.
(Source: Author, based on public data)
The U.S. and International: U.S. cannabis stocks jumped as 2020 got off to a good start. Several beaten-down stocks from 2019 saw a big rebound such as Vireo Health (OTCPK:VREOF) and Harvest Health (otcqx:HRVSF). Harvest Health jumped 37% after the company acquired a cultivation facility in Nevada for $35 million. Curaleaf (otcqx:CURLF) rose 7% after closing its Acres acquisition in Nevada. Cresco Labs (otcqx:CRLBF) rose 4% after its 5 stores began offering adult-use sales in Illinois on January 1, 2020.
(Source: Author, based on public data)
Industry News
Looking Ahead
The first week of trading saw cannabis stocks warming up for the new year. We also saw the U.S. cannabis stocks outperforming with the Horizons U.S. Marijuana Index ETF up 5.9% while the ETFMG Alternative Harvest ETF (MJ) rose only 0.2%. At the beginning of last year, we predicted that the U.S. stocks will outperform Canadian peers in 2019 which has manifested during the last twelve months. As the chart below shows (top row shows the top 5 largest Canadian names, and the bottom row shows the top 5 largest U.S. names), these Canadian stocks lost between 25% and 77% of their values in 2019. Tilray (TLRY) was the worst performer with a 77% decline while Aphria held up the best with a 25% loss. We excluded CannTrust which declined 81% and was among the top 5 largest in Canada during certain periods.
Turning to the U.S. names we can see that performance has been much better. Trulieve (otcpk:TCNNF) returned a positive 26% while Curaleaf rose 5% for the year, both beating Canadian stocks handsomely. The worst performers have also seen smaller losses with Harvest Health falling 38% and Green Thumb falling 23%. Overall, the U.S. large-cap sector performed much better with significant positive returns for investors on the high end and much smaller losses on the low end. Based on the analysis above, we can see that our prediction was largely proven correct as investors fared much better with U.S. stocks compared to Canadian ones. The large-cap names are representative because they are widely held among investors and their share price is more reflective of their underlying business performance and valuation for the whole sector.
(Source: Bloomberg)
Turning to 2020, we think the U.S. cannabis sector will likely outperform its Canadian peers again driven by three factors. First of all, the U.S. market provides strong organic growth opportunities driven by recent legalizations in Illinois (medical) and Massachusetts (medical) which provided an instant boost to operators that have businesses in these states. Furthermore, several states are expecting to begin cannabis in the near future such as Michigan (adult-sales). The U.S. market is growing at a fast rate which is a clear contrast to the struggling legal market in Canada one year into legalization. We expect the launch of 2.0 products in Canada to produce incremental sales but the impact will be limited given the fierce competition, oversupply, and heavy regulation by the government. The business environment for cannabis is more friendly in the U.S. because companies have more flexibility in product marketing, retail stores, and distribution model.
Overall, we continue to favor the U.S. cannabis sector over Canada due to the former’s superior growth outlook, larger addressable market, and the potential of federal legalization in the near future.
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 microcap stocks. Please be aware of the risks associated with these stocks.
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