Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.
Trading Summary
Cannabis stocks continued to fall last week. The Horizons Marijuana Life Sciences Index ETF (HMLSF) fell 3.5%, the ETFMG Alternative Harvest ETF (MJ) dropped 5.1%, and the Horizons U.S. Marijuana Index ETF lost 4.0%.
(Source: Bloomberg)
Canada: Stocks pulled back further as global markets embraced for the impacts of the coronavirus. Canopy (CGC) was flat last week after BMO upgraded the stock to “buy” with a $40 price target. Aurora (ACB) and Cronos (CRON) both dropped ~5% without news. MediPharm (OTCQX:MEDIF) plunged 24% after the company filed a claim against Newstrike which was acquired by HEXO (HEXO) for an unpaid shipment. Aphria (APHA) dropped 12% after closing the C$100 million investment by an unnamed investor.
(Source: Author, based on public data)
The U.S. and International: MedMen (OTCQB:MMNFF) ended the week down 2% after its CEO resigned and both co-founders agreed to surrender their super-voting shares. Curaleaf (OTCPK:CURLF) gained 8% after opening its third location in Massachusetts. Liberty Health (OTCQX:LHSIF) rose 6% after reporting decent fiscal 2020 Q3 results. Green Thumb (OTCQX:GTBIF) dropped 3% after opening its 7th location, an adult-use store, in Illinois. Green Growth (OTCQB:GGBXF) declined 24% as investors become increasingly concerned about its worsening liquidity profile.
(Source: Author, based on public data)
Industry News
Looking Ahead
There has been a slew of management departures at cannabis companies recently. The sector has been stuck in the current downturn for almost a year now, and shareholders have suffered heavy losses. Some of the notable management departures include:
It is not difficult to conceive why cannabis companies are facing increasing pressure from investors to improve performance. As companies suffered unprecedented setbacks in the stock market, some leaders are taking the blame for certain decisions made in the past. Also, several companies are cutting back on personnel to save costs. Lastly, talents are also fleeing the industry after the promise of fast money evaporated along with the falling share price. More importantly, for cannabis investors, we think the management exodus signals a shift in how companies will be run going forward. Most of the companies that announced executive departures have suffered some level of overly-aggressiveness in their planning and expansion which resulted in their current financial difficulties. For example, Aurora had to cancel two massive greenhouse projects after spending hundreds of millions of dollars on them. MedMen’s collapse was also driven by an aggressive expansion that left it with an unsustainable cost structure. Going forward, we think these companies will be a lot more cautious with spending and investments while putting liquidity and balance sheet as their top priority.
When the cannabis sector was the market darling, some companies decided to embark on massive expansion projects while others were more calculated in their approach. That contrast has separated the winners from the losers, in our view, and will continue to dominate the conversation in 2020. With new management set to take the reins at these companies, we think their focus will be squarely on the following items:
- Improve liquidity and repair balance sheets: this could result in more dilutive equity raises given debt is hard to come by.
- Cut back all non-essential spending and roll back previous expansions: many companies have already begun selling non-core assets and laying off staff. We expect 2020 to see more downsizing as the sector continues to experience heightened investor apathy.
- For companies that face an imminent liquidity crisis, we think some of them will be gobbled up by others or outright cease operations.
The recent management shuffles are a natural evolution of the cannabis sector whereby companies re-focus on their core business and cut back on unnecessary spending. For investors, we think the recent executive departures are a sign of what to come in 2020 as fiscal austerity takes hold among management teams. Thus, it is more important than ever to invest in companies with strong balance sheets and a clear path to profitability.
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.
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