Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.
Trading Summary
Amid a global selloff, the Horizons Marijuana Life Sciences Index ETF (HMLSF) fell 14.7%, the ETFMG Alternative Harvest ETF (MJ) lost 15.6%, and the Horizons U.S. Marijuana Index ETF plunged 18.4%.
(Source: Bloomberg)
Canada: While global equities market plunged, cannabis stocks also fell particularly hard. Both Canopy (CGC) and Aurora (ACB) fell double-digits. Cronos (CRON) fell 18% after delaying the release of its Q4 results. Tilray (TLRY) fell 26% after Four20 sued it for reneging the acquisition. Valens (OTCQB:VLNCF) fell 25% despite reporting a profitable Q4.
(Source: Author, based on public data)
The U.S. and International: Acreage Holdings (OTCQX:ACRGF) fell 21% after reporting a 6% quarterly decline in sales last quarter. MedMen (OTCQB:MMNFF) plunged 22% after releasing disappointing Q4 results. iAnthus (OTCQX:ITHUF) dropped 28% after launching a lawsuit against one of its debt holders.
(Source: Author, based on public data)
Industry News
Looking Ahead
As the Q4 earnings season picks up speed, we are noticing a trend that has become evident in the last few quarters. The largest cannabis companies in both Canada and the U.S. have pursued two different strategies in the past but they are reversing their initial decision in the aftermath of a year-long downturn in the sector. We believe the unwinding of these two trends will continue and could shape the future competitive landscape for the sector.
Firstly, Canadian cannabis companies have pursued scale and production capacities in the early days leading up to the legalization. Led by Aurora and Canopy, the sector embarked on a rampant building spree despite a small population and fierce competition from the black market. Fast forward to early 2020, after almost a year of abysmal financial performance and capital markets apathy, Canadian firms began to discard previous capacity expansion plans and to roll back some of their ambitious growth goals. Capital scarcity was the key reason behind recent cutbacks and financial difficulties are increasingly causing firms to conserve cash and cut costs.
Turning to the U.S. where the MSO model was popular and widely adopted by aspiring cannabis operators. Exemplified by companies like MedMen and Harvest Health (OTCQX:HRVSF), companies signed up splashy merger agreements to combine assets with little overlaps in order to build a network of licenses and production facilities across dozens of states. From the beginning, the rationale behind the MSO strategy was that firms need to aggressively pursue a limited number of licenses in each state in order to secure future growth opportunities. Companies didn’t have the cash to develop all these assets but they thought the market could provide them later. However, as financing dried up for most cannabis companies, we are starting to see many U.S. firms discard the MSO model to focus on fewer markets. For example, MedMen has been selling non-core assets (Illinois and Arizona) to fund its money-losing businesses in California. We are also seeing single-state operators achieving superior profitability including Trulieve (OTCPK:TCNNF) and Ayr Strategies which just reported a 28% 2019 Q4 EBITDA margin. We think the MSO model will only survive in a small number of well-capitalized players given its inherent lack of synergies and operational efficiencies due to federal prohibition.
As the cannabis sector continues to adapt to a tough financing environment, we think a smaller and more focused approach will become more prevalent. In both Canada and the U.S., companies will continue to downsize, become leaner operationally, and focus more on its most profitable markets. While there is no end in sight for the current financing drought, we think a small number of companies are taking this opportunity to become better operators which will position them well for growth when the market turns. For investors, it is imperative to avoid companies with near-term financing and liquidity challenges and instead, they should focus on companies that have demonstrated success in running a profitable operation in their markets.
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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