Canadian Pot Firms – The Triggers for Future Growth

I am still convinced that the cannabis industry is nothing less than a new economy rather than just another bubble. What is equally important, it is a very actively growing economy that looks for ways for rapid expansion.

Let us recall that after the official legalization in Canada in October, the stocks of ‘plant growers’ sank. “Buy the rumor, sell the fact” came into play. The depth of correction was quite strong, which, I have to confess, was a surprise for me.

Interestingly, January was marked by return to growth, and some people managed to partially (some even completely) recover from October. Today I would like to focus on a few points concerning individual names and the field on the whole.

What are the triggers for the future growth of companies in the field?

Increased risk appetite. It feels like the ‘green’ stocks bounced back after the correction that took place in early February. Recently, stock prices have grown at a decent pace, which, in my opinion, was due to several reasons. First, the general market, on the whole, is in a positive mood. Secondly, investors’ risk appetite is likely to increase against this background.

Growth in the sales of therapeutic ‘plants’ in Canada. Many believe that the first results of the sales are disappointing. Excuse me, gentlemen, only a few months have passed since the legalization and if anybody was waiting for fantastic sales right away, that was a mistake. I wrote about these overstated expectations, as well as the risks of this field back in May. I assume that we will observe a real sales’ growth in Canada in the 1^st-2^nd quarters of 2019.

Development of export destinations. Many companies expand into international markets. CannTrust, Canopy and others supply the medical ‘plant’ to Europe and Australia. The growth of cultivation capacity will lead to a growth in export flows. Moreover, we should keep in mind that the cost of the product in Europe is significantly higher than in Canada.

Cooperation with related fields. According to some estimates, due to legalization, the companies that produce ‘appetite supporting products’ will be able to attract some of the alcohol producers’ clients. I have to note that alcohol producers are aware of the danger of losing some part of their consumers and are down to taking certain actions. For example, the company Constellation Brand has increased its stake in Canopy Growth to 40%. I do not exclude that the transaction activity of M&A in this field may grow further, which implies that larger players will swallow up the smaller ones. The goal of the larger ones is obvious: they plan to scale up their business. I do not exclude that the activity of large funds may grow and they will probably want to increase their stake in the market leaders of this dynamically growing sector. In this regard, medium-sized companies ($ 1.0 – 1.5 billion) will be in the spotlight. There is also a possibility that two average performers will merge with a view to confronting leading players. In addition, sensing a competitor in the market of sedative agents, alcohol producers and pharmaceutical companies may also be active in this field.

NYSE listing. A lot of Canadian cannabis producers are musing about and planning to be listed in New York, which would be quite favorable for their stocks. With all due respect for Canada, there is more liquidity and a “higher quality” of investors in the United States.

Possible legalization in the United States. There is much talk about the possible full-scale legalization of the plant in the United States. The healing ‘plant’ is currently legalized in a dozen states, but it is likely to spread to the entire country in the coming years. By that time, Canadian cannabis producers will spring up like mushrooms, increase production and be ready to expand. I suppose that any speculation on the legalization in the United States will become a serious trigger for the Canadian sector.

In anticipation of reports

Several companies, in particular, Aleafia (ALEF, March 4), HEXO (HEXO, March 13) and CannTrust (TRST, March 29) are expected to publish financial reports in March. Organirgam (OGI) and Canopy Growth (WEED) have already published reports. In general, the results were received quite favorably in the market. I do not exclude that the situation may repeat itself in one form or another in March.

The ‘green meadows’ are going to be quite interesting in the near future. The field continues to grow. At the same time, the stocks of ‘plant growers’ are still quite volatile, and there is a possibility of dips, possibly strong ones. Such dips allow me to plan for a cheaper buyback.

Summary

I keep a positive view on the sector. Use temporary dips in stocks to increase and average your position. No fanaticism, please.

I expect a significant improvement in companies’ financial indicators and an increase in stock prices and continue to hold stocks of companies such as TRST, ALEF, HEXO, OGI and EMC in expectation of significant mergers.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Please let us know what you think in the comments below.