This week saw the continuation of the pot stock rally that has been in full force since the beginning of the year. The Global Cannabis Stock Index, which saw a decline of 44% in Q4 of 2018, is now up 44% for the month of January. That is simply massive.
This year, some of the companies have far-outperformed the Global Index. Leading the way is the Cronos Group who, following their investment from Altria (the parent company that owns Marlboro) on the 7th December 2018, is 84% up since the start of the year. This was a big deal, and for many reasons.
"Large firms, particularly tobacco companies, will be unlikely to make major moves in the American market until recreational use of THC products is legal at a federal level."
– The New York Times
Cannabis is still illegal at the Federal Level in the US, and hence this is a risky play for Altria. However, if you consider that Cowen believes the US Cannabis Industry to be worth over $80 billion by 2030 and that Altria generated revenues just shy of $30 billion last year, then this is a risky play, but with massive upside.
In addition, the $2.5 billion deal, which saw Altria take a 45% stake in Cronos, came with warrants (at $19 per share) that would give Altria another 10% of the company, and with it, control.
No doubt Cronos is very well positioned moving forward. They also have a retail play in the pipeline, with their recreational retail joint-venture with MedMen in Canada set to go live post the legalisation of edibles and extracts. Still, it is a very high valuation ($3.5 billion at the time of writing), and they need to start producing some big revenue numbers to even begin to fill those valuation shoes.
Others leading the way included Canopy Rivers (up 83%), Origin House (up 50%) on the back of their exclusive distribution agreement with Viola Products (founded by 16-year NBA veteran Al Harrington in 2012), Supreme Cannabis (up 51%) after announcing their 7Acrees cultivation capacity increase, and Canopy Growth (up 63%) on the back of their massive $150 million investment to open their play in the US Hemp Industry game.
It was hard to lose money in pot stocks in January. The only decliners for the month were Australia's AusCann (down 3.17%) and KushCo Holdings (down 3.3%) on the back of another disastrous capital raise. KushCo is finding it very hard to raise capital in the US market as they simply cannot compete with the bank lending the Candian companies have access to. We will be publishing a full review of KushCo Holdings later this week.
However, the week itself has certainly claimed a few victims. Out front, in a race no one wants to win, is the Alcanna Group. They operate in the retail space in the Canadian recreational market. The company has traditionally operated a chain of bottle stores, and are now licensed to open dispensaries catering to the recreational market.
I honestly believe this is where significant long term value lies. Yes, people will make money growing cannabis, but more money will be made selling it to the consumers. If you can own the consumer and own the brands, then you are well positioned for long-term growth. But perhaps we are a little too early in the game for this thesis, as the retail stocks have really performed poorly since adult-use legalisation took place on October 17.
MedMen also saw a significant decline this week, with the news that their former CFO, James Parker, was now suing the company, alleging that MedMen's two main leaders have breached numerous fiduciary duties to shareholders. Although MedMen vigorously denied these claims, the stock really got hit hard.
This is not the first time that Adam Bierman and Andrew Modlin have been under pressure for not acting in the best interests of their shareholders. Just after their IPO, the two came under immense pressure for their remuneration packages and super-voting shares that gave them control of the company. So much so, that their remuneration packages were overhauled and compensation aligned with share value.
Still, they are one of the biggest players in the US and really have set the bar for how to build a brand in the US. Again, I refer to the above…in the land of cannabis, the retail brands will be king.
Overall, the market continues to be in bull mode, and we suggest this may well continue on until we get to the February earnings season. We are due to hear from both Canopy Growth and Aurora Cannabis in February, and think the steam may come off a little at that time.
News out of Canada
Organigram announced their 2019 Q1 results and they were simply awesome! Net Revenue of $12.4 million delivering a 440% increase over the corresponding period. In addition to that, they added over $46.5 million to inventory and then went on to raise their earnings forecast from "simply exceeding Q1, to doubling Q1".
We continue to think Organigram offers some of the best investment value. Well run, well managed, and with significant IP, they are a prime candidate for acquisition and should continue to deliver shareholder value in 2019.
Supreme announced that they will be uplisting from the Toronto Stock Venture Exchange to the bigger Toronto Stock Exchange. This is going to be very good for the company, and we believe they offer significant upside in 2019. Their 7Acre brand is extremely well recognised within the industry for its quality, and their wholesale business model may well end up being the best way to play the production market.
Valens GroWorks signed another extraction agreement, this time with Organigram. The pure-play extraction company, with propriety extract technology, will produce extract concentrates from cannabis flower and hemp for Organigram. This marks another impressive scalp for Valens, who can also count Canopy Growth and Harvest 1 as clients.
The extracts market is the one market to rule them all. Already, in established markets such as Colorado and Oregon, extracts and edibles now make up over 55% of the market and continue to grab market share from flower. This week we covered one of the industry powerhouses, MediPharm Labs.
National Access Cannabis (NAC), one of Canada's leading cannabis retail chains, this week released their Q1 2019 results and they are trending in the right direction. Sales of $3.8 million are an increase of 766% over the corresponding period last year.
The Canadian recreational retail market is only going to get bigger as Canada matures, and certainly post the legalisation of edibles and extracts in October this year. We believe this to be a big opportunity for significant Canadian gains in the coming years. We will be covering the entire Canadian Retail Market in more detail this week.
This week Charlotte's Web added serious experience and credibility to their management team, with Stephen Lermer coming on board as Chief Operating Officer. Lermer, who comes to Charlotte's Web from the pharmaceutical industry, where he held senior leadership and executive positions at DuPont, Johnson & Johnson, and Burroughs Wellcome (now GlaxoSmithKline), has over 38 years of experience overseeing start-up, mid and large-scale global pharmaceutical, cosmetic and consumer-packaged goods operations.
"His appointment dramatically expands our domestic and international operational capabilities and brings high-level pharmaceutical quality and operating expertise to our organization."
– Hess Moallem, President and CEO of Charlotte's Web
One of Charlotte's Web's main competitors, Australian-based Elixinol, this week released their Q4 2018 results. Revenue of $11.9 million was 116% growth on Q4 2017, and 14% growth on Q3. This was down sharply from their last quarter growth of 160%.
What was more concerning, was that cash generated from operations was -$2.6 million, and, on top of that, they had declining Gross Margins of 27.5%. Both Charlotte's Web and CV Sciences are producing positive cash flow, and the decline in margin can only be as a result of an increase in Hemp Foods revenue (which operates at significantly lower margins).
However, on the plus side, they have capital on the balance sheet, an international presence (first to ship CBD product to both New Zealand and Japan), and with the opening up of the US Hemp Industry, are well positioned for significant growth in 2019.
Still, they need to show they can take advantage of their cash position and show growth in line with their rivals if they are to keep pace. The stock was one of the strongest performers in 2018 (we mentioned the stock to our readers at AUD$1.61) and will really need to grow, smart, if they are to continue that trend this year.
And finally out of the US
In what might be considered Grow Biz, international playboy, Dan Bilzerian, the CEO of Ignite International, which owns the Ignite Brand, announced that it had bought Gen X Biosciences, a premium distilled-oil producer with THC levels consistently above the 90% mark, in an all-stock deal.
Ignite has quickly built a reputation as a brand that delivers premium flower, pre-rolls, and oils to the booming Californian market, and we think this is a smart buy. Ignite are due to list on the CSE later this year under the ticker BILZ (yeah – we thought so too!)
Until next week friends.
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