The Biggest Canadian Pot Stocks of 2020 – Part 1

The COVID-19 pandemic has decimated the market cap of Canada's largest pot stocks. Will they survive the upcoming Coronavirus lockdown?

When Canada legalized recreational marijuana in October 2018—becoming the second country in the world to do so after Uruguay—it became a global standard-bearer for the worldwide cannabis industry.

Prior to this the country had already been operating at the forefront of the sector for years, after it legalized medicinal marijuana in 2001, which granted it a massive first-mover advantage when it came to establishing market share.

This gave Canadian companies a significant head-start over many of their international competitors—while also priming the market to reach $5 billion in annual sales by 2024—and would eventually lead to the emergence of cannabis power players such as Aurora and Canopy Growth.

However, if we skip ahead to 2020 it has become a very different story. The initial rollout of was sloppily handled to say the least, as regulatory issues meant that many companies had to wait months to have their licenses approved.

This led to a severe lack of brick and mortar stores, which resulted in lines that were hours long, high prices and a lack of cannabis supplies.

The world has been in a panic ever since the new Chinese coronavirus disease—which is now officially known as COVID-19—began stoking fears of a global pandemic in early 2020.

The Canadian government also made the curious decision to limit its initial legalization rollout to dried flower products, with additional form factors such as edibles, extracts and concentrates only receiving the legal green light a year later in an event dubbed "Legalization 2.0".

Many hoped that the arrival of non-smokable cannabis derivatives—which typically have a significantly higher margin than the plant itself—would supercharge the Canadian cannabis industry. Unfortunately, this excited was short lived as the arrival of the vape crisis in late 2019 dampened what should have been a revenue-generating bonanza.

So, it should come as no surprise that Statistics Canada estimated that up to 79% of marijuana was being purchased on the black market as recently as May 2019.

And with the addition of the ongoing COVID-19 outbreak—which has caused investor panic and crippled global markets—many Canadian pot stocks are seriously struggling.

Which is why we decided to test the temperature of the market by taking a look at the ten biggest Canadian pot stocks according to market capitalization, in a new two-part series.   

Disclaimer: Past performance is not an indicator of future performance.

Canopy Growth

With a market cap of $3.402 billion, Canopy Growth (TSE:WEED), is still the undisputed king of the Canadian market.

Canopy essentially operates as a large umbrella holding company that includes holdings in several different areas of the recreational and medical cannabis sector.

The company has also been busy acquiring a varied group of subsidiary companies that produce high quality medicinal cannabis, licensable intellectual property and industry-based products, which will allow Canopy to appeal to a wide array of customers through a diversified product range.

In Q3 we executed across Canada, in our international markets and in our strategic acquisitions to drive revenue growth. We have a lot of work to do. We are eager to capitalize on the opportunity to create an unassailable position through a tight focus on the consumer and on critical markets. Canopy Growth CEO, David Klein

However, Canopy Growth has also been suffering staggering losses for some time—which saw almost half of its market value vanish during 2019—leading it to lose its large cap status by dropping below $9 billion in value.

Unfortunately, his trend continued into the new year, causing Canopy Growth's market cap to decline by a further $5 billion as of March 2020.

Although, with 10 growing facilities, a combined 5.6 million square feet of cultivation space and an overflowing war chest that held up to CAD$2.7 billion—in both cash and short-term investments—during the most recent quarter, Canopy is still the biggest game in town by a wide margin.

The company also recently made its first entry into the US market, with the launch of its new wellness brand, First & Free, which features a range of hemp-derived CBD products including oil drops, soft gels and creams.

"First & Free marks a new way for US consumers to purchase quality CBD products from a trusted source," Canopy Growth President Rade Kovacevic said.

"Through state-of-the art extraction methods, strict quality control measures, and scientific research, we are delivering a best-in-class product to the market."

The line of First & Free products will be available in all 31 US states where CBD is legal for sale, following the filing of 40 provisional patents and 11 therapeutic trials. If successful, this could help to alleviate Canopy's ongoing share price decline, as the US CBD market is expected to be worth an estimated $22 billion by 2022.

Earlier this month company also took several key steps towards aligning supply and demand—while also improving production efficiency—by closing down two of its facilities in Aldergrove and Delta, British Columbia.

This will allow the company to shed more than 500 jobs and comes as part of a broader shift towards outdoor cultivation activities, which should allow for more cost-effective cultivation and greater production capacity.

Disclaimer: Past performance is not an indicator of future performance.

Cronos Group

The next biggest competitor currently dominating the Canadian market is the Cronos Group (NASDAQ:CRON), which has a market cap of $2.048 billion.

Cronos Group is a global cannabis company with fully international production and distribution chains across five continents. However, it was an investment from the Altria Group in late 2018 which really put Cronos on the map, which saw the tobacco giant hand over USD$1.8 billion in exchange for a 45% stake in the company.

As demonstrated by our progress in the third quarter, we are making great strides to advance the development and diversity of our portfolio and to expand our manufacturing capabilities. We are confident that our platform strategy and focus on consumer driven innovation will continue to differentiate Cronos Group and drive growth and value creation over the long-term. Cronos Group CEO, Mike Gorenstein

This allowed Cronos to immediately begin a mass scale expansion focused on global distribution, increased production and proprietary research into synthetic cannabinoids. The partnership also saw both companies collaborate on a line of "Peace+" CBD tinctures, which are currently being tested in over 1,000 retail locations across Altria's US distribution network.

The company's Q3 2019 results demonstrated 24% quarter on quarter revenue growth—which was fuelled by a significant uptick in the volume of cannabis kilograms sold—while announcing a pivot towards the wholesale market for their supply of cannabis moving forward, so they can focus on the production and brand creation side of the business instead.

The company has also been judicious with its funding—limiting its major acquisitions thus far to the $300 million purchase of upscale CBD beauty product manufacturer Lord Jones—which should provide Cronos with a lucrative entry point into the massively valuable US cosmetics market.

"This acquisition is one of a number of new growth opportunities that is differentiating our company and our strategic direction," CEO Mike Gorenstein said.

"We are pleased to have completed this acquisition and look forward to working closely with Rob and Cindy to further build on their record of innovation and fully capitalize on the platform they have created."

As a result, Cronos Group was still sitting on more than $1.5 billion in cash and cash equivalents as recently as January 2020.

Unfortunately, the company has also failed to file a financial report for Q4 2019, which Cronos management has attributed to a continuing review by the Board of Directors' Audit Committee—with the assistance of outside counsel and forensic accountants—of several bulk resin purchases and sales of products through the wholesale channel.

Disclaimer: Past performance is not an indicator of future performance.

Aurora Cannabis

Aurora Cannabis (TSE:ACB) is one of the world's largest cannabis manufacturers. It currently has a market cap of $773.514 million and is both vertically integrated and horizontally diversified across every key segment of the value chain.

Aurora also had a funded capacity in excess of 625,000 kg per annum, along with sales and operations in 25 countries, which made it a force to be reckoned with, even its previous attempt at reaching large-cap status was ended in defeat.

We are ready and have launched a diversified portfolio of new product formats and are excited for Canadians to have access to high-quality, safe alternative cannabis products such as edibles, vape pens and other derivatives. We have prudently deployed capital and we believe that we're ready with the appropriate combination of technology, scale and consumer insights to have the right products on store shelves in a timely fashion. Aurora Cannabis CEO, Terry Booth

Unfortunately, the company has failed to lived up to its expected status as the peak production market leader, which has only been exacerbated further by the announcement that Aurora has suspended construction on its Aurora Sun facility in Alberta, Canada and the Aurora Nordic 2 in Denmark.

At the same time, the company also elected to put its 1-million-square-foot Exeter facility up for sale, which has effectively stripped away more than 425,000 kg of peak annual output capacity.

Luckily the company also has 16 wholly-owned subsidiaries in its portfolio, which includes MedReleaf, CanvasRX, Peloton Pharmaceutical, Aurora Deutschland, H2 Biopharma, BC Northern Lights, Larssen Greenhouses, CanniMed Therapeutics, MED Colombia, ICC Labs, Whistler, and Chemi Pharmaceutical.

Aurora also recently announced that it will be expanding into the Irish market after receival approval from Ireland's new Medical Cannabis Access Programme (MCAP).

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According to the company's Chief Product Officer, Dr Shane Morris, Aurora's High CBD Oil Drops have now been added to the regulatory schedule by the Irish Minister of Health, which will enable the importation, prescription and supply of the drug.

"Aurora is pleased to be able to assist patients who are seeking treatment with high quality EU-GMP (good manufacturing practice) certified pharmaceutical-grade medical cannabis in Ireland," Morris said.

"We are very proud to be one of the first approved suppliers of medical cannabis under the MCAP.  We want to acknowledge the efforts made by many people, especially the patients and doctors who have campaigned for access to these medicines."

"We look forward to more of Aurora's high-quality medicines being approved, so that more patients can benefit from the MCAP in Ireland. We will continue to work closely with all parties and state agencies to facilitate further availability."

Disclaimer: Past performance is not an indicator of future performance.

Aphria

Aphria (TSE:APHA) is a Canadian Licensed Producer with a market cap of $634.849 million that manufactures and sells medicinal and recreational cannabis to almost all of the Canadian Provinces.

The company maintains its cannabis supply chain via its wholly owned subsidiary Broken Coast Cannabis—which the company acquired for $230 million in 2018—as well as its Aphria One and Diamond facilities.

The same year Aphria also acquired Nuuvera for $826 million, which was crucial in laying the foundation for the company's successful entry into the German market.

We are very pleased with our strong growth and execution in Canada demonstrated by our increase in adult-use cannabis revenue and positive adjusted EBITDA as a result of our compelling brands and market positioning. Aphria Chairman and CEO, Irwin D. Simon

This was followed by of a collection of South American cannabis companies from Scythian Biosciences for approximately $200 million

A few months later Aphria would subsequently purchase a collection South American cannabis companies for approximately $200 million. This deal would eventually become the focus of an aggressive short-report from Hindenburg Research, which heavily attacked the supposed value and arms-length nature of the acquisitions.

The fallout of this report led to the resignation of then-CEO, Vic Neufield. Following this, the company appointed Simon D. Irwin as Chair of the Board of Directors and interim CEO until a permanent replacement can be found.

However, despite the ignominious exit of the company's former CEO, Aphria actually outperformed many of its competitors in 2019 by only suffering an 8% loss to its market cap. Unfortunately, once the COVID-19 epidemic sent the market into freefall this slide accelerated, causing Aphria's capitalization to decline further in value by almost 50%.

Despite this, the company still performed reasonably well during the quarter ending 30 November 2019, which saw Aphria secure $29.0 million in revenue from adult-use cannabis sales, representing a 46% increase on the previous quarter.

Aphria also saw net revenue climb to $120.6 million during the quarter, which constitutes a 457% increase on the previous year.

"We are continuing to expand our capabilities internationally with solid progress during the quarter in Germany and South America and look to monetize non-core assets. We are confident in our market position and our ability to generate sustainable profit growth," Aphria CEO Irwin D. Simon said.  

"I am honoured to continue to work closely with our tremendous team around the world to fuel growth and value for all of our stakeholders."

"Going forward, we believe our brands, cultivation expertise, cash position and balance sheet will continue to differentiate us in the cannabis industry, and we remain focused on the highest return opportunities for growth."

Disclaimer: Past performance is not an indicator of future performance.

Tilray

Tilray Inc (NASDAQ:TLRY) is a global cannabis company that is operating at the cutting edge of cannabis research, cultivation, production and distribution.

The company has a market cap of $428.531 million and currently serves tens of thousands of patients and consumers, in 13 countries—spanning five continents—while also operating with an asset-light model, which means that it prefers to spend its capital further down the value chain.

Like our peers, we have faced industry challenges, but we remain committed to driving long-term value for our shareholders. Tilray has a diversified business model comprised of global medical, Canada adult-use and hemp products which positions us well in the current volatile market environment. We are still in the early days of this emerging growth industry and will continue being good stewards of shareholder capital as we aim to build the world's most trusted and valued cannabis and hemp company. Tilray President and CEO, Brendan Kennedy

This brand and consumer heavy approach is what sets Tilray apart from its competitors, along with its 2.5 million square foot facility in Portugal, which acts as the company's production and manufacturing hub for both the European and the global cannabis export market.

In 2018 the company managed to lock down a deal with Novartis AG's subsidiary Sandoz to sell, distribute and co-brand Tilray's non-smokeable/non-combustible medical cannabis products globally.

This was then followed in 2019 by the company's acquisition of Manitoba Harvest—which supplies nearly 70% of the US hemp food market—giving Tilray access to 13,500 retail outlets across North America, including Walmart and Costco.

"We're proud to officially welcome Manitoba Harvest to Tilray's growing portfolio of brands and network of experts," Tilray CEO Brendan Kennedy said.

"We look forward to working collaboratively to develop and distribute a diverse portfolio of branded hemp-derived CBD food and wellness products in the US and Canada."

While this may sound promising, Tilray is another Canadian pot stock that has experienced a considerable decline in its market cap over the last year, which was still valued at $2.1 billion less than three months ago.

Investors were also rattled by the company's unexpected decision to broaden its focus from purely Canadian investments in mid-2019—right before Canada's market was due to heat up thanks to the arrival of legalization 2.0—to also include the US and European markets.

Unfortunately, at this point it remains unclear whether the company will be able to generate significant market share in the recreational cannabis space, despite its previous success in the medicinal sector.


This could be one of the best investing opportunities of 2020

Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.

With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.

They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.

And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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