It's been a wild ride for marijuana stocks in 2018.
Once again, the industry moved forward at rapid pace with hyperbolic growth being seen in all areas of the market. This year has been categorised by a number of events that have had significant impacts on the market – both positive and negative.
The year began with a milestone. California, The six largest economy by both population and GDP, legalised Cannabis for adult recreational use, and with it, opened up one of the largest cannabis markets on the planet.
The West Coast of the US was now open for recreational use and signified a major stepping stone in the eventual lifting of the prohibition of cannabis.
In anticipation of this event, there was a huge run up in marijuana stock prices in the last two weeks of December. The "Cally Rally" drove nearly all Cannabis stocks to new all-time highs, with January the 4th marking the Market's peak as tracked by the Global Cannabis Index.
JANUARY – The Cali Sessions
However on January 5, then-Attorney-General, Jeff sessions, tore up the Cole Memo, and the markets capitulated big time.
The Cole Memo was an Obama Administration piece of legislature that prevented Federal interference in any State that had legalised marijuana either for medical or for recreational use.
Although not officially an act, the Cole Memo was an important piece of legislature that provided certain levels of protection to the cannabis industry. In removing the protection, Sessions made a statement of intent that the Federal government neither agreed with nor supported, any sort of cannabis legislation.
The markets nosedived. Make no mistake, this was a bad moment for the emerging cannabis industry and one that scared the bejesus out of most retail investors.
With just a hint of recovery behind them coming out of January, pot stocks were dealt another massive blow when, in February, the global stock markets collapsed (maybe 'incurred a significant correction' would be a better phrase). Stocks continued their downward momentum and by mid-April were back to the early January lows.
APRIL – I don't think so Trump
When the Cole Memo was removed, a number of senators came together to petition against this. Some were more outspoken than others. Senator Cory Gardner from Colorado was one of those.
In retaliation to the removal of the Cole Memo, Senator Gardner blocked any of the Supreme Court nominations that President Trump put forward for approval. Ultimately, his persistence and lobbying paid dividends when, on April 13th, President Trump came out and publicly announced that there would be no interference by the Federal Government into any state that was managing cannabis within its own legal framework.
"I received a commitment from the President that the Department of Justice's rescission of the Cole memo will not impact Colorado's legal marijuana industry."
– Senator Cory Gardner
Trump's support of Cory Gardner was extremely important as it provided a level of comfort as yet unseen in the industry. After all, this was the President of the United States speaking out in "support" of Cannabis. Although not in writing, Trump had given Gardner his word, and this seemed to be enough for the markets.
Markets really rallied on the news, and this can most certainly be looked back upon as a significant moment for legislative change. It remains to be seen where exactly Trump stands on the issue, with most commentators pointing to the 2020 elections as the next best opportunity to gain clarity on the issue.
JULY – The first Drug
In July, the first-ever cannabis-based pharmaceutical drug, Epidiolex, was approved by the FDA. Epidiolex was shown to be highly effective in its treatment of various forms of very aggressive childhood epilepsy, such as the Dravatt and Lennox Syndromes.
The CBD-heavy drug has produced efficacy-based results showing a dramatic decrease in the number of seizures these kids were having. Indeed it was quite common for children having up to 30 or 40 seizures a day, to become completely seizure free on Epidiolex.
Following this approval, the DEA did its part, when it rescheduled Epidiolex from its Schedule status, allowing it to be dispensed to patients that qualified for the treatment. Many would look to this is as the turning point in the legitimacy of medical cannabis, both as an industry and as a meaningful form of treatment.
AUGUST – Canopy does it again!
As game-changing as this was, the markets continued their downward slide, with the Global Cannabis Index reaching a new 2018 low on the 13th of August. On the 14th August, Canopy Growth surprised the industry, when they announced their second deal with Constellation Brands.
Constellation, owners of Corona, had now effectively taken control of Canopy Growth.
The CAD$5 billion investment, the largest ever seen in the industry, increased Constellation's holding to around 37%, with warrants, that if exercised for another CAD$5 billion, would give them a 55% holding, and total control of the company. In one swoop, Canopy effectively became a Constellations Brand subsidiary.
And boy, did investors like the news. The markets went into a frenzy with some stocks making gains of 200% in the two weeks post Canopy-Constellation II.
OCTOBER – Day 1 of Forever
And then just a few weeks later, the big one, with Canada becoming only the second country in the world, and the first G7 nation, to legalise cannabis for recreational use. On October 17th, licensed dispensaries were officially open for business.
And what a disaster that turned out to be
They were never going to be ready. Although very publicly reported and expressed, the Provinces simply could not cope with the voracious and insatiable recreational demand.
The most rampant demand for any product in decades. With only a handful of retail outlets opening across the various Provinces and with Ontario not even launching with any physical stores demand simply outstripped any possible supply.
Canada also only went legal with flower and low-potency oils. It is estimated that the black market for vape and extracts to be well over CAD$1.5 billion in Canada alone. This is exactly what one would expect from the fastest growing segment of the fastest growing industry on the planet.
But Canada had taken the decision to only legalise oils and extracts twelve months after the initial legalisation of both flower and low potency oils. Hence many now look to October 2019 when the legalisation of extracts and edibles will be legalised for adults-use. Now commonly referred to as the "real legalisation".
NOVEMBER – Earnings Season & midterm elections
All the excitement of legalisation being an event that would drive pot stocks hyperbolicAnd legalisation proved anything but favourable for pot stocks. With the Licensed Producers unable to fulfill their existing supply contracts, their analyst-predicted revenues fell well short of expectation, as the companies all delivered below-par numbers during the earnings season in November.
The big Canadian LP's were expected to produce massive revenue results, but most delivered significantly less.
What was worse, is that many of them delivered these low revenue numbers with massive cash burns, that once again brought into question their over-inflated valuations. In fact, the stocks have been declining ever since, with some making new 52-week lows in the month of November.
The silver lining for the month was the mid-term elections. Within the U.S., a handful of new states approved marijuana initiatives. Voters in both Missouri and Utah approved medical cannabis measures during the elections, with residents in Michigan doing the same for a recreational marijuana proposal.
Oh, and bye-bye Jeff Sessions. We knew it was coming, we just didn't know when.
All year it seemed like President Trump was on the verge of firing his attorney general. Trump didn't care about cannabis, of course. Sessions' original sin, in the president's eyes, was appointing a special counsel and recusing himself from the Russia investigation.
On November 7th, Sessions finally got the axe. Trump appointed the unknown Matthew Whitaker as interim AG, and nobody was sure whether Whitaker's status was even legal. By the year's end, the president had named William Barr—an actual former attorney general, under George H.W. Bush—as a permanent replacement.
It remains to be seen what stance Barr is going to take on Cannabis. Although staunchly opposed to it, these comments relate back to the late 1990s and we are pretty sure he will not go against both overwhelming public support and a paradigm shift inside the upper echelons of power in Washington.
DECEMBER – In rides the Marlboro Man
In early December, Altria (the owners of Philip Morris – the producers of Marlboro) announced that they had taken a 45% stake in the Cronos Group for USD$1.8 billion. In a deal that closely mirrored the Canopy Constellation one, Altria's purchase also came with warrants that, if exercised, would give them to take effective control of the company.
And just like Constellation, Altria – as a result of the investment – got 4 of the 7 board seats. This was another very big moment for the industry. It once again legitimised it, and showed just how far it had developed, both commercially and "politically".
But unlike the Canopy Constellation II deal, the market did not go hyperbolic. Quite the contrary, it simply kept on declining.
The Bottom Line
2018 has seen Canada's Legalisation, the entry of both Big Alcohol (Colson Moors) and Big Tobacco, with Coca-Cola, Diageo, Novartis, and a few others apparently rumoured to be looking to enter the sector. Yet the market is significantly down year to date.
I recently wrote why now is not the time to panic. Firstly, I believe that a correction was needed, and has now happened. Secondly, I believe that the market is fundamentally stronger than it has ever been. And finally, I am still very bullish on the sector. This is not a short-term play, this is a long-term thesis.
This is an industry expected to grow by over 15% per month, compounded, for the next 10 years. An industry that is expected to be worth over $100 billion by 2035. And most importantly, an industry that is disrupting healthcare as we know it. This is the marijuana Green Rush.
And finally, one cannot talk about 2018, without talking about the Farm Bill of 2018. The Bill, debated for amendments every 5 years, has been passed by the Senate and the House and was signed by President Trump on the 20th December. And with it, a $22 billion industry (by 2022) was born.
"I offered him my hemp pen for the occasion"
– Senate Majority Leader, Mitch McConnell
McConnell, whose hometown of Kentucky stands to greatly benefit from the production of industrial hemp, has been the driving force behind the bill.
In it, are provisions to lift the prohibition of Hemp, and allow full-scale industrial production of the cannabis plant, provided it has less than 0.3% of THC in it. There are many who feel that the Hemp Industry is going to be even bigger than marijuana.
While the jury's still out on this, there can be no doubt how monumental this is. Another step closer to the lifting of Cannabis Prohibition in the US.
So what next? Where to from here? What does 2019 hold in store for the booming cannabis industry? In Part II of this article, I will look at the big catalysts for 2019, and what might drive the industry onwards and upwards.
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