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Cannabis - Sector Recap

Charles Stewart | April 9th 2020 | Editor: Nichola Monroe

An in-depth analysis of how Cannabis related securities will handle the Covid-19 epidemic. Current and future states of these securities will be discussed.


Involved Securities: Cronos Group (CRON), Canopy Growth Corp (CCG), Tilray (TLRY), Aurora Cannabis (ACB), ETFMG Alternative Harvest (MJ)


Summary

Though the cannabis sector has experienced immense decline over the last 3 years, 2020-2025 is poised to be a historical period for the industry. The public opinion swaying to complete legalization and taxation by the majority of US citizens puts legislative pressure on multiple states to pass legalizing bills. Total sales and market value of cannabis in states that have legalized it have skyrocketed, solidifying the economic success of legal weed. Combine these two factors with new bills that lessen the risk of US banks loaning money to cannabis companies and reduce the tax rates of said companies, profitability will be far more convincing. The demand for cannabis from mid-large cap public producers will dramatically heighten and investors will be excited. If weed-legalization and tax-rate cutting bills begin to be passed in state legislatures, cannabis stocks will utterly return to their high-flying behaviors in 2016. The 2020 presidential election will have a massive hand in the success of cannabis stocks so pay attention! If the bills that will be discussed are not passed, I would keep my nose out of the long term cannabis market.


Context:

Marijuana and all related stocks have been risky purchases since their popularity sparked in 2016. Profits have been scarce within the industry, seen in the average non-gap EPS of the mentioned stocks for 2019 being 1.076, and the EPS predictions for Q3 of 2020 are all negative. With these earnings, weed stocks are hungry for capital and turning profit has proven to be difficult, causing the volatility of these stocks to be highly dependent on news and speculation. Regardless, cannabis companies continue to find revenue and investment. In Q3 of 2020, Cronos is projected to generate 14.2 million in revenue, a 210.63% increase from 2019’s Q3. Canopy Growth has a projected 30.01% increase to 92 million in revenue. Tilray: 50.7 million (210.25% increase), and Aurora with a disappointing 2.53% decrease in revenue of 47.8 million. It is crucial to highlight the market behavior of the ETFMG Alternative Harvest fund, a strong indicator of the sector's financial health as it has by a majority the highest total assets and is traded more than any weed related fund. Previous to the dramatic falls of major indexes such as DJIA and NASDAQ because of Covid-19, which began on February 20th, Alternative Harvest was down from $27.25 in August of 2019 to $17.20 in early February of 2020, which was a 36.9% decrease. The market consensus of cannabis stocks was clearly cynical long before Covid-19 struck the economy.


Current:

Covid-19 presents various issues for marijuana companies. Firstly, cannabis is widely considered a non-essential good for recreational users. With unemployment scratching 4.4% from January's rate of 3.6%, cannabis will not be prioritized by the majority of adults in this harsh economic climate. Secondly, trade relations with China will affect the supply chain of major cannabis companies as a majority of the vaporizers and related products are manufactured there. Lastly, investment will be channeled away from speculative asset classes, which all cannabis stocks belong in, and will be channeled into more essential asset classes such as energy and finance.

Can cannabis companies financially take the hit? In certain cases, yes - Previously mentioned, cannabis companies, though not profitable with the legal climate surrounding them, or the successful business models in their infancy, are impressively skilled at raising money. For example, Canopy Growth had 1.6 billion, Cronos Group had 1.51 billion, and Aurora had 147.8 million in cash and investments, showing how these companies' balance sheets can absorb the large shots Covid-19 has taken on the economy. Though less cash heavy companies such as Tilray are beginning to rely on lay-offs and production cuts to compensate for the losses.


The past 1 month


Cronos Group (CRON) Dark Blue

Canopy Growth Corp (CGC) in Orange

Tilray (TLRY) in Purple

Aurora Cannabis (ACB) in Light Blue

Dow Jones Industrial Average (DJI) in Red

EFTMG Alternative Harvest (MJ) in Yellow

Cronos Group(CRON): +6.84%, Canopy Growth (CGC): +9.68%, Tilray (TLRY): -16.95%, Aurora Cannabis (ACB): -15.59%, ETFMG Alternative Harvest (MJ): -6.38%

Cannabis stocks have generally reflected the dramatic movements of large-cap indexes such as DJIA and NASDAQ. Within the rectangles, the market swings that cannabis stocks reflect are highlighted. Outside of the index swings, the current highly volatile climate has uniquely raised and lowered the value of cannabis stocks, causing market predictions for the cannabis sector as a whole to be unreliable, and individual companies must be evaluated for the following weeks. The uniqueness within the cannabis sector has created very profitable day trading opportunities, such as Tilray releasing 11 million Class 2 commons shares causing a 12% gain in stock price, and in the same week Cowen & CO raised their price of Cronos from $8 to $10. Covid-19 has only blurred the financial issues that cannabis companies face and as long as Covid-19 is wholly relevant to the US economy, cannabis stocks will continue to be highly volatile, regardless of their financial safety or future performance.


Big Picture

Cronos Group (CRON) Dark Blue

Canopy Growth Corp (CGC) in Orange

Tilray (TLRY) in Purple

Aurora Cannabis (ACB) in Light Blue

Dow Jones Industrial Average (DJI) in Red

EFTMG Alternative Harvest (MJ) in Yellow

Cronos Group(CRON): -68.00%, Canopy Growth (CGC): -66.05%: , Tilray (TLRY): -88.76% , Aurora Cannabis (ACB): -91.15%, ETFMG Alternative Harvest (MJ): -69.33%

Should I buy with these incredibly low “Bargain Prices?” Cannabis stocks were in a spiral towards massive losses long before Covid-19 arose. Supported by the low EPS previously mentioned, and lack of safe and consistent profit, the companies’ journey downward has been violent. Covid-19 only provides a distraction from their large roadblocks, including a lack of legal and widespread recreational use in America that brought cannabis stocks in the green in Canada. With an absence of the Covid-19 epidemic, it can be safely assumed that cannabis stocks would continue to plunge in 2020… Right?


A 2020 Rebound?

Cannabis stocks can look forward to three possibilities in 2020 that would solidify success and signal a rebound in the cannabis sector, including states sanctioning medical marijuana, a growing change in the public’s perspective of marijuana, and discovering profitable business models’ mid-large cap public companies can take advantage of.



State Sanctioned Use

In recent years, Canada and America’s populations have shown a drastic increase in the approval of medical and recreational marijuana. SAMHSA and RIT International recorded a steady increase in cannabis usage from 2009’s recording of 16,826,000 users to, most recently, 2019’s 25,997,000, a 54.5% increase. This steady increase is mirrored in the annual tax revenue from the cannabis market; In 2017, the annual tax revenue capped at .61 billion dollars and dramatically increased to 1.8 billion dollars as of early 2020, according to New Frontier Data. It may seem that these numbers do not match the market behavior of cannabis stocks but the bullet wound is found in the investments. Investments in retail and cultivation for legal marijuana have been infrequent, like the general cannabis market. In 2015, total investments were at 106.98 million, rising to 477.96 million in 2016, and plummeting to 235.8 million in 2017, per New Frontier Data. That is above a 50% drop in investments between 2016 and 2017, signaling investors and venture firms are not convinced. These investors and firms are not convinced due to the lack of proven profitability of mid to large cap cannabis companies. Simply put, the cannabis market in the US has steadily grown from 2016 but growth is irrelevant to investors until it can be capitalized with efficient and profitable business models.

How does this relate to State Sanctioned Use? Pressure on legislatures. Over the past 3 years, America has shown growing support for the legalization of marijuana and the statistics back it up. Over 66% of US citizens believe marijuana should be completely legalized. With a majority of citizens agreeing that cannabis should be taxed like tobacco and alcohol, legalization would be beneficial to the government as well as the citizens; already seen in the mentioned tax revenue. With illegal and legal cannabis market values in California just below 7 billion, New York’s value at 2.3 billion, and Florida’s value at 2 billion, there is immense financial and social pressure to legalize marijuana. The general public is aware of the financial benefits as well, with 67% of Americans agreeing the legalization would benefit the economy. All this pressure has led to 22 states currently having bills to legalize recreational and medical marijuana use. In 2020, Illinois and Minnesota are the closest States to passing bills for complete legalization of medical and recreational marijuana this year. Illinois would expunge criminal records for low-level offenses regarding marijuana possession and, most importantly, establish 30 million dollars in low-interest loans for cannabis entrepreneurs. Minnesota’s bill is similarly constructed. With New-York recently decriminalizing cannabis and New Mexico, Vermont, Connecticut, Pennsylvania and Rhode Island openly supporting recreational and medical cannabis use, the future seems bright for the industry.

How Do We Know Legalization Will Help Profit?

Take a look at cannabis markets in states that have legalized it, namely California, Alaska, and Vermont. When cannabis was legalized in California, sales more than doubled from 2.69 billion to 5.62 billion (+108%), Alaska saw sales in 2016 (its legalization) raise from 3.4 million to 119.5 million in 2020 (+3414.71%), and Vermont’s legalization in 2018 saw sales increase from 22.4 million to 32.7 million in 2020 (+45.98%), per New Frontier Data. Traditionally, cannabis companies have paid high tax rates for loans and are typically denied bank loans and access to US capital markets. With new bipartisan cannabis reforms taking place this year, these concerns will be addressed. Importantly, the Secure And Fair Enforcement Banking Act of 2019 (SAFE) recently passed by 91 repbublican votes protects US banks from the penalties that are carried along with doing business with large cannabis companies due to marijuana being federally illegal. The SAFE Act and bills alike make profitable financial models much more reasonable and applicable to mid-large cap cannabis companies, attracting frequent and lasting investors.

Written & Edited for Lallic Partners

Citation

#, “Marijuana Statistics 2020, Usage, Trends and Data - AmericanMarijuana.” American Marijuana, American Marijuana, 30 Jan. 2020, americanmarijuana.org/marijuana-statistics/.

Project, Marijuana Policy. “2020 Marijuana Policy Reform Legislation.” MPP, www.mpp.org/issues/legislation/key-marijuana-policy-reform/.

Cover Page:

https://www.app.com/story/news/local/new-jersey/marijuana/2018/12/10/new-jersey-marijuana-legalization-legal-weed-taxes-phil-murphy/2207359002/

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