Time to buy the dip on Cannabis?

Canadian Cannabis 2.0 is on its way and the U.S. is set to be the "biggest and the best cannabis market in the world"

Ruth Saldanha 26 November, 2019 | 1:18AM

 

 

Ruth Saldanha: Cannabis stocks in Canada have been a bit of a roller coaster recently. After a dramatic drop earlier this month, the stocks have somewhat recovered but are still trading below our fair value estimates. Is now a buying opportunity? Morningstar Analyst, Kristoffer Inton covers cannabis and is here today to talk about his views.

Kris, thank you so much for being here today.

Kristoffer Inton: Thank you for having me.

Saldanha: What's going on with Canadian cannabis? Is the distribution the main culprit here?

Inton: Yeah, I think that's one of the primary causes of what's going on in Canadian distribution. I think also a part of it is investor expectations. So, I think people forget, this is a growth industry. These are all very early stage stocks. And when we look at where we are in terms of the growth cycle, we've only just past one year of recreational legalization. On top of that when you look at how Canada has been doing in terms of its rollout, you look at its two biggest provinces, Ontario and Quebec. They've really underperformed relative to expectations in terms of opening dispensaries. So, to us, it's a little combination of slower than expected government rollout limiting demand growth and investor expectations for growth and even more so profitability a little too soon.

Saldanha: So, should Canadians consider investing in established U.S. retail players while we still wait for the market here to develop a bit more.

Inton: Yeah, I would definitely say so. I think that in our view, the U.S. is going to be the biggest and the best cannabis market in the world. And they operate in isolation the U.S. and Canada and so while the Canadian market continues to develop, you can also play and get investment exposure into the U.S. story as well. And because the U.S. distribution rollout has been a little bit smoother, it looks like growth and profitability are coming to American companies before it has come to for the Canadian companies.

Saldanha: After the recent drop in prices is now a buying opportunity for Canadian cannabis.

Inton: Definitely, I think that it definitely warrants a long-term view. In the near term, it's not going to take overnight to open enough stores to get distribution right and to get the products lined up. So, it won't happen in the next quarter or so. But if an investor is patient and willing to wait, they'll be able to get exposure to a long runway of growth.

Saldanha: Finally, Kris, which is your top Canadian cannabis pick and why?

Inton: So, we recommend two Canadian picks. We like Aurora Cannabis (ACB) and we like Canopy Growth (WEED), really for two different reasons. Aurora Cannabis has largely been focused on production. And it shows their gross margins are the highest amongst the Canadian cannabis companies we cover. And we like Canopy Growth because we think that with the partnership with Constellation Brands, they're really focused on developing downstream infused consumer products. With Cannabis 2.0 hitting Canada later this year and into next year, we think that Canopy is well exposed to being able to enjoy growth from that.

Saldanha: Thank you so much for being with us today, Kris.

Inton: Thank you.

Saldanha: For Morningstar, I'm Ruth Saldanha.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Aurora Cannabis Inc3.24 CAD-2.41
Canopy Growth Corp26.63 CAD0.11

About Author

Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca