4/20: Calm Before the Cannabis Storm

Tailwinds of growth for the industry ahead with reopening of economy, U.S. legalization

Andrew Willis 20 April, 2021 | 4:28AM
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Cannabis dispensary in New YorkTo celebrate 4/20 we wanted to check in on the cannabis industry to see how the growth was going. In Canada, we’re still finding a bit of a lull with the lockdowns – while in the States we’re finding swift undercurrents.

Continued progress in the U.S. cannabis space was largely swept under the rug by investors, thanks to Aphria (APHA)’s rather off returns last week, and a wholesale trim to cannabis stocks that followed for days. “Aphria reported its weird quarterly earnings (third quarter ending February), and we saw a drop in both prices and volumes in Canada,” says sector director Kristoffer Inton. “Prices was mostly due to [user/product] mix shift and volumes was due to the pandemic shutdowns.”

Canadian LPs Regroup
Inton says it’ll be interesting to see how the shutdowns are playing out among the other Canadians licensed producers (LPs). Meanwhile, and perhaps more importantly, potentially positive catalysts to look out for in the Canadian space include the fruits of recent mergers and acquisitions. “It’s good for the industry to see the ongoing consolidation,” says Inton, although Aphria’s weirdness appears to be extending to Tilray (TLRY). “Inexplicably, Tilray delayed their vote for the Aphria merger to April 30. Aphria shareholders approved the deal with over 99% ‘Yes’,” says Inton, adding that he believes the deal will go through. 

Canopy is also getting in on the acquisition action, buying smaller player, Supreme Cannabis (FIRE). Inton sees this as a sign of a healthy sector, “This is all good for rationalizing the industry and helping it reach profitability.”

While Canadian companies ready for a relaunch in the background as local lockdowns continue, American multi-state operators (MSOs) make cannabis policy progress and advance ‘as usual’ at the state level.

U.S. MSOs Continue to Roll
After the recent winning streak for cannabis legalization at the U.S. state level, eyes are on advancements at the federal level. “We already know (via all the bills the House has previously approved) that there’s enough support in the House, but Schumer’s push earlier this year for cannabis legalization is going to face much stiffer opposition in the Senate,” says Inton. Cannabis investors should keep an eye on first impressions in the Senate to get an idea of the biggest-picture catalysts ahead. “This is going to determine how soon we’ll see any change to federal law.” 

After Aphria, some Canadian investors may be worried about the latest earnings from American counterparts, however, the pandemic picture is much different down there. It’s been relatively ‘business as usual’ for MSOs with Green Thumb (GTII), for example, posting more than US$100 million in operating income in 2020, while Aphria and other Canadian companies still strive for break even. “The same pandemic stuff that affected Aphria isn’t very true to the US MSOs,” says Inton.

Investors might be mistaken to miss out on uninterrupted expansion within U.S states. “In Canada, the latest shutdowns shifted to online- and delivery-only for dispensaries. Earlier lockdowns within Canada that allowed dispensaries to remain open for in-person,” says Inton, “In contrast, the U.S. hasn’t really ever barred in-person, so all the secular tailwinds of growing legal cannabis should continue unabated.”

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Cresco Labs Inc8.02 USD-2.20
Curaleaf Holdings Inc12.60 CAD-3.82Rating
Green Thumb Industries Inc23.30 USD-2.57Rating
Green Thumb Industries Inc28.80 CAD-2.70Rating
Tilray Inc13.73 CAD-3.99Rating

About Author

Andrew Willis

Andrew Willis  is Content Editor for Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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