Cannabis CliffsNotes: Shopper’s Drug Mart, The 8th Catalyst, Small Cap Liveliness

Benjamin A. Smith
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Below are the events we’re tracking closely in the upcoming week ahead.

Shopper’s Drug Mart

It appears that Shopper’s Drug Mart is getting ready to open its cannabis portal.

Late last week, an adjunct cannabis.shoppersdrugmart.ca page was created, informing consumers that, “patients with a valid medical document will soon be able to purchase a wide selection of medical cannabis products that meet strict quality and safety standards…”. No timeline was given, other than product would be “Coming Soon, Exclusively Online.”

Of course, all of this was well-telegraphed already. In September, Shopper’s Drug Mart received Health Canada’s approval to become a licensed cannabis producer, opening the door for the pharmacy giant to dispense medical cannabis to patients. That moment is close at-hand, and the ramifications could be more material than people think.

While the soon-to-be cannabis emanating from SDM is similarly available elsewhere, Shopper’s has a partnership agreement with Manulife Financial Corp. to offer enhanced medical marijuana insurance coverage. According to Manulife’s Medical Marijuana Program FAQ, that includes advantages such that “members won’t have to pay up-front for medical marijuana expenses that are covered through the program.” In other words, cannabis costs will be subsidized for those covered under the plan, much the same as other prescription medication.

It will be interesting to see how much flow-through sales Shopper’s Drug Mart generates on the medical insurance side of the ledger. Either way, it’s a net positive for licensed producers with existing supply agreements in place. That includes Tilray Inc.Aurora Cannabis Inc. (MedReleaf), Emblem Corp., WeedMD Inc. and Aphria Inc., which has procured the largest deal—a 5-year primary supplier agreement with minimum purchase volumes in place.

The Eighth Catalyst

Without question, cannabis stocks turned out a collectively disappointing effort last week. Despite a multitude of material macro catalysts at its disposal (seven), the market went nowhere. In fact, the Horizons Marijuana Life Sciences Index ETF (HMMJ) finished down ↓2.99% on the week, bucking a sizable broad market and risk asset bounce.

But like Morris the cat, the cannabis market gets another shot at redemption.

Thanks to a temporary ‘trade war truce’ proclaimed between Donald Trump and adversary Xi Jinping, market exuberance will be seen at tomorrow’s open.

The tweet below details what broad cash market futures indexes looked like at around 6:30 this evening, and little has changed since. As of this writing, Dow 30 futures are +487, maintaining the majority of gains into the overnight session.

Thus, rather significant gains will be seen in the cannabis complex tomorrow on-open. Given the sector’s stark under-performance in recent times, we will be tracking the sector’s ability to capture and lock gains into the close. Should both of these things transpire, it will be sweet redemption for a sector which hasn’t seen any real buying traction since the beginning of November. Failure to respond would sent a very foreboding signal to cannabis investors in the short term.

Some select key levels we’re watching:

Canopy Growth Corp. (CGC) – hourly close above $34.12 (minor); hourly close above $34.85—especially with above trend volume—would signal to us the intermediate downtrend has been broken.

Horizons Marijuana Life Sciences Index ETF (HMMJ) – hourly close above $17.77 (minor); hourly close above $18.46 (major); BONUS: daily close above $18.81 (200-Day MA)

Small Cap Resurgence?

In what could be described as a “canary in the coalmine” type of situation, select cannabis juniors have seen outsized bull moves recently on positive news flow.

For instance, Sproutly Canada jumped ↑66.66% off the November 27th lows after enlisting two high-profile beverage executives to its Boards. Between November 20-22, Wayland Group rose ↑28.20% just a couple sessions prior to announcing it had entered the United Kingdom. And this past Wednesday, FSD Pharma Inc. surged ↑25.00% on ‘news’ that the company’s land & facility package in Cobourg, Ontario has a fair market value of $105,000,000, according to a recent commercial comprehensive property value assessmentAustralis Capital Inc. rose ↑16.13% on Friday just because.

While none of this constitutes proof of a broad sector turnaround, it does seem like beaten-up juniors are itching to rally on any piece of disseminated good news. It’s not hard to fathom Tier-1’s garnering similar reaction, once the right news cycle comes along. Unfortunately for the top end, material news has been monolithically barren for some time now. Outside of the recent swath of earnings reports—not the best optics for a sector still not recognizing legalization revenues in the September-ended quarter—it’s been exceedingly quiet.

We’ll wait and see what happens on the cannabis news front this month. Last December, HMMJ catapulted ↑33.59% in a period which culminated with complicated merger procedures (originally announced November 17th, 2017) between CanniMed Therapeutics and Newstrike Brands Ltd.—and subsequent interference by Aurora CannabisIf the sector is afforded similar material catalysts this time around, individual names are certainly in prime condition to respond.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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