Junior Canadian Cannabis Scintillating to Start 2019—But Can It Last?

Benjamin A. Smith
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Junior Canadian cannabis stocks are red hot to start 2019—but can it last? While it’s obviously too early to draw conclusions, the dichotomy between the beginning of this year and last is quite pronounced.

Backtracking to begin 2018, almost everything went up in unitary fashion. Tier-1, mid-major, junior and micro-caps all rode the M&A wave sweeping the sector via Aurora Cannabis’ hostile takeover bid of CanniMed Therapeutics. Newstrike Brands—the junior immersed in it all—rocketed up ↑526.78% in six sessions from January 2-9, 2018. The blow-off top the would soon follow would become the second iteration of the Canadian cannabis bubble.

Select Tier-1/Mid-Major-Junior Canadian Cannabis Stock Returns, January 2-9, 2018

Company Ticker Dec 29/17 Close Price Jan 9/18 Close Price % Gain
Canopy Growth WEED $29.74 $42.07 41.45
Aurora Cannabis ACB $7.63 $10.94 43.38
Aphria Inc. APHA $18.70 $22.89 22.41
Hydropothecary Corp. HEXO $4.09 $4.21 2.93
Emerald Health Therapeutics EMH.V $5.21 $6.70 28.59
OrgaiGram Holdings OGI.V $4.10 $5.40 31.71
MariCann Group WAYL.C $2.65 $3.45 30.18
Supreme Cannabis Company FIRE.V $2.29 $3.07 34.06
Harvest One Cannabis HVT.V $1.28 $1.81 41.41
Delta 9 Canabis NINE.V $2.78 $2.75 -1.07

In the first three trading session to begin 2019, the action has been noticeably more one-sided. While just about everyone has been crushed uniformly during the ongoing post-legalization bear market, only juniors and mid-majors have bounced to begin the year. Granted, it’s early. But here’s how 2019 is shaping up so far:

Company Ticker Dec 31/18 Close Price Jan 4/19 Close Price % Gain
Canopy Growth WEED $36.61 $37.94 3.63
Aurora Cannabis ACB $6.78 $7.02 3.53
Aphria Inc. APHA $7.85 $8.07 2.81
Hydropothecary Corp. HEXO $4.71 $5.81 23.35
Emerald Health Therapeutics EMH.V $2.83 $3.11 9.89
OrgaiGram Holdings OGI.V $4.84 $5.75 18.81
MariCann Group WAYL.C $0.92 $1.09 18.47
Supreme Cannabis Company FIRE.V $1.32 $1.57 18.93
Harvest One Cannabis HVT.V $0.39 $0.46 17.94
Delta 9 Canabis NINE.V $1.22 $1.45 18.85

If we include post-tax loss selling gains ended on December 27th, returns would be more significant.

With juniors (and mid-majors) outperforming to begin the year, signs are emerging that our cannabis investment thesis in 2019 is bearing fruit. The key for investors is ascertaining whether a protracted new trend has begun, or whether the junior sector’s head-start is just another selling opportunity. I don’t believe there’s an ironclad answer to that question; just circumstantial reasoning which an out-of-the-box thinker like myself is paid to verbalize.

So here goes.

Canadian Cannabis Reviews A Mixed Bag So Far

Whether it’s due to industry’s nascent scale growing dynamics, consumer reviews for have been mixed. Reports or over-dried, badly trimmed and packages filled with seeds and stems remain widespread. This appears to be an multi-LP phenomenon, as opposed to isolated companies failing to optimize proper seed-to-sale processes.

One such LP bucking the narrative stereotype in Supreme Cannabis Company. A quick search online yields almost universally good reviews—as do some in-depth connoisseur and consumer reviews. Whether this is perception, reality, or a combination of both, the company has long since advocated high quality product and branding that reflects discerning tastes and preferences. Supreme Cannabis’ estimated production run rate is slated for 50,000 kg at full capacity, coming online in 1H 2019. Just maybe, the market is pricing-in a winning long-term cultivar here—although that’s 110% guesswork. Now that the tax loss selling is complete, perhaps investors are staking their bets.

That doesn’t mean Big Cannabis isn’t receiving its share of positive reviews. Aurora Cannabis products, for example, are generally held in high regard and frequently sellout quickly in jurisdictions across the country. But there doesn’t appear to be consensus dominant brands, opening the door for smaller LPs to establish market presence.

In fact, smaller LPs are already taking advantage of the opportunity erratic roll-out and persistent cannabis shortage is causing. On November 30th, BNN Bloomberg reported that documents provided to it demonstrate smaller LPs are selling briskly in at least two provinces.  The figures show that New Brunswick-based Organigram Holdings took the top spot with a 24 percent share of the marijuana market in both Nova Scotia and Prince Edward Island. Other smaller players among the top five producers by sales include Zenabis, Cronos Group and Canada’s Island Garden. Similar dynamics were playing out in Ontario—at least in legalization’s nascent first few weeks.

While Tier-1 LPs may flex their scale dominance and coverage over time, to date, the sky isn’t falling on Canadian select cannabis juniors. It looks increasingly likely that several will carve out significant market share—as opposed to Big Cannabis gobbling up all dried flower/concentrate sales. Although it remains to be seen how much smaller LP will be squeezed on margin over time, Canada’s supply shortage is keeping those concerns at bay.

No doubt it’s a stock picker’s market, but investors able to flesh out juniors with winning brands and compelling valuations can do well here. Be wary of chasing or FOMOing in this environment. We hope to profile more such companies in the coming weeks as time allows.

Final Thoughts

No doubt, Big Cannabis has much going for it. Canadian cannabis Tier-1’s are loaded with international assets and partnerships in jurisdictions which have bright futures. With a global Medical Marijuana Market expected to touch USD$55.0 billion by 2024—at 36% compound annul growth—Canopy Growth and others are well positioned to capitalize on the trend.

The question is not about long term opportunity, but immediate impact. With juniors sensitive to immediate revenue increases the Canadian adult-use market is providing, investors may be focusing domestically ahead of longer-cycle international sales capture. Of course, Tier-1 participate in the domestic arena as well. But with select juniors stock prices overly discounted in many cases, the realization that some can actually thrive and attain profitability is giving them a nice boost to start 2019.

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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