Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) reported a loss of $1.08 per share, or $374.6 million on revenue of $85 million. The dismal performance is consistent with all cannabis companies with a few exceptions. At least there is no risk of Canopy needing to seek additional capital to keep moving forward.
The continued contraction of the cannabis segment show little signs of abating, and the earnings coming out this month are only adding momentum to the downdraft. Oversupply is becoming an issue faster than most LP’s were prepared for, and decreasing sales across the board demonstrate the incumbents fighting for what appears to be dwindling market share. The black market continues to thrive, and LP’s are now forced to compete on unlicensed producers’ terms. The outlook is not great.
There are fresh murmurs of emerging mini-bull markets in E-sports, Online Betting, Psychadelics and Artificial Intelligence, but none of those are threatening to become the global phenomenon that cannabis was.
So where does an investor deploy capital now, if not into the FAANG technology sector driving the lion’s share of S&P 500 record-setting heights?
Start-ups are over, for now. That much is clear. Across Canada, early stage investors are largely pulling in their horns, while the promotional crews continue to roll out weakly funded vehicles across the newest hot sectors.
The market lacks conviction, and sentiment is overwhelmingly negative.
My approach at this point is to remain in cash and wait for a a reversal of sentiment, which I expect will occur in January 2020, and there is good reason to believe it will be led by the cannabis industry.
With the revaluation to the down side now well above 50 percent across the board, and as much as 80 percent in some circumstances, there is a growing consensus that the bottom may be approaching – especially for companies that are not a) burdened with large debt, and b) needing to look to capital markets to fund operations.
That leaves a pretty tiny handful of companies to consider.
I think 2020 is where we will see the Great Bifurcation unfold, whereby Canadian LP’s get beaten into submission with the ugly stick while US MSO’s who have successfully spread out into multiple states and established robust retail operations that require no further funding reverse course and start to perform.
Canada’s notable exceptions include Medipharm Labs, Valens Growworks, and despite the warning of a weaker 4th quarter, Organigram.
Then there is the fact that 2020 is likely going to see the entire world tip into a recession, as inventories once again reach historical highs across manufactured goods while demand begins to slump as consumers pull back spending.
With the whole negative interest rate on sovereign debt experiment crumbling under global skepticism, and the banking sector weakened by the entire debacle, there is no choice for interest rates but to stay remain at just above zero. This despite shorter term rates being driven higher.
This will likely see the recovery in cannabis stocks in Q1 2020 become muted, and deteriorating sentiment globally, and a rising lack of confidence in stock market indices being correlated to real economic growth, could yet catalyze a major abandonment of stocks altogether – a situation that would constitute the resumption of the 2008 rout that was temporarily (in retrospect) staved off by massive QE and ZIRP.
Those “tools” as the Fed and US administration likes to call them will not be available in their 2009 format. The only response from the Fed, however, will be massive QE, which will result in more currency debasement, and at the risk of sounding like a broken record, a resumption in rising gold prices.
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