Some cannabis issuers are down over 90% of their intra-2019 highs. Some have gone into bankruptcy. Some are flirting with all time highs. Some are running out of cash. None are wildly profitable. Welcome to Cannabis 2.0.
Cannabis CEO’s are going to great lengths to convince the investing public that the Canadian launch of its version of Cannabis 2.0 is going to be the salvation of the income statement when it kicks in in January 2020. Others are more sanguine about the launch of edibles and extracts, cautious that overt enthusiasm might cause the company to break out in lawsuits if results don’t support projections down the road.
One need only look to Aurora Cannabis’ newsfeed to see the perils of waxing too optimistic in forward looking statements. The profusion of news releases by law firms exhorting investors to join class action lawsuits is reminiscent of a swarm of flies on dead bull on a hot summer day. Aurora is starting to look like it may succumb to the many factors that are causing it to be starved for cash.
The hubris that was the hallmark of cannabis CEO’s from 2014 up until Q3 2019 has all but vanished from the guidance issued recently. Its funny because its tragic how quickly the first companies raced to become the first to report significant revenues, thereby catalyzing the premature switch to market valuations based on financial performance, rather than speculation.
But there are a number of catalysts likely to reverse or at least staunch the outpouring of blood from the sector.
Among the most prevalent, and likely, is the US imminent end to federal de-prohibition – especially if presidential candidates make it an election issue if they sense an elevated risk of loss the closer we get to November 2020.
But other less obvious catalysts lurk on the periphery of the dawn of cannabis 3.0. Among them:
- Broader EU uptake of cannabis as a legitimate medical treatment: So far, cannabis for medical purposes, despite being declared legal for medical purposes in several EU countries and the UK, has generated scant acceptance of the plant by physicians. In all of these countries, the rate of patient onboarding to the medical regime is puny compared to what it is post-legalization in Canada and the US. It would appear The Establishment in these countries, while bowing to constituent pressure to ease up on access, are nonetheless morally entrenched in archaic values, and incapable of permitting the vast number of patients for whom cannabis would be potentially life changing in a positive way. If that were to change in a very visible way, it could have positive impact on cannabis company share prices with significant presence there.
- Canada’s over-regulated status precludes any serious competition against the un-licensed contingent of the industry, who still dominates both on the supply side and demand side by a huge margin – 80:20 according to Statscan’s own data. Permitting edibles and vapes and beverages is a step in the right direction, but until the chokehold on advertising and promotion are deprecated, there is little chance this ratio will change significantly. The US embrace of caveat emptor in its approach to regulating cannabis marketing is providing something more like an even playing field, though taxation in both countries is the killer for cannabis pricing in licensed dispensaries versus unlicensed. Canada can’t seem to get a single case of an unlicensed market participant through the courts that might qualify as a deterrent, since the risk of a constitutional quagmire itself acts as a deterrent to “justice”.
- Latin American cannabis companies, while very vocal in promoting their extremely large yet historically less affluent markets, may yet become significant contributors to the industry’s total tally of legal sales. All it would take is a few quarters of consecutive double-digit revenue growth reported in the hundreds of millions, and the whole investor landscape would twist their necks as the comprehension dawns that, while much poorer than North America per capita, 670 million Latin Americans is a way bigger market than California – potentially. The problem is, Latin America has long been complacent with the fact that its source of mind altering substances of the unlicensed portion of society. That might change gradually over time; it might not.
- The CBD monster-sized market opportunity is plagued by FDA-driven confusion. Despite having tremendous implications for everyday dietary supplements, skin care, athletic energy drink ingredients, veterinary inputs and even shampoo (yes, CBD is exhibiting great promise for split ends!), the FDA’s mealy-mouthed fumbling around the issue and subsequent lack of status has wrecked the lion’s share of the economic potential of CBD products. CBD should not be regulated at all, as its only possible health risk is to the liver in excessive quantities, according to clinicians. The multi-billion dollar revenue generation is thus being sucked up by online illicit mail-order suppliers, because the FDA is so befuddled in understanding CBD. If they were to become miraculously enlightened, and untether CBD from the bonds of fear and hypocrisy (think opiates), that could unleash an industry surge in profitability that would make Rockefeller do a backflip in his grave.
These are four big ones that could come into play in 2020 all of a sudden, or they might not. Either way, accumulating the highest quality cannabis stocks right now, ahead of the start of the 2020 Q1 investment season, is unlikely to hurt you.
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