Why the cannabis industry has stalled for more than a year: Morning Brief


Tuesday January 14, 2020

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… and how 2020 could change the fortune of the industry

To say that the cannabis industry has not gone anywhere in the past year and a half could be a generous assessment.

In 2019, the sector fell 32%, compared to a 29% increase for the S&P 500, according to data from Stifel. And so in a year when investors were able to "throw a dart" and make money, the cannabis sector lost about a third of its value.

The decade ended with stocks of cannabis that made their debut as part of the trifecta mini-bubble of the 2010s: Blockchain, cannabis and fake meat.

But it might not be like this forever.

In a customer note released on Monday, Stifel analysts took a broad look at the cannabis industry and described the challenges and potential opportunities that these stocks will face in the coming year. According to the firm, the decline in the sector was "a (consequence) of the rapid development of the industry colliding with a possibility of slower development, particularly in Canada, the first market developed for adults."

He added: "The themes propelling the sector to more than $ 50 billion in value for state-owned enterprises are now diametrically opposed to the themes currently prevalent in the sector."

Easy financing has turned into a difficult financing environment. A clear path to regulatory easing has become more confusing. The vaping crisis has held back progress across the board, and incentives to enter big business are limited.

In 2018, it seemed like all the big consumer product companies were packing the idea of ​​cannabis or CBD products. In August 2018, Constellation Brands (STZ) took a $ 4 billion stake in Canopy Growth (CGC), telling industry bulls that the sustainability of cannabis and hemp products is next large category of consumers.

"August 15, 2018 was a landmark event for the industry bringing broad and undifferentiated enthusiasm to the public actions of cannabis," wrote analysts at Stifel. "This event provided a lifeline to many companies, but if we look at the landscape 16 months later, very few public cannabis companies are in better shape today than August 14, 2018. . "

Over the past month, Stifel has reduced revenue forecasts for the four cannabis companies in its coverage area: Canopy Growth, Aurora Cannabis (ACB), Tilray (TLRY) and Cronos (CRON). In August, Constellation suffered a loss of $ 54.8 million on its investment.

Jessica Rabe, co-founder of DataTrek Research, wrote on Monday that 2020 still presents the cannabis space with a huge clarity opportunity regarding its biggest business problem: legalization in the United States.

"Public stocks of marijuana are a buy option if a Liberal Democrat candidate wins the 2020 presidential election," said Rabe.

Activists from DC Marijuana Justice (DCJM) organize a gigantic marijuana joint to demand that Congress pass a cannabis reform law on the US Capitol's lawn in Washington, DC, October 8, 2019 (photo by Olivier Douliery / AFP) (Photo by OLIVIER DOULIERY / AFP via Getty Images)
Activists from DC Marijuana Justice (DCJM) organize a gigantic marijuana joint to demand that Congress pass a cannabis reform law on the US Capitol's lawn in Washington, DC, October 8, 2019 (photo by Olivier Douliery / AFP) (Photo by OLIVIER DOULIERY / AFP via Getty Images)

And while the expected stalemate in Congress – in the event of a Democratic or Republican victory in the presidential race – could hamper progress in legalization, Rabe notes that Bernie Sanders and Elizabeth Warren "said they would take executive action to cancel the marijuana schedule under the Controlled Substances Act, which would essentially legalize drugs at the federal level. "

Rabe also notes that several states – including Florida, Connecticut, New York and New Jersey – may be considering legislation or polls to legalize the use of marijuana.

"Exceeding adult consumption and sales in highly populated states with large cities, such as New York and New Jersey, could also give a significant boost to the US marijuana industry," added Rabe .

"But all that said, legalizing marijuana state by state is still a difficult path for the industry, as it leaves behind many existing challenges related to its federal illegality," she said.

According to Stifel, the cannabis industry still represents a $ 100 billion opportunity in the United States and $ 200 billion worldwide. And it is TAM which, according to Stifel, has subscribed to the investments of the 2018 era in space.

But this kind of market opportunity only exists in a world where the United States has legalized marijuana use at the federal level. A process that should take a big step forward – or backward – in November.

Through Myles Udland, reporter and co-presenter of The final round. Follow him on @MylesUdland

What to watch today

Economy

  • 6 a.m.ET: NFIB Small Business Optimism, December (104.8 expected, 104.7 in November)

  • 8:30 a.m.ET: CPI monthly, December (0.2% expected, 0.3% in November); CPI excluding food and energy on a monthly basis, December (0.2% expected, 0.2% in November); CPI YoY, December (2.4% expected, 2.1% in November); CPI excluding food and energy year-on-year, December (2.3% expected, 2.3% in November)

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Pre-market

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  • 8 a.m.ET: Citigroup (C) is expected to post adjusted earnings of $ 1.84 per share on $ 17.88 billion in revenue.

  • 8 a.m.ET: Wells fargo (WFC) is expected to announce adjusted earnings of $ 1.11 per share for revenue of $ 20.08 billion.

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