Failure of crops, bankruptcy and competition in the US: why 2019 can be a difficult year for cannabis



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Marijuana was one of the biggest investment stories of 2018 as the promise of legalization of recreational weeds in Canada has attracted billions of dollars from both sides of the border, bringing corporate valuations to levels unfathomable just a year ago. But as we approach 2019, the landscape for investors is changing rapidly. While there are new opportunities – think edible in Canada and increasing legalization in the US – there are also bigger risks as companies now need to deliver their high ratings. Amidst this uncertainty, the Financial Post asked four experts to share their perspectives on cannabis investment in 2019. Responses have been edited for clarity and space.

Matthew Nordgren, CEO and founder of Arcadian Fund

What do you see as the biggest investment theme for the cannabis sector in 2019?

I believe that 75% of major stocks will perform lower in 2019 because they are overvalued. I would stick with the big three because the market will move with them. Retailers and institutional buyers, such as the small mid-caps and the market, value that, so I think the market returns to where it's always been successful – and that's where you need to focus.

What company is about to become the next darling of the market in the cannabis industry?

I think iAnthus Capital Holdings Inc., which has a similar presence in MedMen Enterprises and the world's Green Thumb Industries, has a significantly lower valuation and this is one reason why its actions performed better than anyone else's in 2018.

Which subsidiary company do you think can benefit the most from an expanded market in 2019?

KushCo Holdings Inc. is, I think, very exciting. I can see an uplisting (currently markets over the counter in the US) at some point. When that happens, the institutional faces will be more on board than they already are and Kush will have the opportunity to get out and consolidate in an important way. "

There is a lot of competition for position in the USA. Which company is best positioned to take advantage of the expansion of a legal market there?

I really think this probably harms Canadian retail manufacturing companies, and the reason is because their growth has already gone through other markets. I think this helps the Medmens, the Acreage Holdings, the intimates of the world tremendously here. These guys will continue to grow and open new places in the US and buy the existing ones.

What is the story that investors are still not talking about that will be in 2019?

I think people are not saying enough about what institutional buyers are doing. If you are an institutional buyer, you may think that the cannabis industry will continue to grow in 2019, but how can you put big dollars to work? Well, you can not do this illegally, now, all of a sudden, these secondary companies have become the focus. I think the big dollars start appearing in the US and I think they end up investing in companies with which they have less risk.

You have $ 1 million to invest in 2019. Pick a stock of marijuana.

If I'm in Canada and I have to buy in Canada, of course I buy Canopy. It's the same reason you buy Amazon.com Inc. The whole market moves one way or another and Canopy will go up and down with it.

Charles Taerk, president of Faircourt Asset Management, portfolio manager, Ninepoint Alternative Health Fund

What do you see as the biggest investment theme for the cannabis sector in 2019?

What we began to see in 2018 was a rising tide that carried all the boats and the market was very trading in sync. Whenever there was an important announcement for a company, usually all names would react to that news. Now each ad is being monitored in a more individualized way and thus you get to see the companies being generally more traded based on their own results compared to the general sentiment of the market. Gains will matter, to put lightly.

What company is about to become the next darling of the market in the cannabis industry?

We like CannTrust Holdings. It is a larger company in Canada and will be listed in the US. Now it is being traded around 10 times the billing of 2020 and has production capacity, current production which is among the top five and still not among the top five in terms of market value. We are looking at undervalued situations.

Which subsidiary company do you think can benefit the most from an expanded market in 2019?

The company we invest in is Molecular Science Corp. Increasingly, outsourced laboratories will be called to be an outsourced group of quality control for small producers. Molecular Science has a mobile laboratory and they travel through southern Ontario visiting different facilities available for testing during the process. If you wait until the end, it is when the plants are susceptible to pests and fungi. The company is also expected to go public in early 2019.

There is a lot of competition for position in the USA. Which company is best positioned to take advantage of the expansion of a legal market there?

When farming costs are to be reduced, Village Farms International Inc., with 30 years of fruit and vegetables within a structure of NAFTA, has learned to be a low-cost producer. They have greenhouses in Texas and with the legalization of hemp, expected to arrive in 2019, they can take their facilities – they have 5 million square feet – and convert one million square feet to grow hemp. They could be immediately a significant grower in the US.

What is the story that investors are still not talking about that will be in 2019?

On the science side, will cultivation be the only way to extract the active pharmaceutical ingredient from cannabis plants (CBD)? Companies are already starting to focus on biofermentation. For businesses that go into it, it will significantly reduce the cost of operations, and then a cascade effect will be: Do all these Canadian LPs need all of that crop? I think you will see, in the medium term, people begin to realize well, perhaps, we do not need 140 licensed producers in this country.

You have $ 1 million to invest in 2019. Pick a stock of marijuana.

If I had a million dollars now, I would probably put it on OrganiGram Holdings. They are domestic producers, have the lowest cost per gram compared to their most recent quarterly reports – they are at 80 cents per gram – and are a producer below cost. They are trading below the market value of $ 1 billion and yet they are also in the top five in terms of current capacity.

Greg Taylor, portfolio manager at Purpose Investments and active manager of the Purpose Marijuana Opportunity Fund

What do you see as the biggest investment theme for the cannabis sector in 2019?

I think the great thing about the Canadian industry is that we're finally going to separate the winners from the losers. We had several years in which people were able to launch business plans and fund the hopes and dreams of what they could do. I think it's cool now, let's find out who the guys are who can really deliver.

What company is about to become the next darling of the market in the cannabis industry?

What I want to watch for next year is probably Fire and Flower Inc. Fire and Flower is a private company and they have not yet decided when they go to the public. They are a totally retail store, starting in the west and going to Ontario, and I think if they can secure the places, which I believe they can in the Ontario market, they could be a great retailer.

Which subsidiary company do you think can benefit the most from an expanded market in 2019?

There seem to be a lot of guys trying to move their business to being in ancillary companies in the industry. I have not yet seen a great leader come out of it. Certainly there are several extraction companies out there, but at the end of the day it is difficult to figure out how much value they are adding.

There is a lot of competition for position in the USA. Which company is best positioned to take advantage of the expansion of a legal market there?

I think Acreage Holdings is interesting because they have a good comeback in the western US and I think it's going to move eastwards. They also have the support of (former Republican House Speaker of the House of Representatives) John Boehner. I think it does much to advance the cause within the old Republican establishment and, at the very least, will help to enact legislation and truly legitimize space.

What is the story that investors are still not talking about that will be in 2019?

If you are a company that does not have the ability to deliver what they said they would do and do not have a supply contract with one of the provinces, I think you would see bankruptcies in that space. This can catch a lot of people off guard – that not everyone will win. If the US stunts everyone and they are legally faster, you have to figure out how Canadian companies do in that environment because, once Americans open up and dominate and can finance the industry, they tend to win.

You have $ 1 million to invest in 2019. Pick a stock of marijuana.

In Canada, I would probably go with OrganiGram because it looks like they are the most prepared to provide supplies for what they said they could. With that, I think they'll be in a position where some of the big guys, they stumble and OrganiGram's multiple did not go up very high, so those companies will start taking an acquisition approach to OrganiGram.

Bruce Campbell, founder of Stonecastle Investment Inc., manager of the StoneCastle Cannabis Growth Fund

What do you see as the biggest investment theme for the cannabis sector in 2019?

I think a major theme will be the US and the potential for de-escalation or decriminalization of the drug from the national perspective, which would lead to a new class of investors, who did not invest in the sector, investing in the sector. .

What company is about to become the next darling of the market in the cannabis industry?

Cannex Capital Group is one of the two major processors in the state of Washington. They already have operational experience and were very efficient. Their output per square foot is higher than any other in Canada and I think they could go in and buy existing facilities to get licenses in several states and then apply some of their best practices to really speed things up.

Which subsidiary company do you think can benefit the most from an expanded market in 2019?

One that is in the process of IPO is a company called Innovate Phytotechnologies Inc. and it is one that I would definitely attend. They are in the testing arena and as all of these products are regulated regulated in 2019, there will be a huge amount of testing and compliance that need to be done. It goes to the public in the first quarter of 2019.

There is a lot of competition for position in the USA. Which company is best positioned to take advantage of the expansion of a legal market there?

Cresco Labs LLC is one of the multi-state US carriers and these guys have done a phenomenal job of building your company to date with limited capital. They are actually treating (themselves) as a good consumer-packaged company and a brand versus a LP company. They are just raising capital now and will become public and this will give them access to new markets.

What is the story that investors are still not talking about that will be in 2019?

You'll see the cost overdue and the delay, which will vary between the largest and smallest companies, and you'll probably see gaps in the harvesting of the entire facility. There will be more evidence of how difficult it is to raise quality and meet Health Canada guidelines on a large scale.

You have $ 1 million to invest in 2019. Pick a stock of marijuana.

I think if I could buy one would be Originhouse (CannaRoyalty Corp). They have distribution and in California you have to have a distribution license or use someone you have. If you are a dispensary, you will not want to deal with 300 different suppliers. (Distribution) will be difficult because someone will have all brands tied up and that's what Originhouse is doing. They will probably be one of the few (marijuana companies) that is positive cash flow at the beginning of the second half of 2019.

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