Cannabis Market Update: Q2 2019 in Review

As another quarter wraps up for the marijuana sector, investors are getting a look at the value of the US marijuana play and learning when exactly edibles will hit the Canadian market.

While cannabis stocks suffered a challenging quarter in terms of performance, the growing US market and edibles stand out as the next big catalysts for the space.

Click here for a recap of notable events in the first quarter of the year or read on for a look at some of the key cannabis news in Q2.

Cannabis Q2 2019: Edibles to appear in mid-December

After growing anticipation from the industry, in Q2 the Canadian federal government finally unveiled its regulations for the edibles and infused market, set to become legal on October 17. That is one year after the legalization of adult-use marijuana.

However, due to the review process needed from Health Canada in coordination with cannabis producers, the federal government is projecting no edible items will be sold until the end of the year.

“It is expected that a limited selection of products will appear gradually in physical or online stores, and no earlier than mid-December 2019,” Health Canada said in a statement.

Cannabis edible items in Canada will face a limit of 10 milligrams of tetrahydrocannabinol (THC) per package.

During the quarter, two new projections on the edibles and infused market highlighted just how significant the impact of this space will be in Canada.

First, Deloitte published its annual study on the marijuana sector, focusing specifically on predictions for the value of edibles and infused products.

According to the research, the entire edibles space will be worth C$2.7 billion per year.

“The introduction of cannabis-infused edibles will clearly threaten the alcohol industry as consumers are using the product for similar usage occasions,” commented Jennifer Lee, a partner with Deloitte.

Lee indicated that the economic boost from the edibles market will take place on top of the current spending for cannabis products.

While novelty items like marijuana-infused beverages are expected to attract C$529 million per year, the main draw will be pure edibles, which will represent C$1.6 billion of the total edibles and infused market.

As part of this new spending, another study projects that the second stage of cannabis legalization could attract 1.5 million new consumers to the space.

During a presentation on the upcoming study, Ashley Chiu, strategic growth and risk leader with EY, and Jon Kamin, chief revenue officer at Lift & Co. (TSXV:LIFT,OTCQB:LFCOF), highlighted some of the consumer benefits this market will bring.

The duo also stressed how important the relationship between consumers and budtenders in cannabis stores will be for licensed producers.

It is expected that budtenders will act as guides for new consumers exploring the marijuana space away from smokeable products.

Cannabis Q2 2019: US market sentiment on the rise

Cannabis experts have long been saying that the next stage of growth in the sector will be the US market.

Analysts and portfolio managers have been moving their attention to the state-by-state space and determining some early contenders by reviewing multi-state operators (MSOs), which are companies acquiring assets in legal US markets.

In addition to the continued performance of publicly traded companies operating in the US, Q2 saw one of the biggest marijuana deals so far.

The Canadian market saw its first major connection between a Canadian player and a US-based company when Canopy Growth (NYSE:CGC,TSX:WEED) announced its intention to acquire Acreage Holdings (CSE:ACRG.U,OTCQX:ACRGF) in a deal worth US$3.4 billion.

The transaction involved an initial payment to Acreage shareholders of US$300 million, and investors approved the deal in June. This acquisition will be triggered once marijuana becomes legal at the federal level in the US.

Steve West, vice president of investor relations at Acreage, previously told INN that the cash infusion allowed the MSO to hit the market and gain a bigger footprint before Canopy completed the transaction.

“We expect that potential acquisition candidates will have more confidence in the equity of Acreage given that it will be tethered to Canopy,” Alan Brochstein, cannabis analyst with 420 Investor, wrote following the announcement between the two firms.

While initially rumors spread about the potential for more deals between Canadian producers and MSOs, no others have been confirmed so far.

For now, the biggest question regarding the US cannabis market remains: When will marijuana become legal federally? While many disagree on how feasible the appearance of a sweeping legalization bill is, one respected analyst offered a novel possibility on what could happen.

During the Lift Cannabis Business Conference in Toronto, Vivien Azer, managing director for consumer research in the beverages, cannabis and tobacco markets for Cowen (NASDAQ:COWN), outlined a potential way for marijuana to gain legal protections in the US.

“We think that the (Trump) administration could very well (do it) … it really just comes down to timing,” the analyst said during a panel at the event.

According to Azer, US President Donald Trump might feel compelled to move forward with a new cannabis legalization program or the existing STATES Act if his polling numbers drop ahead of the upcoming 2020 election.

The STATES Act is a proposed bill that would create protections at the federal level for cannabis operations made legal by policies at the state level.

Beyond the increasing trading volumes seen by MSOs that have gained the attention of investors, two new US-focused exchange-traded funds (ETFs) were created on an emerging Canadian exchange in Q2.

Competing ETFs from Evolve Funds Group and Horizons ETFs Management (Canada) launched in April to offer targeted exposure to the US cannabis market.

The Horizons US Marijuana Index ETF (NEO:HMUS) and the Evolve US Marijuana ETF (NEO:USMJ) held assets under value amounts of C$16.8 million and C$4.21 million, respectively, as of July 4.

Both ETF firms determined that investors were in need of a fund offering direct exposure to the MSOs many investors had already started exploring.

“Late last year, we saw most cannabis investment move to the US, and that has been the target of this year’s investment thesis as well,” Nawan Butt, associate portfolio manager with Purpose Investments, told INN. Purpose Investments maintains the Purpose Marijuana Opportunities Fund (NEO:MJJ).

As part of the new research on edibles from Deloitte, Lee indicated that Canadian firms are still well poised to be leaders at the international stage, but competition from the US demands a stronger effort.

“Cannabis companies with strong professional leadership and business fundamentals, a focused strategy, and a willingness to place bets — while playing the long game to wait out the changing regulatory environments — will be the ones who succeed and prosper,” she said.

The trend of investment in the US sector has clearly continued full steam ahead in 2019.

Cannabis Q2 2019: NEO Exchange sees boost in marijuana investments

While many investors are only now learning about the Toronto-based NEO Exchange, launched in 2015, its operators have been busy attracting listings from cannabis ETFs and novel marijuana MSOs active in the US market.

Jos Schmitt, president and CEO of the NEO Exchange, previously told INN that the exchange’s operators made the critical decision to not block US marijuana investments, since the US market represents an area of growth for the cannabis space.

“Clearly we are moving now in a period where there was a lot of focus on US marijuana firms,” Schmitt told INN. “There’s a lot of interest in that space.”

Thanks to this open system, the exchange has seen the launch of the two ETFs mentioned above, which are dedicated exclusively to the US marijuana space.

As well, a recent round of MSOs such as Columbia Care (NEO:CCHW), AYR Strategies (NEO:AYR.A) and Jushi Holdings (NEO:JUSH) have elected for listings on the NEO Exchange instead of the Canadian Securities Exchange (CSE).

Columbia Care and AYR Strategies debuted with market capitalizations of over C$1 billion, representing two of the biggest stock launches on the exchange.

While marijuana investment has been dominated by Canadian players with senior Toronto Stock Exchange listings or those with US listings, investors have seen a rush of marijuana stocks to the CSE throughout the last year.

Now the NEO Exchange may be poised for more marijuana listings to attract investors.

Cannabis Q2 2019: Experts point to investment trends

A significant shift in investment sentiment during 2018 brought rising interest in the US market with the MSO play. According to Butt, that trend has moved on into 2019 as well.

However, Butt isn’t dismissing the Canadian market entirely. “Once the big guys start getting it right, you’ll see a lot more efficiency in the Canadian markets, which will lead to a lot more consolidation as well once the industry matures.”

The portfolio manager also expressed bullish sentiment for the potential impact that the edibles and infused products market could have in Canada.

“People who didn’t smoke their whole life are not going to smoke now, so what’s going to happen is once edibles come online you will get that incremental user. There’s still lots of opportunities left in Canada.”

As a projection of where things might be heading in the investment market, Butt identified Europe as a market that investors will want to keep a close eye on.

“We’ve carved space in our portfolio for international exposure. We think Europe is going to be very interesting within the next two to four years,” he said.

Elliot Johnson, chief investment officer and chief operating officer with Evolve ETFs, agrees with the bullish sentiment for the US market.

His firm launched a new ETF in 2019 focused exclusively on the companies south of the border and he is in charge of the actively managed fund.

Johnson also acts as the portfolio manager for the two ETFs his firm offers, the Evolve Marijuana Fund (TSX:SEED) and the Evolve US Marijuana ETF.

Johnson told INN he will be keeping a close eye on the rollout of retail stores in Canada and the introduction of the legal edibles market.

Canadian players are also set to continue the path of global expansion currently seen.

“Whether you’re looking at Europe or South America or Australia, you’re seeing Canadian names popping up all the time … I think that global opportunity justifies a lot of the valuation of Canadian companies,” Johnson told INN.

While Johnson also pointed to some areas of interest for the Canadian market and its investors, in his view the US market is the sector to monitor; it offers the biggest revenues available and a significant discount to the valuation of its players due to the lack of federal legalization in the country.

Cannabis Q2 2019: Investor takeaway

During Q2, investors were hit with some declines in the market, with underperforming financials from the leaders in the sector as they adjusted to the demands of the Canadian recreational market.

The cannabis sector is at an inflection point thanks to the endless possibilities for companies. Investors will need to maintain close vigilance on the sector to monitor long-term bets and any fast trading action.

Don’t forget to follow us @INN_Cannabis for real-time updates!

Editorial Disclosure: Acreage Holdings is a client of the Investing News Network. This article is not paid-for content.

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.