The marijuana stock market was rocked during Q3 2019 due to various bouts of volatility and a sharp decline in positive short-term sentiment for the industry.

As the nascent marijuana sector continues to go through growing pains, it also expanded its reach when it comes to product offerings and international operations.


A change in company management in the sector accompanied by a downturn in funds available for mid-tier marijuana firms caused a shift in the outlook for this market. But above all else, one of the biggest scandals in the Canadian market led to new doubts about the space.

 

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Read on below to learn about the quarter’s biggest highlights, and click to see breakdowns of previous significant cannabis moves in Q1 and Q2 of this year.

Cannabis Q3 2019: Regulatory issues and a shift in management

An undeniable issue during Q3 was the CannTrust Holdings (NYSE:CTST,TSX:TRST) illegal growing scandal.

At the beginning of the quarter, Health Canada found one of the company’s facilities in Pelham, Ontario, to be “non-compliant” for growing cannabis in unlicensed rooms, sparking an investigation into CannTrust’s operations.

The shocking revelation was followed by the firing of former CannTrust CEO Peter Aceto and the forced resignation of former Chairman Eric Paul, who served as CEO before Aceto. This came after it was revealed they, along with other high-level executives, knew about the unlicensed rooms.

Most recently, Health Canada suspended CannTrust’s production licenses, furthering the company’s troubles. CannTrust has also had recreational product returned by Ontario and Alberta.

The share price of the Ontario-based producer has dropped almost 70 percent since the firm first notified investors of the investigation.

While CannTrust has easily been one of the most troubled players in the cannabis space this quarter, others have also had their share of hardships.

In July, the US Food and Drug Administration (FDA) issued a warning letter to Curaleaf Holdings (CSE:CURA,OTCQX:CURLF) for making “unsubstantiated” claims about the effects of cannabidiol (CBD) and for selling products that had not been approved by the regulatory body.

Curaleaf quickly discontinued the sale of unapproved products and took down webpages that claimed CBD is an effective treatment for illnesses such as anxiety and ADHD.

After the letter was sent, the FDA released a statement in which Ned Sharpless, acting FDA commissioner, said the agency is looking into ways to protect public health while also marketing cannabis products.

 

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“Selling unapproved products with unsubstantiated therapeutic claims — such as claims that CBD products can treat serious diseases and conditions — can put patients and consumers at risk by leading them to put off important medical care,” Sharpless said.

Apart from big scandals, there was also a management change that shook up the industry.

Bruce Linton, co-founder and former CEO of cannabis heavyweight Canopy Growth (NYSE:CGC,TSX:WEED), was dismissed from his position as head of the company in July.

Linton was terminated after Canopy’s board of directors, driven by investment partner Constellation Brands (NYSE:STZ), were left unimpressed by less-than-stellar quarterly results.

“While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy’s recent reported year-end results,” said Bill Newlands, CEO of alcohol maker Constellation Brands, at the time.

Linton said that once Canopy Growth received an investment of C$5 billion from Constellation Brands — Constellation has a 38 percent stake in the company — a conditional board adjustment was set.

After some time off, Linton is now back in the cannabis game as a special advisor to small CBD firm Better Choice Company (OTCQB:BTTR). He also has roles with Gage Cannabis and SLANG Worldwide (CSE:SLNG).

Cannabis Q3 2019: Critical US Congress vote for SAFE Banking Act

One of the biggest challenges facing American firms operating in the US cannabis market has been a lack of access to banking services at federal financial institutions due to the federal illegality of the drug.

“It’s a very strange scenario to be in when you’re in a fully fledged state legal industry that doesn’t have access to traditional banking,” Cresco Labs (CSE:CL,OTCQX:CRLBF) CEO Charlie Bachtell said in an interview with the Financial Post.

Cannabis is still listed as a Schedule I drug, which makes it illegal at the federal level, preventing federal institutions from engaging with companies that deal directly with the plant.

That’s where the Secure and Fair Enforcement (SAFE) Banking Act of 2019 comes in.

 

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The bill was first introduced to the House of Representatives in March of this year and seeks to prohibit federal banking regulators from “penalizing a depository institution for providing banking services to a legitimate marijuana-related business.”

The bill quickly garnered bipartisan support as it moved through the House and a companion bill was introduced to the US Senate.

In September, the bill was approved in the House by a vote of 321 in favor and 103 against, representing the first cannabis-related legislation to pass through Congress.

However, the real challenge for the industry will now be getting the bill passed through the GOP-led Senate, according to experts.

At the industry level, cannabis experts are apprehensive about what the bill could mean for companies in the US if it manages to get past the Senate.

Nawan Butt, an associate portfolio manager at Purpose Investments, previously told the Investing News Network (INN) that the industry is cautiously optimistic as it watches the SAFE Banking Act’s journey.

“The industry is hanging onto the hope that this would make it a lot easier for a lot of these bigger plays to grow a lot quicker, capture market share and bring over the black market to legal channels,” said Butt.

Cannabis Q3 2019: Industry prepares for cannabis-infused drink barrage

This most recent quarter has also seen big strides in the cannabis-infused ingestibles space. Several companies have now thrown their hats into the cannabis-infused beverages ring.

Chuck Smith, CEO of Dixie Brands (CSE:DIXI.U,OTCQX:DXBRF), previously told INN he thinks cannabis drinks are eventually going to be able to challenge the alcohol industry.

“The format for beverages hasn’t become as consumer friendly in the THC world as it is in the alcohol space,” Smith told INN. “We think that’s going to change. We think ultimately consumers are going to be able to go into a consumption lounge and order a THC beverage.”

Dixie Brands has teamed up with AriZona to develop a line of AriZona-branded THC drinks. The firm says it has made a breakthrough in terms of solubility and time delivery for its drink additives.

When it comes to competing with alcohol, Zenabis Global (TSX:ZENA) has also strengthened its position in the Canadian cannabis-infused beverage arena by setting a partnership for the technology development of its planned drinks.

 

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Zenabis CEO Andrew Grieve noted that cannabis-infused drinks could shake up the recreational beverage market — a space alcohol has long held dominion over.

“I believe that, if you have a beverage technology with a known onset and offset and limited calories and the flavor profile that people want, people will choose a cannabis infused-beverage for their recreational experience over an alcoholic beverage,” Grieve told INN.

Deloitte estimates that beverages could contribute C$529 million to the C$2.7 billion upcoming edibles industry in Canada.

Other players that joined the beverage space this quarter include well-known drink maker Jones Soda (OTCQB:JSDA), which is launching a branded line of CBD-infused drinks in the US with the help of an investment from HeavenlyRX, a CBD wellness company that is planning to go public.

There is also The Alkaline Water Company (NASDAQ:WTER,TSXV:WTER), which announced a merger with bottled water firm AQUAhydrate. It plans to expand the portfolios of both companies with lines of CBD-infused drinks and ingestible products.

Industry experts have expressed excitement about the growing cannabis drink market. In a previous interview with INN, Elliot Johnson, chief investment officer and chief operating officer with Evolve ETFs, said the market could see investment moves from big alcohol and beverage companies as winners emerge from the space.

According to Johnson, cannabis drink makers with early leads in the market could end up being acquisition targets moving forward.

Cannabis Q3 2019: Investor takeaway

With Q3 now over, the cannabis industry is still reeling from a summer slump that has been marked by scandal and investor pullback.

The marijuana sector could still rally, however. Johnson previously told INN that Q3 brought a “good growing up summer” for the industry, and opportunities will continue to spring up.

The portfolio manager for two marijuana funds from Evolve also said it is only a matter of time before the US follows Canada with its own cannabis legalization.

Investors could see a “significant repricing” of cannabis companies in the US, Johnson said, as the market readjusts to a growing American presence in the marijuana business.

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

Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

 

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Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis market update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.

 

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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the US federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, working in the lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now undergoing a return to form as excitement about the US opening up increases.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes in US cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.

“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

 

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As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed for the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be.

 

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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance. In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

“We’ve seen the Canadian licensed producers be really hot stock performance-wise, outpacing the US (MSOs), and I’ll say it’s rather nonsensical to me,” said Ahrens, who oversees the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

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