The allure of cannabis investments took a hit in 2019 — as the sector continues its evolution, what are companies in the space looking forward to in 2020?

According to various players in the cannabis industry, the market is now entering a critical time in its maturation process.


Investors are raising the stakes by following stricter strategies and looking for guidance from established institutions evaluating the marijuana stock arena.

 

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A proposed extension of the merger and acquisition (M&A) trend also looms large over the sector, indicating that fewer stocks may be available by the end of 2020.

Here the Investing News Network (INN) takes a look at how representatives from marijuana companies are feeling in regards to the new year and what it may have in store for them.

Cannabis forecast 2020: What are cannabis companies excited for?

Despite the current condition of the cannabis investment market, a variety of companies are looking to turn the page in 2020, and many even expressed excitement for the new year to come.

“We’re optimistic that 2020 will bring a clearer, more efficient cannabis market,” Narbé Alexandrian, CEO of Canopy Rivers (TSX:RIV,OTC Pink:CNPOF), told INN.

Similarly, Christine Hersey, director of investor relations with Harvest Health & Recreation (CSE:HARV,OTCQX:HRVSF), said 2020 will be, overall, a positive year for the industry.

While the downturn has caused a sense of worry for the marijuana space in the short term, companies are still bullish on the long-term options at hand.

In Canada, marijuana firms are eager for the rollout of edible and infused items as a way to transition the market and begin offering a variety of new formulations to consumers.

“The potential impact of Cannabis 2.0 (edibles, oils, other derivative products) can’t be overstated,” commented Greg Engel, CEO of Organigram Holdings (NASDAQ:OGI,TSX:OGI).

This transition may open the door to a stronger way for companies to differentiate each other in the eyes of consumers. These products will include the much-anticipated cannabis-infused beverages.

“I hope the market comes back to valuing brands, revenues and profits,” Terry Donelly, chairman and CEO Hill Street Beverage (TSXV:BEER), told INN.

A variety of cannabis and beverage companies have made substantial investments into the development of this product category in Canada. 2020 will prove to be an initial testing round for these items.

While the results for the sale of these new products won’t be felt in the earnings reports of public companies for some time, the opportunity attached to the new market in Canada has companies excited about what’s to come.

 

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“I believe the sector will turn around in the second half of 2020 as companies begin to report better financial results due to rightsizing their capacity and operations,” Jesse McConnell, CEO and director of Rubicon Organics (CSE:ROMJ,OTCQX:ROMJF), told INN.

Engel added that he sees the “early frenzy” attached to cannabis stocks settling down now, especially as the space continues its maturation period. Instead, the executive is expecting to see growth driven less by “promises and more by a company’s ability to deliver against plans and produce a return on capital investment.”

Cannabis forecast 2020: What do cannabis companies want investors to know?

As participants in the market itself, cannabis companies are in constant conversation with their own investors to set the stage for their business operations. Investors in return bring their own expectations.

The crunch seen at the moment has made cannabis companies ask investors to take a closer look when it comes time to make stock picks in the space.

Investor education — in particular due diligence — was a hot issue with the company representatives INN spoke with.

“Investors got burned this year. For 2020, investors should look for performance and solid fundamentals from operators,” Carlos Frias, CEO of GL Brands (OTCQB:FRLF), told INN.

Brady Cobb, CEO of SOL Global Investments (CSE:SOL,OTCQX:SOLCF), told INN he thinks investors should be evaluating profitability and earnings before interest, taxes, depreciation and amortization (EBIDTA) above all right now when it comes to their stock picks.

In the pursuit of reasonable investments, Sproutly Canada (CSE:SPR,OTCQB:SRUTF) CFO Craig Loverock told INN that investors will have to take a long-term look into the sector from now on. He still expects to see volatility continue in the stock market for the short term.

Similarly, Alexandrian told INN stocks in the market market still move in strides, either up or down, as a group rather than based on specific developments.

“In the market’s current state, companies are moving together regardless of what each individual company is doing,” Alexandrian said.

In Alexandrian’s view, true differentiation is still a ways away. “Not all cannabis companies are the same and there are certain differentiators that can drive success or result in stagnation and failure,” Scott Boyes, CEO of MPX International (CSE:MPXI), told INN.

 

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As part of the differentiation needed for cannabis stocks, Guy Chamberland, CEO and chief regulatory officer of Tetra Bio-Pharma (TSXV:TBP,OTCQB:TBPMF), said investors need to become more aware of the difference between medical cannabis work.

“The cannabis companies to watch in 2020 will be the ones making early investments into a consumer focus,” explained Roger Beharry-Lall, vice president of marketing with Lift & Co. (TSXV:LIFT,OTCQB:LFCOF). “The companies that will dominate the next decade will be defined in the next year, so these strategic initiatives will be critical.”

Overall companies hope investors can see and understand which players are performing and which ones are lagging behind.

“This will be a big year for the companies that execute well on their business plans. We will see those companies emerge as leaders and those will be the ones to watch in 2020 and beyond,” Jeff Fallows, president of Valens GroWorks (TSXV:VGW,OTCQX:VGWCF), said.

Cannabis forecast 2020: Investor takeaway

The upcoming year should help clarify some big picture questions about the marijuana industry.

“I think more consistent financial performance from some of the larger players in the market will help restore investor confidence,” noted David Gordon, chief corporate officer at PharmaCielo (TSXV:PCLO,OTCQX:PCLOF).

Companies are hopeful that the effects 2019 had on investors will ultimately benefit the entire sector.

McConnell, the leader of Rubicon Organics, expects to see two lanes open for cannabis companies. As capital becomes increasingly difficult to come by, companies with sound operations and results will be able stand out from the rest.

“These companies should be able to attract investment interest and see their share prices stabilize or gradually appreciate,” he said. “While the other path will see companies still struggling, leading to consolidation or flat out shutdowns.”

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

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

Editorial Disclosure: Hill Street Beverage and Valens GroWorks are clients of the Investing News Network. This article is not paid-for content.

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 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 business of cannabis found its stride during the first quarter thanks to policy change signals and consolidation.

The Investing News Network (INN) discussed progress in the cannabis market through the first major period of the new year and found out 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 work the federal government has ahead of itself 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 told 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 spent his time learning from traditional investment banks where he worked on lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and with 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,” Butt, who acts as the co-manager of the Purpose Marijuana Opportunities Fund (NEO:MJJ), said.

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 seeing a return to form by way of the excitement for an ongoing opening process in the US.

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

In the lead-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.

 

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“What I’d hope is that we continue to see continued 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.”

As far as the struggles go, Butt explained the cannabis industry has cemented itself as a growth-type sector, and as such there are macro environment 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 current potential of the industry and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the investment scene for cannabis.

Butt explained the current shareholder base still lacks enough institutional support to avoid the day-to-day volatility cannabis has been known for before.

“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.

As such, hedge funds and retail investors still represent the dominant portion of the shareholder base for cannabis stocks. These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“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,” Butt said.

So for investors asking themselves when volatility will leave the industry, don’t expect that 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 potential, but questions remain

A surge of merger and acquisition deals have taken over the Canadian cannabis sector as more producers see the potential within the American opportunity.

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

 

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

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

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 ones some operators have done, 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.

Canadians, however, still retain the upper hand at times in terms of valuation, which still confuses 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 with year-over-year growth lines and projections for continued positive performance.

However, in his view the numbers still don’t reflect the value. “Those are really being discounted at this point,” Butt told INN.

Ahrens doesn’t see the same kind of stock performance match what the MSOs have been able to produce by way of their financial results.

“We’ve seen the Canadian LPs 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 most 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 for US confirmation from a federal level.

While for some, the Canadians waiting on the sidelines, this development can feel like a major necessity to address current financial struggles, for others, US-based operators, the heat around the corner will represent an increase to their already thriving operations.

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