Cannabis Market Update: Q1 2019 in Review

As cannabis investors continue to grapple with growing challenges for the early movers, excitement has arrived in the form of new markets in the US.

During the first quarter of the year, the marijuana market saw critical decisions in the US government that will have a direct impact on the way consumers and companies interact with the industry.

Here, the Investing News Network (INN) offers investors a closer look at the calendar Q1 for the marijuana market in 2019.

Cannabis Q1 2019: Hemp market gets boost in US

Elliot Johnson, chief investment officer at Evolve ETFs, told INN that his biggest focus in the quarter was the policy changes coming from the US. Johnson also acts as the portfolio manager for the Evolve Marijuana Fund (TSX:SEED).

Thanks to the passing of a US$867 billion farm bill in December 2018, hemp and its derivatives became legal in the country. This includes cannabidiol (CBD) produced from hemp.

“This is not cannabis and marijuana in the recreational sense, but a significant move forward in terms of the adoption of stuff that’s derived from that plant being used in the US,” he said.

This change in policy allowed for the burgeoning hemp-derived CBD market to expand into established retailers. A majority of these brands and products are focused on health and wellness.

During the quarter, pharmacy retailers Walgreens, a Walgreens Boots Alliance (NASDAQ:WBA) company, and CVS Pharmacy, a CVS Health (NYSE:CVS) company, confirmed separate plans to begin selling the products.

“I think that, in anticipation of the farm bill last year, many retailers were trying to come to a strategy for how they were going to address hemp,” Joseph Lusardi, CEO of multi-state operator Curaleaf Holdings (CSE:CURA,OTCQX:CURLF), said during a call with investors and analysts.

The Curaleaf brand of products was one of the first announced to be available with CVS.

“This marks the first of what we anticipate are many announcements where national chains will be opening their stores to hemp-derived products,” Charles Taerk, president and CEO of Faircourt Asset Management, told INN. He also acts as the sub-advisor to the Ninepoint Alternative Health Fund, which secured a 26.91 percent return over a year-to-date basis during the quarter.

He called the confirmation that CVS and Walgreens will carry CBD products the biggest news for the quarter in the entire sector.

Cannabis Q1 2019: Investor interest moves south of the border

So far in 2019, the US marijuana market has commanded the attention of investors. Some Canadian companies have even confirmed that their larger plans include a wide range of activities in the US.

During a conference call with investors in March, Tilray (NASDAQ:TLRY) CEO Brendan Kennedy said the company is now focused on deploying its capital in the most important markets for its growth: the US and Europe.

With attention from investors in the US space, two exchange-traded fund (ETF) operators confirmed plans to launch marijuana funds exclusively focused on the US.

Evolve Funds Group and Horizons ETFs Management are set to launch these funds later this year.

“We’ve had a lot of investor inquiries saying, ‘HMMJ is great, but I want exposure to the underlying US marijuana market directly,”’ Steve Hawkins, president and CEO of Horizons ETFs Management, told BNN Bloomberg.

Johnson told INN that the size advantage the US market has, even in its current fractured state, is an alluring prospect for an entry into the space.

Greg Taylor, chief investment officer of Purpose Investments, credited the success of the funds he manages to his ability to invest in “thematic opportunities, such as the rapid product innovation happening now in the US.”

In February, Taylor’s fund, the Purpose Marijuana Opportunities Fund (NEO:MJJ), posted returns for investors of 53.43 percent on a one year basis since its inception on January 31, 2018.

Cannabis Q1 2019: Acquisition deal highlights challenges for Canadian pure plays

Johnson indicated that, so far in 2019, the leading Canadian marijuana companies have rallied in the stock market due to the return of healthy expectations for the sector.

“I think what’s happened there is that, because of the volatility in the market in Q4 [2018], you’ve seen a lot of these [stocks] come rally back because people said, ‘We were worried about the markets in Q4 and everything is kind of running back to where our expectations are going to be for the growth in this market over the next year or two,’” he said.

When asked which important announcement in the quarter did not get enough attention, Taerk pointed to HEXO’s (NYSEAMERICAN:HEXO,TSX:HEXO) acquisition agreement for Newstrike Brands (TSXV:HIP,OTC Pink:NWKRF).

He said this deal represents one of the unforeseen challenges for the “late entrants” into the Canadian cannabis market.

“There are the larger incumbents that have access to capital and distribution agreements with the various provinces and international markets. However, there are also many others that do not have traction,” he said.

Taerk added that, despite Newstrike being well capitalized and having a strong balance sheet and a solid capacity of production, “the company felt that the path to success was too great and decided to be acquired.”

Cannabis Q1 2019: Trends to follow for rest of 2019

Retail will play a key role in Canada and, in particular, Ontario, where the market finally opened to consumers in April.

Due to the pressures of opening a shop in a tight time frame, several applicants to the first 25 mandated legal shops in the province cut deals with publicly traded marijuana companies. A combination of cannabis retailers and licensed producers secured stakes in the new market.

Investors in the Canadian cannabis market are also waiting to see the entry of edibles and other infused products into the mix of available options for consumers.

The Canadian government has implemented a deadline of October 17, 2019 to legalize these products.

Johnson is interested to see the breakdown for popular brands in the edibles space and which companies will be able to capture consumers with upcoming novelty products.

However, the executive is more interested to see the movements of policy in the US, in particular with critical bills that could significantly boost the entire industry.

In March, the House Financial Services Committee voted in favor of the Secure and Fair Enforcement Banking Act of 2019, otherwise known as the SAFE Banking Act.

This bill would allow legal marijuana businesses at a state level to safely access the banking system, despite the federal illegality of the drug.

“I think that the passing of the SAFE Banking Act could help to signal a larger shift in public opinion that may ultimately help legislation like the STATES Act to gain traction,” Marc Adesso, veteran cannabis attorney with law firm Waller Lansden Dortch & Davis, told INN.

The STATES Act is a policy designed to protect cannabis operations in states that have legalized the drug from the continued federal illegality of cannabis.

Johnson added that he is expecting to see a continued adoption of cannabis-based products from developed or established markets, such as pharmaceuticals or beverages.

“The biggest challenge in the US, frankly, has been that there is this discontinuity between federal legislation … and the state level legislation, where, on a state by state basis, it’s been approved,” Johnson said.

While projections and predictions for the STATES Act vary in range and approval, the issue of marijuana legalization in the US or protections for these companies will surely pick up interest.

One potential benefit this policy change in the US could unlock is the participation of Canadian banks in the American marijuana space.

In April, the heads of the Bank of Montreal (NYSE:BMO,TSX:BMO) and Toronto-Dominion Bank (TD) (NYSE:TD,TSX:TD) reaffirmed to the market that these banks are not ready to participate in the burgeoning US sector.

“Depending on what comes out [from policy changes in the US], we’d look at it and make sure it is appropriate for TD in terms of our risk appetite and whether it’s right for our customers,” Bharat Masrani, CEO of TD, said according to a report from Bloomberg.

While the major Canadian banks have shown acceptance of the general marijuana market, the risk in the US remains a challenge for these institutions.

Other independent financial firms have already launched coverage of US-based marijuana companies.

Cannabis Q1 2019 update: Investor takeaway

As the cannabis market continues its expansion, more options are becoming available for investors in the form of growth and diverse plays in the stock markets.

Companies have to present plans on branding, retailing and research now more than ever, since the maturation of the space represents the gradual shift away from pure cultivation plans.

The first quarter of 2019 showed the dynamism the industry is seeing and laid the foundation at a policy level for more significant changes in critical markets such as the US.

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: 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.