During the past trading week (March 9 to 13), a cannabis analyst discussed how the novel coronavirus that causes COVID-19 could affect the larger marijuana industry in Canada.
Two cannabis players fell further in an already struggling market after announcements of poor results and job cuts, while analysts at CIBC Capital Markets have marked some companies investors can find refuge in amid the current market volatility.
Here’s a closer look at some of the biggest cannabis news over the week.
TGOD, Zenabis tumble on losses, staff reductions
Starting off our list is a tale of two cannabis companies that both took significant hits following the release of less-than-encouraging news.
TGOD’s losses are matched against quarterly revenue of C$3.25 million and C$11.16 million for the year.
In a press release, TGOD CEO Brian Athaide mentioned that though the past fiscal year proved to be challenging for the company, the firm remains optimistic about its continued sales momentum moving into the 2020 fiscal year.
Along with the results, TGOD revised its near- and long-term forecasts and said it is forgoing the expansion of its proposed cultivation activities for export in Jamaica to focus on activity in Canada.
Since market close on Tuesday (March 10), shares of TGOD have plummeted over 35 percent. The firm opened at C$0.28 on Friday (March 13), the lowest it has been in the last six months.
The cut comes after a review of operations during a pivot to becoming a consumer packaged goods company and ensuring operational efficiency.
Shares of Zenabis tumbled over 21 percent during Thursday’s trading session following the news and opened at C$0.07 on Friday.
Zenabis said the black market for cannabis is still putting pressure on wholesale prices, but its decision to rightsize, along with producing low-cost, high-quality products, will aid the firm in remaining competitive.
Despite the setbacks, CEO Kevin Coft said that the firm still expects to become cash flow positive this year.
Analyst discusses COVID-19 and the cannabis industry
Amid extreme volatility due to the global spread of COVID-19 — which has caused stock markets to reach record lows in the past few weeks — one analyst has said the biggest hurdles for the cannabis supply chain are in lighting and vape production.
“This comes at a time where vape sales are expected to ramp up given their recent launch in the Canadian adult-use market and a rebound in sales in the US, after concerns late last year on vape-related illness,” Eight Capital Equity Research Analyst Graeme Kreindler said in a note to investors.
As Kreindler explained, his concerns about lighting for cultivation facilities and vape machinery are connected to the hit that manufacturing in Asia, and specifically China, has taken as the virus has spread across the continent.
Kreindler mentioned that the environmental control segments are another space investors should keep an eye on. He explained that virtually all vape hardware is made in China, though a build up of product created during the vape health crisis could help supply the demand.
In Canada, vape sales are part of several companies’ strategies for cannabis 2.0 — the second stage of marijuana legalization in the country that put edible and ingestible cannabis-infused products online.
CIBC tags Canopy Rivers, Cronos as cannabis safe havens
Wrapping up our weekly list is a note from CIBC Capital Markets analysts John Zamparo and Seth Rubin, who have said that Canopy Rivers (TSX:RIV,OTC Pink:CNPOF) and Cronos Group (NASDAQ:CRON,TSX:CRON) are the places to “hide” in the current market conditions.
Zamparo and Rubin called Cronos’ balance sheet the strongest in the sector, noting that it has assets that can be used as a buffer, including a strong management team and an established relationship with cigarette giant Altria (NYSE:MO).
Meanwhile, Canopy Rivers is expected to be one of the few cannabis businesses that should generate revenue in 2020, they said. The company isn’t getting the credit it’s due, they noted, as the market ascribes virtually no value to some of the investments in its portfolio.
The pair said that as an industry leader, Canopy Growth (TSX:WEED,NYSE:CGC) should remain on investors’ radar as well.
“We believe focus among cannabis investors has shifted to minimizing downside; in other words, evaluating cannabis stocks from a liquidation perspective, simply comparing market capitalization to net cash balances,” Zamparo and Rubin wrote.
The pair stressed that investors looking to move into cannabis should make a note of strong balance sheets that will protect firms against future downsides.
Investors should be mindful, however because the cannabis space could be looking at an even more difficult time than it has faced in the past several months.
“At this stage, with trusted, high-quality, extremely profitable names with lengthy track records across multiple sectors trading 10%-30% lower than just a few months ago, we believe the cannabis industry will likely garner even less attention than it did during a very challenging H2/2020,” they wrote.
While the volatility is sure to knock out some players, the analysts said they see this as a necessary step for the industry and believe that the negative sentiment will soften over time.
In a statement, Columbia Care CEO Nicholas Vita called 2019 “a historic year” for the company, noting that the firm has seen quick growth in Illinois and Massachusetts after launching adult-use sales.
Delta 9 Cannabis (TSX:DN,OTCQX:VRNDF) dropped its guidance for its upcoming quarterly results with anticipated revenue set at between C$10 million and C$10.5 million for the quarter and yearly revenue to come in between C$31.1 million and C$31.9 million.
AgraFlora said that Sanna is looking at an extraction capacity of 250,000 kilograms of dried cannabis and hemp biomass a year once it’s granted the proper license amendment.
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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.