Cannabis Weekly Round-Up: Analyst Expects Issues with Canadian Inventory

During the past trading week (April 22 to 26), an analyst issued a new report raising some questions on the production timelines for Canadian producers.

A new quarterly update from a multi-state operator (MSO) made headlines this week as well, while some reactions from the latest blockbuster deal in the space caught the attention of the market.

Here’s a closer look at some of the biggest news during last week’s trading period.

Following the initial challenges in supply from Canadian licensed producers and the legalized marijuana market, Health Canada issued new data showing a drop in recreational product sold in the country during January and February.

Tamy Chen, cannabis analyst with BMO Capital Markets, wrote a note to investors saying that this report confirms a theory of producers depleting accumulated inventory during Q4 2018.

“As a result, we anticipate it will take some time for most [licensed producers] to meaningfully replenish finished product inventory due to the challenges of growing quality cannabis at scale and managing various supply chain bottlenecks, particularly packaging,” she wrote, as per BNN Bloomberg.

On Tuesday (April 23), Harvest Health & Recreation (CSE:HARV,OTCQX:HRVSF) issued its financial results report for the fourth quarter and fiscal year for 2018.

During its most recent quarter, the MSO reported an increase in revenue of US$16.9 million, representing a 52 percent spike compared to Q3 2018. The company also posted a net loss of US$71.1 million, of which US$50.7 million was attributed to a convertible debt converted to equity.

“Three key initiatives dictated our decisions throughout the year and will continue to be our focus in 2019: aggressively expanding our retail and wholesale footprint across the US, building, acquiring and expanding our suite of brands across our footprint and continuing to operate in a financially disciplined way while also fueling the revenue growth of the company,” said Steve White, CEO of Harvest.

Competing reactions to Canopy deal with Acreage

Following an agreement between Canopy Growth (NYSE:CGC,TSX:WEED) and Acreage Holdings (CSE:ACGR.U,OTCQX:ACRGF), the cannabis industry has been on the lookout for potential similar deals.

Cam Battley, chief commercial officer for Aurora Cannabis (NYSE:ACB,TSX:ACB), told Yahoo! Finance Canada that he still sees Canada’s dominance in the global cannabis market holding, despite the growing enthusiasm for US cannabis firms.

The executive said he has brought the issue of dominance and a race in the cannabis space to Canadian government officials, who he said were receptive to his comments.

“Any government, especially in an economy that is changing fast — we’re losing in oil and gas, we’re losing in automotive — would be interested in a growth industry,” he said.

On Thursday (April 25), during a quarterly update call with shareholders, Howard Willard, CEO of Altria Group (NYSE:MO), was asked about the potential for its cannabis partner Cronos Group (NASDAQ:CRON,TSX:CRON) to expand its presence into the US, similar to the deal struck by Canopy.

“I don’t have anything to talk about today but our intention in making the investment into Cronos and capitalizing them quite competitively versus the other cannabis companies in this space was really designed to enable them to make the moves that are necessary to build out our leadership position,” he said. “And I imagine over the next year or two we’ll have more to say about that.”

During the quarter, the company completed its C$2.4 billion investment in the marijuana firm, giving Altria a 45 percent stake, with the option to acquire an additional 10 percent interest.

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

** This article is updated each week. Please scroll to the top for the most recent information**

Cannabis Weekly Round-Up: Canopy Lays Acquisition Plan for Acreage Holdings

By Bryan Mc Govern, April 19, 2019

During the past trading week (April 15 to 19), a shocking deal between a Canadian marijuana leader and an emerging US multi-state operator (MSO) was brokered.

The launch of new public funds covering the US cannabis space made headlines this week as well, while the impact of another short seller report also caught the attention of the market.

Here’s a closer look at some of the biggest news during last week’s trading period.

Continuing with the trend of rampant merger and acquisition activity in the marijuana space, this past week Canadian cannabis leader Canopy Growth (NYSE:CGC,TSX:WEED) confirmed the latest blockbuster deal in the industry.

The firm is looking to secure the rights to buy US-based MSO Acreage Holdings (CSE:ACGR.U,OTCQX:ACRGF) in a deal worth approximately US$3.4 billion. The acquisition will go through only once marijuana becomes legal at a federal level in the US.

If approved, the deal would see Canopy issue a payment of US$300 million, or around US$2.55 per Acreage share. Additionally, holders of the MSO would get 0.5818 of a Canopy common share per Acreage share that they own.

Kevin Murphy, CEO and chairman of Acreage Holdings, said this deal will allow his firm to access the vast resources of the Canadian company. He also indicated that it will provide some relief as the ramp up for an MSO is a challenging road.

“At the same time, a confluence of factors are making it much more difficult for a multi-state operator to achieve its full potential, including the enormous amount of cash required to scale,” he said.

The deal must be approved by shareholders of both companies.

New funds launch offering exposure to burgeoning US cannabis space

Competing exchange-traded fund (ETF) firms Evolve Funds Group and Horizons ETFs Management (Canada) both launched new funds covering the US cannabis market.

While key differences exist between the two funds, mainly the decision of Evolve to provide active management for its fund, both ETFs went public on the NEO Exchange in Toronto this week.

Elliot Johnson, chief investment officer with Evolve ETFs, will manage the Evolve US Marijuana ETF (NEO:USMJ). He also manages the firm’s first cannabis fund, the Evolve Marijuana Fund (TSX:SEED).

Steve Hawkins, president and CEO of Horizons ETFs, said he anticipates investors will keep looking for investments in the US as the country keeps its path of easing regulations on the drug.

Some of the top holdings for the Horizons US Marijuana Index ETF (NEO:HMUS) include MSOs such as Curaleaf Holdings (CSE:CURA,OTCQX:CURLF) and Cresco Labs (CSE:CL,OTCQX:CRLBF).

New bank and short sellers reports

This past week, Bank of America (NYSE:BAC) launched its coverage for the marijuana sector and issued ratings for three cannabis companies, according to a report from The Street.

Christopher Carey, an analyst with the bank, made HEXO (NYSEAMERICAN:HEXO,TSX:HEXO) his top pick and assigned the Canadian producer a “buy” rating and a US$10 price target.

Fellow Canadian firms Aurora Cannabis (NYSE:ACB,TSX:ACB) and Canopy Growth also received “buy” ratings and price targets of US$11 and US$52, respectively.

The last assessment from the analyst was for Cronos Group (NASDAQ:CRON,TSX:CRON), to which Carey gave an “underperform” rating and a target of US$13.

On a different note, shares of Village Farms International (NASDAQ:VFF,TSX:VFF) were targeted this week by short seller Andrew Left from Citron Research.

Left published a report calling out the firm for the leap its stock has seen so far in 2019 based on a joint venture for marijuana operations in Delta, BC, alongside Emerald Health Therapeutics (TSXV:EMH,OTCQX:EMHTF).

Before the short seller report went public, shares of Village Farms had enjoyed a 222.22 percent rise in New York and 256.28 percent in Toronto. The company finished the trading week at US$11.92 and C$15.99. Left indicated in his report that the stock will go down to US$1.

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: Acreage Holdings is a client 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.