Cannabis Update: Q3 2018 in Review

With legalization of cannabis in Canada here, companies in the sector faced the entry of big name corporations and the refinement of details across Canada for recreational sales.

As cannabis stocks moved past a summer of solid movement and catalysts, the three-month period between July and September offered a rush never before seen in the market; rumors abound of industry giants in the beverage and alcohol space seeking cannabis plays also dominated headlines.

However, cannabis investors may have faced the last hype for these stocks. After legalized adult-use in Canada, real numbers will start telling the story of the real winners and losers of this industry.

On that note, here the Investing News Network (INN) offers cannabis investors an update on the significant developments during the third quarter of 2018. For what happened in Q2 2018, click here to read our second quarter cannabis update.

Cannabis Q3 2018 update: big brands come to town

In 2017, Constellation Brands (NYSE:STZ) made a significant investment deal into Canopy Growth (NYSE:CGC,TSX:WEED), which sent shockwaves across the sector. After that, there were few established industry leaders joining the sector through partnerships; that finally accelerated in Q3.

In August, Molson Coors Brewing (NYSE:TAP;TSX:TAP) formed a joint venture with Canadian LP HEXO (TSX:HEXO) to create Truss, a company tasked with developing cannabis infused beverages for the recreational market. The deal was significant, but a large shareholder of HEXO requested that the company attempt to make it a more meaningful partnership through investment.

“When consumable cannabis is legalized in Canada, Truss will be ready to make its mark as a responsible leader in providing high-quality beverages for the Canadian consumer,”Brett Vye, a Molson executive who will act as CEO of Truss, said.

Constellation also dipped back into Canopy, adding a C$5 billion investment showing its commitment to the sector.

“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” Rob Sands, CEO of Constellation Brands, said.

Reports appeared during the quarter about alcohol producer Diageo (NYSE:DEO) and The Coca-Cola Company (NYSE:KO) seeking to add dancing partners in the cannabis space. Hugh Johnston, CFO of PepsiCo (NASDAQ:PEP), even said in a televised segment the company will take a closer look into the cannabis space.

The interest from these established players is rising as the cannabis market offers a growth proposition. With the potential of more countries legalizing the drug — including the US — the gains could be substantial for these big name corporations.

“We believe that it is inevitable for mega cap companies. from the alcohol, tobacco, pharma, pharmacy, beverage, and beauty care industries to enter. For some companies, it’s a way to protect against substitute products and [for] others it’s a way to find growth,” Everett Knight, portfolio manager of the Matco Small Cap and Cannabis Fund with MatCo Financial, told INN.

Cannabis Q3 2018 update: Tilray moves needle for sector

Tilray (NASDAQ:TLRY) had a steady increase to its stock during Q3 since its initial public offering (IPO) was launched in July. During the quarter, the stock picked up steam as market observers noticed double digit gains nearly every day for the stock.

At the peak of its rush, Tilray was priced over US$300 with a market cap of over US$10 billion. Speculation as to the TLRY rush was centred on the tight float of shares the company offered to investors.

Shares of the Canadian licensed producer (LP) gained status as a trading asset as the price of the stock continued to rise.

“I think this is a great thing in the long term, I think it’s going to end poorly most likely for anybody buying Tilray because they think is a good investment at this point,”Alan Brochstein, cannabis analyst with 420 Investor, said in an online interview.

The cannabis expert explained Tilray’s IPO was the “perfect storm” for bulls in the space thanks to its NASDAQ listing, attracting a more diverse US investor numbers and its limited share float.

Critics of the stock volatility and the overall fast paced growth of the cannabis space voiced opinions against the company and what the impact of its stock could have in the long term.

“Tilray’s stock is completely out of control… It’s going to hurt investor confidence in public markets and private markets,”Nic Easley, CEO of 3C Consulting and a managing partner with Multiverse Capital, told INN.

Cannabis Q3 2018 update: Ontario moves physical retail to 2019

With the legalization of adult-use cannabis opening the new market in Canada on October 17, provinces in the country were tasked with setting up the way consumers would be purchasing product in stores and online.

Ontario was at the center of controversy since its previous local government had announced a conservative plan with limited stores proposed across municipalities. That all changed as a new provincial government was elected, with Doug Ford becoming the new premier of Ontario.

Ford’s administration unveiled in August it would instead privatize the physical retail cannabis market, allowing companies to set up shop across the province. Ontario would offer financial support to municipalities and would even allow them to vote on whether or not they might want stores at all.

Despite the excitement from experts and cannabis industry insiders, the stock market took a dip following what was seen as a delay in the implementation of physical retail space. Ontario announced retail stores wouldn’t appear until April 2019; until then, consumers in the province will be able to buy legal cannabis from an online system only.

Later in September, Ontario revealed Canadian LPs would only be allowed to apply and obtain one physical retail store license, severely limiting retail plans from various LPs making bets in the retail market long term.

“We want to have as many participants as possible be involved… This is an opportunity for small businesses to get involved,” Ontario’s Minister of Finance, Vic Fedeli, said in a press conference.

The province will not limit the overall amount of licenses given but it will seek to limit how many licenses each applicant may obtain. Approval of these licenses will be determined by the Alcohol and Gaming Commission of Ontario (AGCO).

Investor takeaway: Beyond Q3

The final details pre-legalization have been set and is now up to the consumers to provide feedback and determine actual numbers and which product will get a leading advantage.

Investors are about to embark on a potential ride of excitement as the cannabis market gets attention from all around the world. Experts have indicated the true market rush may come at a later time, when the global opportunity makes itself more apparent and once legitimate numbers for the Canadian market come in.

“In my opinion the next 3 quarters will separate the cannabis space from those generating meaningful revenue and those that aren’t,” Knight said.

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.