Tuesday, January 14, 2020
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...And how 2020 could change the industry’s fortunes
To say the cannabis industry has gone nowhere over the last year and a half might be a generous assessment.
In 2019, the sector dropped 32%, against an increase of 29% for the S&P 500, according to data from Stifel. And so during a year in which investors could "throw a dart" and make money, the cannabis sector lost around a third of its value.
The decade closed with cannabis stocks getting their comeuppance as part of the 2010s decade-ending mini-bubble trifecta: Blockchain, cannabis, and fake meat.
But it might not have to be this way forever.
In a note to clients published Monday, analysts at Stifel took a broad overview of the cannabis sector and outlined the challenges, and potential opportunities, facing these stocks in the year ahead. In the firm’s view, the sector's decline was a "[consequence] of the industry's rapid development colliding with a slower developing opportunity particularly in Canada, the first developed market for adult use."
It added: "The themes propelling the sector to over $50 billion in public enterprise value now stand diametrically opposed to the themes currently prevailing in the sector.”
Easy financing has turned into a challenging financing environment. A clear path to regulatory easing has become more muddied. The vaping crisis has crimped progress in the entire space, and incentives for large companies to enter are limited.
Back in 2018, it seemed like every major consumer-packaged goods company was toying with the idea of cannabis or CBD products. In August 2018, Constellation Brands (STZ) took a $4 billion stake in Canopy Growth (CGC), affirming to industry bulls the here-to-stay nature of cannabis and hemp products as the next great consumer category.
"August 15th, 2018 was a watershed event for the industry bringing broad and undifferentiated enthusiasm to public cannabis equities," Stifel’s analysts wrote. "This event provided a lifeline to many companies, but as we consider the landscape 16 months later, very few public cannabis companies are in a better position today versus August 14th, 2018."
Within the last month, Stifel has cut year-ahead revenue expectations for all four of the cannabis companies under its coverage area: Canopy Growth, Aurora Cannabis (ACB), Tilray (TLRY), and Cronos (CRON). In August, Constellation took a $54.8 million loss on its investment.
Jessica Rabe, co-founder at DataTrek Research, wrote Monday that 2020 still presents the cannabis space with a huge opportunity for clarity regarding its biggest business issue: Legalization in the U.S.
“Public marijuana stocks are a call option on a win by a liberal Democratic candidate in the 2020 Presidential election,” Rabe said.
And while expected gridlock in Congress — in the event of either a Democratic or Republican victory in the presidential race — could hamper progress on legalization, Rabe notes that both Bernie Sanders and Elizabeth Warren “have said they would take executive action to de-schedule marijuana under the Controlled Substances Act, which would essentially legalize the drug at the Federal level.”
Rabe also notes that several states — including Florida, Connecticut, New York, and New Jersey — could be looking at legislative or ballot-based pushes to legalize marijuana use.
“Passing adult-use and sales in highly populous states with big cities, such as New York and New Jersey, could also meaningfully boost momentum for the U.S. legal marijuana industry,” Rabe added.
“But all that said, legalizing marijuana on a state by state basis is still a difficult route for the industry, as it leaves many existing challenges that come with its Federal illegality,” she said.
In Stifel’s view, the cannabis industry still represents a $100 billion opportunity in the U.S. and $200 billion globally. And this is the TAM that Stifel believes underwrote the 2018-era investments in the space.
But this kind of market opportunity only exists in a world in which the U.S. has legalized marijuana use at the federal level. A process that stands to take a major step forward — or backward — this November.
What to watch today
6 a.m. ET: NFIB Small Business Optimism, December (104.8 expected, 104.7 in November)
8:30 a.m. ET: CPI month-on-month, December (0.2% expected, 0.3% in November); CPI excluding Food & Energy month-on-month, December (0.2% expected, 0.2% in November); CPI year-on-year, December (2.4% expected, 2.1% in November); CPI excluding Food & Energy year-on-year, December (2.3% expected, 2.3% in November)
6:55 a.m. ET: J.P.Morgan (JPM) is expected to report adjusted earnings of $2.36 per share on $27.90 billion in revenue.
7 a.m. ET: Delta Air Lines (DAL) is expected to report adjusted earnings of $1.40 per share on $11.34 billion in revenue.
8 a.m. ET: Citigroup (C) is expected to report adjusted earnings of $1.84 per share on $17.88 billion in revenue.
8 a.m. ET: Wells Fargo (WFC) is expected to report adjusted earnings of $1.11 per share on $20.08 billion in revenue.
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