Marijuana Stocks In 2019: Time To Separate ‘Winners From The Sinners’

For the marijuana industry, observers say, 2019 will be a year of reckoning after Canada’s marijuana stocks implode. Or, it might be the year of better U.S. banking laws, kicking open the gates for expansion. Maybe it will be the year of CBD, after the 2018 Farm Bill legalized industrial hemp. Or, it will be the year of CBN, or THCV, or other cannabis compounds you haven’t heard of yet.


Whatever combination of the above 2019 will be, worldwide consumer spending on legal cannabis is expected to jump 40% to $18.1 billion next year, according to Arcview and BDS Analytics. The research firms expect $14.4 billion of that to come from the U.S., where cannabis isn’t even federally legal but the market is nonetheless the biggest.

Still, there’s a sense among some that the party might be a bit tamer a year from now, after wild swings in shares of marijuana companies Canopy Growth (CGC), Cronos Group (CRON), Tilray (TLRY) and Aurora Cannabis (ACB).

Marijuana Stocks Correction Or Bifurcation?

“I think a correction is likely to come after reporting for Q1 of 2019,” Micah Tapman, managing director at Canopy Ventures, a Colorado cannabis-focused investment firm, said in an interview earlier this year. “I think that the numbers are going to be pretty humbling for most of those Canadian companies.”

Canadian marijuana stocks on U.S. exchanges have crumbled from the pre-recreational-legalization highs. U.S. marijuana stocks trading in Canada have also slid. But if 2019 isn’t a year of humbling, perhaps it will at least be a year of growing up, as Wall Street digs deeper into the industry’s finances.

Investors, largely, still don’t differentiate among the companies whose products line dispensary shelves. That’s a sign that buyers of marijuana stocks are still mostly retail investors, said Todd Harrison, founding partner and chief investment officer of CB1 Capital Management. But when the big money jumps in, marijuana stocks will start to diverge more.

“Presumably, institutional coverage is going to help to bifurcate the winners from the sinners,” he said.

Ongoing ‘Sh*tshow’ For Canadian Cannabis Market?

Despite Constellation Brands (STZ) investing $4 billion in Canopy Growth, none of the big marijuana stocks in Canada have fully proven themselves, some analysts argue.

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Many cannabis companies are losing money as they fight for available business licenses. Walsh also predicted that Canada’s marijuana stocks bubble would pop or at least deflate next year.

Cowen analyst Vivien Azer said that Canada, where recreational legalization took hold in October, still has a few things working in its favor. Increasingly popular forms of consumption like vaping, beverages and edibles go on sale next year in Canada, she notes. Ontario, Canada’s most populous province, also gets physical retail dispensaries, which many customers prefer over online ordering.

But due to shortages of recreational pot amid cramped production capacity, Ontario said it will take a “phased approach” to handing out licenses for those stores. The province will hand out 25 licenses via lottery. Licensed producers won’t get any of those first 25.

Most execs of the big Canadian cannabis producers also expect shortages to last at least through much of 2019. Some say it will last longer. Others have complained openly — as in, outright calling it a “sh*tshow” — about the way Canada’s government set up the recreational market in the first place.

The difficulties in Canada’s legal recreational market, Walsh said last month, could offer a preview of the coming scene in the U.S.

Boris Jordan, executive chairman of Curaleaf, said in October that a “repositioning” was taking place in marijuana stocks, as more investors ditched an overvalued Canadian market for the cheaper, bigger, higher-potential one in the U.S.

Banks Wait For Green Light On Marijuana Industry

One big blockage in the way of that potential? Banking. Even as JPMorgan (JPM) and Goldman Sachs (GS) pitch in for the likes of Constellation and Altria, nobody knows when Congress might lift the banking restrictions that have stifled expansion and kept much of the industry running on cash rooms.

Harrison, whose firm focuses on cannabis’ medical and wellness potential, said that with the farm bill out of the way, all eyes would be on banking reform in 2019. Banking reform, Harrison said, would “open the spigots for demand.”

Banking reform hinges on two laws. One, the SAFE Act, bars the federal government from punishing banks that serve the marijuana industry in states that have legalized it.

The other, the STATES Act, goes further. That law — sponsored by GOP Sen. Cory Gardner of Colorado and Democratic Sen. Elizabeth Warren of Massachusetts — keeps the feds out of states’ pot policies altogether. It would also open up banking and tax deductions to the industry.

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Recent signals haven’t been favorable. A U.S. Tax Court ruling, filed in November, upheld section 280e of the IRS tax code. That section bars deductions for any company whose business “consists of trafficking in controlled substances.”

And at a recent Cowen & Co. cannabis industry summit, presenters for a panel to discuss regulations felt that the STATES Act might not pass until after the 2020 election. The main reason, they felt, was Warren, a vocal critic of President Donald Trump.

“The extent that Elizabeth Warren is at all presumed to be a candidate in the 2020 election, even just in the Democratic primary, our panel participants were hard-pressed to envision President Trump signing a bill that was co-sponsored by Elizabeth Warren,” Azer said.

CBD Status Still Hazy After Hemp Legalization

The 2018 farm bill that President Trump is expected to sign into law includes a provision that legalizes industrial hemp. Industrial hemp is a source of cannabidiol, or CBD. CBD is believed to, and is often used to, reduce anxiety, induce sleep and have anti-inflammatory effects — without the psychoactive punch of THC.

Market research firm Brightfield estimates that U.S. CBD sales will stretch 55% higher to $648 million in 2019. Canopy Growth has said it would enter the U.S. hemp market if the farm bill passed. So has Cronos Group.

But CBD’s exact legal status on a federal level is still unclear. The farm bill would remove hemp-derived substances from Schedule I of the Controlled Substances Act, the most restrictive category.

But, according to the Brookings Institution, producers would need to make hemp-derived CBD and other cannabinoids exactly according to the farm bill’s guidelines. Other agencies still need to weigh in, potentially delaying a megacorporation exodus toward CBD.

The DEA in September moved some FDA-approved CBD products to the less restrictive Schedule 5 category. But the new farm bill wouldn’t change FDA policy preventing CBD from being marketed as a dietary supplement, said Patrick Goggin, a senior attorney at Hoban Law Group.

For now, CBD can be used in pharmaceuticals. The FDA approved a CBD-based anti-seizure drug, GW Pharmaceuticals’ Epidiolex, in June.

Meanwhile, Harrison, of CB1, said two other cannabinoids — CBN and THCV — could become standouts next year. THCV, or tetrahydrocannabivarin, is often said to function as an appetite suppressant. CBN, or cannabinol, is said to work as a sleep aid.

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More Ways For Marijuana Stocks To Come Public?

The industry in 2019 is likely to continue prying open the cracks in barriers to investors’ cash. Take, for instance, MTech Acquisition (MTEC), a blank-check company with no operations whose principal office is, technically, someone’s house.

A blank-check company goes public largely to buy up another company and, in turn, bring that company public. For MTech, that target company is MJ Freeway, a cannabis tech firm whose backers include early Facebook (FB) investor Roger McNamee.

Jessica Billingsley, MJ Freeway’s CEO, said in an interview last month that the acquisition by MTech saved MJ Freeway “at least six months, if not a year” in time otherwise spent trying to go public via an IPO or other route.

The time saved could be crucial. Billingsley, in a presentation announcing the merger, said MJ Freeway plans to pursue an “aggressive” acquisition strategy. As competition simmers, the months ahead will open up the industry to more mergers and acquisitions.

“In the next four to six months, there is so much movement and consolidation and opportunity in cannabis that there is a very real timing consideration,” she said in the November interview.

Just Chill To The Next Episode

Which companies endure longer-term may come down to strong branding, Cowen analysts say. But for now, they add, U.S. companies are likely to focus on expanding as they wait for more regulatory dominoes to fall in 2019.

Azer said that marijuana producers could learn from the shifts in the alcohol and tobacco companies the cannabis industry is trying to upend. Those industries, she said, have shifted to things like vaping and spiked seltzer to offset weaker demand in old standbys like beer and cigarettes.

“The lesson for manufacturers is to expect a competitive landscape that reflects the consumers’ desire for choice,” Azer said. “Which isn’t to say that every company should be all things to all people.”


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