Cannabis Update: Q1 2018 in Review
The concepts of legitimacy and maturity reigned during the first quarter of 2018 for the cannabis space. Despite suffering severe losses, the market saw significant developments in Canada and the US that excited investors for the remainder of 2018.
The first months of the year took the cannabis industry by storm. As the markets were celebrating an unexpected rush that started in December, a significant market correction slashed gains for company share prices.
At the time, Jason Zandberg, special situations analyst with PI Financial, told the Investing News Network (INN) that there wasn’t a particular announcement that caused the industry decrease.
Zandberg said he doesn’t think this type of trading nature is healthy for the industry, with “too much enthusiasm” causing overcorrections, which — in the end — affect new investors.
On that note, with Q1 officially behind, here INN looks back at some of the biggest trends in the cannabis space with insight from industry experts on what we can look forward to for the rest of the year.
Cannabis Q1 2018 update: Market correction and policies
Following the continued dip, experts across the board have said companies were overvalued during the rush of early January. Since this new status quo for cannabis stocks was settled, there have been research reports indicating catalysts are coming and investors should consider these stocks again.
“It’s not until the rubber hits the road in the second half of the year with the roll out of legal adult-use marijuana in Canada that we envision potential negative operational catalysts,” Javed Mirza, an analyst with Canaccord Genuity, wrote in a note.
The cannabis market took another hit earlier this year, when US Attorney General Jeff Sessions rescinded the Cole memo, a government guidance protecting legal marijuana companies operating in the country.
Policy wise, it wasn’t until very recently that Senator Cory Gardner changed the grey outlook on cannabis stocks with US assets. The Republican from Colorado announced he received a personal commitment from US President Donald Trump to not perform a crackdown on the markets.
This promise from Trump led to a rush from investors into stocks all over the cannabis public markets.
“While the Sessions action caused some consternation in the industry, we did not expect it to have a material impact and it did not,” Scott Boyes, CEO of MPX Bioceutical (CSE:MPX,OTCMKTS:MPXEF), told INN. “However, the president’s endorsement is significant in that it not only removes doubt, it gives industry players a green light to move ahead accordingly.”
Cannabis Q1 2018 update: Branding in focus
Marijuana received another endorsement from a significant figure during the first quarter of 2018. John Boehner, former Speaker of the US House of Representatives, and Bill Weld, former governor of Massachusetts, joined the board of advisors of Acreage Holdings, a multi-state owner of cannabis licenses and assets in the US.
Similarly, celebrity endorsements in the cannabis public market continued, as musician Gene Simmons himself announced a creative partnership with Invictus (TSXV:GENE,OTCMKTS:IVITF) as the new “chief evangelist officer.”
The company followed it up by changing its ticker symbol on the TSX Venture Exchange from “IMH” to “GENE.” This type of business decision relates to the industry’s need to expand its visibility ahead of retail markets opening in Canada.
Companies will be dependent in attracting consumers through the power of brands, and investors should be asking more questions about these efforts, according to former Eight Capital analyst Daniel Pearlstein, now head of business development with Canopy Rivers.
“The global cannabis industry is accelerating but the market stills seems focused on farming and oversimplified capacity based metrics,” Pearlstein wrote in a research note. “We encourage investors to think broader and think of cannabis as an ingredient.”
In Canaccord Genuity’s first research note covering MPX Bioceutical, analyst Matt Bottomley echoed the sentiment of Pearlstein by saying, “[w]e believe successful branding strategies and retail distribution will eventually determine industry winners.”
During the quarter, MedReleaf (TSX:LEAF) and Aphria (TSX:APH,OTCMKTS:APHQF) launched recreational brands, officially attempting to appeal adult-use cannabis consumers in anticipation to the legalization of marijuana in Canada.
Other companies in the space, like Hiku Brands (CSE:HIKU) and Choom (CSE:CHOO,OTCMKTS:CHOOF), have started to differentiate themselves by promoting the tactics planned for the promotion of their products, instead of reminding consumers entirely on the production capabilities of their facilities.
Hiku has been able to capture the attention of the industry at large, as Greg Taylor, portfolio manager with Redwood Asset Management, picked the company as one that impressed him the most during the first months of 2018.
“This goes to show that the market is moving away from just looking at the growers to looking at what companies are creating brands and working on distribution models,” Taylor told INN.
Cannabis Q1 2018 update: Under the radar
But what went underrepresented in the news cycle? According to several analysts that INN spoke with, issues include the continued efforts of US Congress to protect the cannabis industry from the Department of Justice, the addition of medical marijuana into insurance services for Sun Life Financial and the continued upgrades in policy from legal cannabis states in the US.
Taylor told INN that in his opinion, the decision by CannTrust Holdings (TSX:TRST) to let go of its US assets and upgrade to the TSX did not have the impact he expected.
“Once this move was made, the TRST was uplisted to the TSX, which I thought would be a major positive and the stock would see a re-rating higher,” Taylor said. “But it didn’t seem to be noticed by the market.”
In a peculiar turn of events, Maple Leaf Green World (TSXV:MGW,OTCQB:MGWFF), a public cannabis company with a late-stage ACMPR application to become a licensed producer, ditched the TSX Venture Exchange and instead will place its common shares on the Aequitas NEO Exchange, starting on April 20.
This move follows a strict enforcement by the TMX Group, the company in charge of the Toronto Stock Exchange and the TSXV, for cannabis companies listed on its exchanges to not hold any US assets.
Maple Leaf then decided to protect its interests below the border and become the first TSXV-listed company to join a new exchange. However, instead of picking a more traditional exchange for companies with holdings in the US, like the Canadian Securities Exchange, Maple Leaf picked the NEO.
Jos Schmitt, president, and CEO of NEO, said in a statement that one of the benefits Maple Leaf will see by listing with his exchange is a streamlined liquidity- and disclosure-based listing model.
Another company stock exchange announcement was the official launch of Cronos Group’s (TSXV:CRON,NASDAQ:CRON) common shares into the NASDAQ Global Market. The move by the cannabis producer provided another step signaling the maturity of this industry.
“It marks the first time a cannabis cultivator was allowed to list on any US exchange, and added significantly to Cronos’ market value,” Marc Adesso, an attorney with Waller, told INN.
The Bank of Montreal has also fully embraced the industry this year by announcing a deal with Canopy Growth (TSX:WEED) worth approximately C$175 million for over 5 million shares.
The bank also announced that a specific research analyst will focus on the cannabis market and it will also host its own cannabis-focused event for investors. Taylor called the BMO entry a big deal and said it “starts to legitimize the space.”
Legitimacy and maturity were trending themes for the cannabis industry in the early months of 2018. As legalization looms in the Canadian markets, companies are racing for a spot in the eyes of consumers’ and investors’ minds alike.
The key will be differentiating the companies able to deliver on realistic goals and able to create a lasting impression for cannabis consumers.
Looking ahead at the next quarter, cannabis investors should be ready to see more news on the development of Bill C-45, the Cannabis Act and more on the tactics from companies’ brands given the regulations by Health Canada.
More consolidation deals have been expected by analysts and experts since the beginning of the year.