We are launching a brand new series called "Best and Worst of the Month" where we discuss the extreme price movements of the month.
The cannabis sector has undergone an incredible transformation in the last year as both Canada and the U.S. made significant progress in legalization. Canada legalized recreational pot on October 17 this year while the U.S. is getting closer to legalizing industrial hemp through the 2018 Farm Bill. We are the dedicated cannabis coverage on SA where we cover over 60 individual stocks and cannabis-related topics. However, we think it is important to take a step back and review the biggest movers in the cannabis sector each month. It's easy to get lost in the weeds (no pun intended) and forget the big picture. We hope to use this series to identify and examine the biggest movers.
Aphria (APHA) (33.8% loss)
It is also worth noting that during the same period of time Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF) declined 5.7% while the ETFMG Alternative Harvest ETF (MJ) declined 5.3% as well.
(TSX Website; HMMJ and MJ)
We introduced BaM in our "Best Ways To Play The U.S. Cannabis Industry (Part 2)". The stellar returns were mostly driven by the company's recently announced investment into a California-based Green Light District Holdings ("GLDH"). BaM will invest $5.2 million in the form of senior secured convertible notes and Australis Capital (otcpk:AUSCF) will lend $4 million to help fund the deal. If converted, BaM would own 89.75% of GLDH which owns 2 assets:
The assets owned by GLDH seem to be of low quality and we think the share price reaction at BaM was overdone. With 93 million fully-diluted shares outstanding, the share price gain represents an incremental $35 million in market value that was created last month. As a result, we do expect the share price to come back down as they hype dissipates over time.
(TSX Website; Body and Mind)
It is worth noting that the stock lost 31.3% during the first week of December after the company announced that its 4 retail dispensary applications were all rejected by the state of Nevada.
We couldn't attribute Cronos' outperformance this past month to any specific catalyst easily. The company did announce its Q3 results which we've analyzed in details through "Cronos: Another Weak Quarter Reinforces Our Cautiousness" and concluded that it was a rather underwhelming one. We continue to believe that the stock is one of the most overvalued in the sector and by 2019 Q1 investors will realize just how behind the company is in the domestic Canadian market.
(TSX Website; Cronos)
On December 7, Altria announced a $1.8 billion into Cronos sending Cronos shares up another 39% during the first week of December. We think the strength of Cronos shares in November could be related to the imminent announcement from Altria as insiders position themselves early-on.
The reason why Khiron rallied is rather simple. As we discussed in "Weekly Cannabis Report: Mexico And U.S. Moving Closer To Pot Legalization", Mexico's new government is proposing legislation to legalize medical and recreational pot across the country. Khiron is thought to be well-positioned to enter the Mexican market due to its recently appoint of former Mexican President Vicente Fox. We expect Khiron to continue its strong performance as Mexico moves closer to legalization and Khiron continues its expansion in LATAM. We also believe that Khiron would be an ideal takeover target for larger companies looking for a platform investment in LATAM.
(TSX Website; Khiron Life Sciences)
Charlotte's Web has benefited from recent momentum behind the 2018 Farm Bill which also included the Hemp Farming Act. The recently released Q3 results were disappointing and revenue essentially stalled from Q2, however, management attributed the slowdown to logistical issues related to an overhaul of branding and packaging that pushed sales into Q4. We think the stock remains one of the best-positioned to benefit from a secular trend of increasing acceptance and demand for hemp-derived CBD products
(TSX Website; Charlotte's Web)
MedMen's problems were well-documented by us including its recent CFO departure and downsized equity offering. The company reported its calendar 2018 Q3 results that again shocked investors with a $66 million loss and the company burned through a massive amount of cash due to bloated corporate expense structure and management compensation. We think MedMen management has clearly mismanaged its pace of expansion as revenues aren't keeping up with expenses fast enough. The financing market can be volatile and its recent stumble has reminded investors of the risks for companies that rely on frequent visits to the financing markets. We rate MedMen shares Underperform because we think the company is running out of money as its expansion requires a huge amount of capital that will need to be financed through additional equity raises. For example, the company needs to start from scratch in Florida and it has signed leases that will continue to incur additional costs in the months to come.
Aphria became the biggest loser last month, which is a little surprising to most of us. Granted that Aphria kicked off the Q3 earnings season with a challenging report filled with operational challenges, we think the drop last month was a reversal of gains related to reports by Globe and Mail that Altria is in talks to acquire a minority stake in Aphria. Aphria remains one of the better-positioned in Canada it trades at cheaper valuations compared to Canopy (CGC) and Aurora (ACB). However, the stock has been under pressure after the short report released in the first week of December.
On Monday, December 3, Hindenburg and Quintessential published a joint research piece on Aphria where the authors had a target price of zero dollars for Aphria. They accused the company of acquiring empty shell companies in Latin America that are owned by an insider. We analyzed the situation in details in "Aphria: From Nuuvera To Scythian, It's DéJà Vu All Over Again."
The best performers during the month of November were influenced by several macro events including the potential legalization of industrial hemp in the U.S. and Mexican legislation to legalize recreational pot. It also includes developments specific to companies such as Body and Mind. For the worst performers, the problems were more company-specific. MedMen's problems were self-inflicted and could take a few quarters to resolve. Aphria remains well-positioned and most Canadian stocks declined to various degrees.
Cannabis Stocks Performance 2018 YTD
Below summarizes the 2018 performance of our coverage universe. We are working as hard as we can to expand our coverage so please bear with us as there are many interesting stocks yet to be included here!
(Prices as of November 30, 2018)
Author's Note: We also publish a widely read Weekly Cannabis Report, which is your best way to stay informed on the cannabis sector. We are the only place to find detailed research on over 50 cannabis companies.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.