Weekly Cannabis Report: U.S. Pot Stocks Are In A Correction

by: Cornerstone Investments

Canadian cannabis stocks stabilized last week while U.S. stocks continued to crater, extending its recent significant underperformance.

We remain of the view that the U.S. cannabis sector possesses superior growth potential in the long term despite a temporary correction.

Cannabis stocks will continue to be influenced by the broader equities market as investors adjust their appetite for risky assets.

Cannabis, Marijuana, Hemp, Cornerstone Investments

Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.

Trading Summary

Cannabis stocks stabilized last week amid a recovery in the broader market. The Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF) rose 1.7% and the ETFMG Alternative Harvest ETF (MJ) gained 3.6%. U.S.-focused Horizons U.S. Marijuana Index ETF continued to slide another 3.1% which extends its total loss to 22% since it was launched in mid-April this year.

(Source: Bloomberg)

Canadian Large-Cap: Canadian stocks enjoyed broad-based rebound last week. The rally was led by Cronos (CRON) which was boosted by an upgrade from research analyst citing upside from potential U.S. entry.

Canadian Mid-Cap: Aphria (APHA) and OrganiGram (OGI) were both selected by Pax Labs as its suppliers in Canada, in addition to Aurora (ACB) and Supreme. CannTrust (CTST) continued to drift sideways.

Canadian Small-Cap: Small-cap stocks saw broad weakness last week. Supreme (OTCQX:SPRWF) gained 7% after the Pax Labs supply deal. Neptune (NEPT) gained 21% after securing an extraction deal with Tilray. WeedMD (OTCPK:WDDMF) dropped 14% to more than reverse recent gains on the back of receiving its outdoor growing license.

(Source: Author, based on public data)

U.S. Large-Cap: U.S. cannabis stocks continued its free-fall mode. Vireo Health (OTCPK:VREOF) dropped 20% without any obvious catalyst. Harvest Health (OTCQX:HRVSF) dropped 6% despite announcing a distribution deal with an American trade association. MedMen (OTCQB:MMNFF) dropped 3% after acquiring a dispensary in Long Beach for $13 million. Green Thumb (OTCQX:GTBIF) dropped 8% after closing its acquisition of Integral Associates. Green Growth (OTCQB:GGBXF) lost 9% despite acquiring a Florida license holder to enter one of the hottest cannabis markets.

U.S. Small-Cap and International: TILT Holdings (OTCQB:SVVTF) dropped another 19% as news continued to ferment around its $60 million stock options grant. Elixinol (OTCQX:ELLXF) dropped 16% after raising A$50 million in an equity deal. Sunniva (OTCQB:SNNVF) dropped 23% after the company gave up its Canadian operation while scaling back to focus on California only. Body and Mind (OTCPK:BMMJ) dropped 40% in an inevitable pullback after the stock rose more than 300% in 2019, as we expected.

(Source: Author, based on public data)

Industry News

Looking Ahead

In April 2019, we wrote that investors should consider overweighing U.S. cannabis socks and reducing their exposure to Canadian cannabis stocks. We viewed the U.S. cannabis market as more appealing and attractive due to its superior growth profile. We also think the Canadian market has got off to a slow start due to a government-orchestrated supply constraint and limited retail stores across the country. However, things have not turned out the way we predicted so far with U.S. stocks underperforming its Canadian peers significantly in the last month.

The chart below shows that the newly-listed Horizons U.S. Marijuana ETF lost 15% of its value in the last month while the longstanding HMMJ (no U.S. cannabis holdings) only dropped 5%. While the entire cannabis sector has been under pressure due to an uncertain global economic backdrop and a red-hot Q1 to start 2019, we think the weakness among U.S. cannabis stocks are hard to ignore. The top U.S. cannabis plays have lost 15-25% of their values last month whereas Canadian companies managed to do much better with Aphria and Cronos reporting gains.

(Source: Bloomberg)

We think a potential reason for the underperformance includes a reversal of the strong gains seen among U.S. cannabis stocks during the last rally. Investors witnessed the uprising of key U.S. plays such as Curaleaf, Harvest, and Cresco Labs propelled by large M&A and the legalization of hemp. We remain of the view that the U.S. cannabis market is better-positioned to drive continued growth compared to Canadian companies. History has shown to us that the cannabis market can be cyclical and volatile, often driven by large-scale M&A and events. We would view the current correction in the U.S. cannabis sector as a relative buying opportunity for investors that remain overexposed to the Canadian sector. Notwithstanding what we wrote last week and our view that the downside is more pronounced for pot investors at this particular point, our favorable outlook for the American cannabis sector remains intact.

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.