Weekly Cannabis Report: Canopy's Soul-Searching Moment

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Includes: ACB, CGC, CRLBF, CRON, CTST, CWBHF, GNLN, HMLSF, HRVSF, MEDIF, MJ, MMNFF, SNNVF, SPRWF, STZ, TCNNF, TLRY
by: Cornerstone Investments
Summary

The cannabis sector cratered once again last week, wiping out most of the gains in 2019.

Canopy Growth reported disappointing results with recreational revenue declining for a second quarter in a row.

Earnings season is underway and so far U.S. companies have reported robust growth while Canadian LPs struggled to turn profits.

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 crashed hard last week. Horizons Marijuana Life Sciences Index ETF (HMLSF) dropped 7.6%, ETFMG Alternative Harvest ETF (MJ) lost 8.1%, and Horizons U.S. Marijuana Index ETF dropped 2.5%.

(Source: Bloomberg)

Canadian Large- and Mid-Cap: Canopy (CGC) and Tilray (TLRY) both reported calendar 2019 Q2 results that disappointed investors. Canopy reported the second consecutive quarter of declining recreational sales, dimming hopes for its near-term profit outlook. Aurora (ACB) also suffered from the fallout and dropped 8% along with Cronos (CRON).

Canadian Small-Cap: Supreme Cannabis (OTCQX:SPRWF) reported 2019 Q2 revenue and gave an upbeat revenue forecast for next year; the stock rose 27% in a down market. MediPharm (OTCQX:MEDIF) also saw revenue and EBITDA jumping in its latest quarter but the stock was under pressure. CannTrust (CTST) dropped 34% as the large gain from an ETF rebalancing in the prior week was reversed amid continued regulatory uncertainty.

(Source: Author, based on public data)

U.S. Large-Cap: Cresco Labs (OTCQX:CRLBF) jumped 19% last week without major news as other MSOs stayed flat. Charlotte's Web (OTCQX:CWBHF) dropped 4% after the company reported muted Q2 results. MedMen (OTCQB:MMNFF) gained 6% after announcing calendar Q2 revenue and a 20% SG&A reduction. Harvest Health (otcqx:HRVSF) dropped 5% after announcing Q2 results and a settlement with the regulator in Pennsylvania to revoke 2 licenses. Trulieve (otcpk:TCNNF) was flat after reporting a strong Q2.

U.S. Small-Cap and Ancillary: Greenlane (GNLN) dropped 24% after announcing weak 2019 Q2 results; the stock has lost 62% of its IPO value. Sunniva (otcqb:SNNVF) dropped 44% after disclosing that the construction of its California facility has experienced a significant delay.

(Source: Author, based on public data)

Industry News

Looking Ahead

Canopy Growth is in trouble - not financially as the company still has over C$3 billion in its bank account despite blowing through more than C$2 billion in less than 12 months - but operationally and strategically. The company is finding little success overseas while mounting competitive pressures in Canada is causing jitters among investors. The last quarter was bad and investors could find nothing to cheer about. Canopy reported total net revenue of C$90.5 million which declined 4% from last quarter. However, recreational sales in Canada declined for the second consecutive quarter, from C$72 million in calendar 2018 Q3 to C$61 million this quarter. Canopy struggled while the whole cannabis market in Canada continued to grow. The Canadian recreational market grew from C$55 million in monthly sales to $86 million in May, with Canopy losing market share to other LPs.

(Source: Public Filings)

Canopy's troubles marked a near-term defeat of Constellation Brands (STZ) and a temporary setback for the company. Constellation has publicly expressed multiple times that it is not happy with Canopy's progress and it had to walk back its previously stated target of $1 billion run-rate revenue. However, the abrupt firing of Bruce Linton signals a significant change that is about to happen at Canopy. We expect a new CEO with deep operational experience in the CPG or related industry to be announced in short order accompanied by significant cost-cutting and a major overhaul of its strategy to a focus on profitability and financial discipline.

For the entire cannabis sector, Canopy remains the most-watched stock given that it has the largest market cap and wide following among institutional investors. We think Canopy's success will indirectly affect most of the companies in this sector and we should all hope that Canopy lands its new CEO soon so that it could stabilize investor confidence and reignite optimism in the sector.

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.