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Weekly Cannabis Report: FDA Pours Cold Water On CBD

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Includes: ACB, CGC, CTST, CVSI, CWBHF, GRWG, HMLSF, MJ, MMNFF, SNNVF, TGODF, WDDMF
by: Cornerstone Investments
Cornerstone Investments
Long/short equity, long-term horizon, cannabis industry
Summary

Cannabis stocks were little changed due to U.S. thanksgiving.

Financing remains the key concern for cannabis stocks with weak balance sheets and many firms are issuing equity at historically low prices.

We expect more corporate failures in the coming months as weak players can no longer fund unprofitable operations.

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

Trading Summary

Trading was muted due to Thanksgiving. The Horizons Marijuana Life Sciences Index ETF (HMLSF) dropped 3.2%, the ETFMG Alternative Harvest ETF (MJ) dropped 1.7%, while the Horizons U.S. Marijuana Index ETF rose 0.2%.

(Source: Bloomberg)

Canada: Canadian stocks were little changed amid U.S. Thanksgiving. Canopy Growth (CGC) rose 1% after unveiling cannabis 2.0 products. Aurora Cannabis (ACB) dropped 7% and it opened a large store in Edmonton. The Green Organic Dutchman (OTCQX:TGODF) plunged 22% after announcing an equity offering instead of debt financing. CannTrust (CTST) dropped 11% after TSX warned of a potential delisting. WeedMD (OTCPK:WDDMF) dropped 18% after announcing a weak Q3 and an all-stock deal to acquire Starseed.

(Source: Author, based on public data)

The U.S. and International: FDA issued warning on CBD safety which caused Charlotte's Web (otcqx:CWBHF) and CV Sciences (otcpk:CVSI) to drop. MedMen (OTCQB:MMNFF) fell another 19% after posting weak fiscal 2020 Q1 results. GrowGeneration (OTCQX:GRWG) rose 14% after receiving Nasdaq listing approval. Sunniva (OTCQB:SNNVF) plunged another 36% after its California landlord issued a 30-day termination notice.

(Source: Author, based on public data)

Industry News

Looking Ahead

In an interview with Bloomberg last week, Aurora CEO Terry Booth said that he is expecting a "carnage" coming for the Canadian cannabis sector. Since the beginning of 2019, well before the sector began its current downturn, we have been warning investors about the bleak outlook for Canada. Now that the market has been in a correction for months, we think investors are becoming more realistic about the future outlook of the industry. Outside Canada, we have also expressed our opinion that the European medical cannabis market will remain tiny for the years to come, contrary to many Canadian LPs had claimed. Last week, Aurora products were suspended in Germany due to production issues and Terry Booth also acknowledged that the European market has been overestimated in the Bloomberg interview. We think the market has realized that Canadian LPs will derive very little sales from the EU which dramatically reduced their valuation.

The challenges in Canada and the EU make the U.S. market all that more important to the global cannabis industry. Last week, the CBD industry finally heard from the FDA but the message was not exactly what they were expecting. The agency said it cannot conclude that CBD products are safe for human and animal consumption. FDA's statement dampened investor enthusiasm for near-term industry growth and CBD stocks fell on the news. As the only federally legal substance in the U.S., CBD was deemed as a big opportunity for most industry players including Canadian LPs. CBD-focused players CV Sciences and Charlotte's Web both cited a lack of regulatory clarify on CBD as a primary reason for their Q3 underperformance. We expect the industry to face even more growth obstacles in the near-term as major FDM retailers could dial back their CBD plans due to FDA stance.

The global cannabis industry has experienced a roller-coaster as 2019 unfolds. As we head towards the end of the year, we will begin to review key developments that shaped the global cannabis industry this year and, more importantly, our updated view for 2020. You can review our 2019 predictions here and two of the three predictions we made have proven to be correct. The cannabis sector has seen divergent performances with several high-profile failures such as CannTrust, MedMen, and TGOD. The Canadian sector has also experienced a sharp sell-off although the U.S. sector also suffered heavy losses. The U.S. market was also hit by the vaping crisis, merger delays, and challenging financing market. These are things we didn't expect a year ago.

Looking ahead, we remain of the view that the U.S. market presents a better growth story than Canada due to its sheer size and large untapped legal market. We think Canada will enter a consolidation phase which will lead to corporate failures and a shake-up will leave only the strongest companies to survive. However, we remain confident that the global cannabis sector will enter a more healthy path towards redemption after a dramatic 2019 because the secular trend of increasing acceptance of cannabis worldwide is undeniable.

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.