We are making a few changes to our Hedgeye Cannabis Best Ideas List:
- We are adding Canopy Growth Corporation (CGC), Village Farms International (VFF), and 4Front Ventures (FFNTF) to the LONG bias list.
- We are adding Aurora (ACB) and Tilray (TLRY) to the SHORT bias list (both companies report today).
- We are removing Indus Holdings (INDXF) and Greenlane Holdings (GNLN) from the SHORT bias list.
CANOPY GROWTH (CGC) – ADDING TO LONG BIAS LIST
We have been bearish or SHORT CGC since we launched coverage of the industry over two years ago. While there is still a significant amount of pain unfolding in the Canadian cannabis sector, the industry will mature, retail points of distribution are growing, and CGC is positioned to capture significant market share. The question that remains is when will the market make that pivot. In the meantime, CGC is saddled with the burden of owning a low-quality US MSO. One day, CGC and the broader Canadian cannabis market will turn the corner – it's just a question of timing.
AURORA (ACB) – ADDING TO SHORT BIAS LIST
So far, in November, ACB is up 140%, and it's only November 9th. Things move fast in the cannabis industry but not in Washington. Despite the Senate control is still unclear, the market has already determined that legalization is imminent. ACB is still down 62% for the YTD because its fundamentals are among the worst of the Canadian LP's. Over the past five years, it has been as high as $147 to as low as $2's and now trades at $9.70. As Aurora desperately tries to transform itself into a legitimate company, the challenges are real, and the outlook (recent guidance) is unhealthy. The company reported earnings before the market open today, and the outlook provided still appears dismal. The company is scrambling to achieve positive EBITDA by mid-2021, which we don't believe to be possible. ACB is struggling to keep a foothold on the Canadian market, with a cash burn that has averaged C$142 million over the past year and C$185 million last quarter. ACB’s balance sheet and cash flow are disastrous, with the company facing violating a bank covenant by year-end.
TILRAY (TLRY) – ADDING TO SHORT BIAS LIST
Tilray is on a path to take a step back from the Canadian cannabis market, and that is a good thing? It has no choice. Like ACB, TLRY can only survive and fund operations with an ATM that is dilutive to shareholders. The company is shifting aggressively to the International medical cannabis markets, with its Portugal (GMP-Certified) facility serving as a production hub. The Portugal facility offers the opportunity for both indoor production space and outdoor grow space of at least 2.4 million square feet each. The total production space is 2.7 million square feet. The company is planning on having its International Medical segment revenues "exceed our revenue in Canada over the course of the next several years." Over the past year, TLRY has improved the cash burn as it has shed or closed several facilities. The combination of stepping back from the Canadian market and focusing on international will create profitability issues for the foreseeable future. While the global market may have better margins, the current Canadian production costs of over $3.40 per gram and declining revenues per unit sold will keep profitability a long way off. I expect that TLRY guidance is revised lower or withdrawn in the upcoming earnings release.
ELECTION RESULTS BOLSTER HOPES FOR BANKING BILL
The cannabis industry and especially Canadian cannabis companies are euphoric about the prospects for making legislative progress on Capitol Hill with a Biden presidency, even though it seems likely that Republicans will continue to control the Senate. The wild card is Mitch McConnell, and how big of an impediment he will be in passing cannabis legislation, particularly the SAFE Act. Many Washington insiders point to significant progress in building support for the SAFE Banking Act before the current Presidential race. The MORE Act, which is expected to get a floor vote in the House before the end of the year, will be the first indication of how things will proceed. As JT Taylor said in our cannabis election speaker call, the Senate’s makeup will not be finalized until January, pending the Georgia race outcome. Still, it appears more likely that Republicans will have a slim majority, but anything can happen in the runoff. Another significant change coming in the new session is a greater number of Republicans from legal states. The mini red wave within the green wave suggests new incremental legislation over the next two years. The political impetus for lawmakers has changed, especially with more Republican lawmakers representing marijuana states. Current thinking is that the election results indicate that the country is clearly on a full legalization path.
WILL NJ TAKE MORE THAN A YEAR?
Gov. Phil Murphy said last week the "it could take as long as a year to begin recreational sales of cannabis in New Jersey." The constitutional amendment approved by voters to legalize sales and use of the drug for adults 21 and older will go into effect on Jan. 1, 2021. However, the state legislature and Murphy need to agree on enabling legislation that formalizes the industry's legal and regulatory structure. Sen. Nicholas Scutari introduced that bill on Friday. Also on Friday, Gov. Murphy said that Dianna Houenou, an associate counsel and senior policy adviser to the governor, will serve as the chair of the five-person commission, and Assistant Department of Health Commissioner Jeff Brown, head of the state's medical-marijuana program, has been named the commission's executive director. The fastest route to making recreational cannabis available to New Jersey consumers would be through the state's 12 existing medical marijuana dispensaries, which favors the following companies: Acreage Holdings (ACRGF), Curaleaf (CURLF), Green Thumb Industries (GTBIF), TerrAscend (TRSSF), and Columbia Care (CCHWF). The vital issue is maintaining an adequate supply for the 90,000-odd patients registered to receive prescriptions, but supply and demand are already out of wack in NJ. We hear that some dispensaries do not even have the space to accommodate the level of demand that personal-use sales would bring. This makes it contingent on the industry to ramp up supply as fast as possible.
