SCS: What's Happening on November 5, 2021
Is now the time to start buying MSOs? Trulieve, Curaleaf, Green Thumb, Cresco and Ayr all have big moves. Canaccord downgrades Canopy Growth. Jay laughs as Auxly overtakes Canopy in market share.
Last night I was tweeting that I’d rather sit on the sidelines of the American cannabis trade until there was real momentum towards changing the status of cannabis as a schedule I drug.
I received a DM shortly afterward from Todd Harrison promising me he’d buy me two steak sandwiches if there wasn’t major political cannabis movement in the US over the remainder of the year. As a side note, I think people offer to buy me steak at a high clip. I guess I look like a steak guy? I don’t know. They aren’t wrong. I once ate two steak dinners in back-to-back afternoon meetings out of courtesy. Let’s save that story for another day.
I digress.
Less than 24 hours later, Marijuana Moment released word that a Republican-led bill to legalize and tax marijuana is imminent. They tell us,
The measure is being framed by advocates as a compromise between simple descheduling as proposed by other GOP lawmakers and wide-ranging comprehensive legislation that Democratic leaders are championing.
The bill is reportedly being led by South Carolina Representative Nancy Ruth, a Republican. Titled the States Reform Act, it is currently in the feedback stage amongst key stakeholders and is expected to have a final version filed later this month.
High-level points include:
Federal descheduling
A 3.75% excise tax
The Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau would be the Chief Regulator
FDA would have a role similar to what it does for alcohol
The legislation would grandfather existing state-licensed cannabis operators into the federal scheme
A mandatory 21 age limit for recreational cannabis
This is the kind of event that sideline cannabis investors like myself have been waiting for. I’ve been saying for years, the second that names like Trulieve, Curaleaf, and Green Thumb can get access to Robinhood and WeBull, we will start to see a retail-driven craze that will make the Canadian cannabis bubble look tiny. Regardless of common sense fundamentals, getting rich off pot with names you can buy products from around your block will be extremely marketable to those same “investors” who went long GameStop, AMC and Bed Bath and Beyond.
Let’s take a look at US Cannabis stocks today:
Curaleaf (CSE: CURA) up 11.6%
Trulieve (CSE: TRUL) up 15.5%
Green Thumb Industries up (CSE: GTII) up 13.9%
Ayr Wellness (CSE: AYR.a) up 13.1%
Cresco Labs (CSE: CL) up 10.5%
Of course, this happens on the same day that Canada’s number one bag boy Matt Bottomley over at Canaccord downgrades Canopy Growth off the back of another pathetic quarter. The star sell-side analyst who drove the Canadian cannabis bubble to great heights has downgraded Canopy from hold to sell, and from $25 to $12.
When it comes to that US cannabis trade, we have seen multiple bills come and go over the last few years. Every time there is political movement, people like myself start to shuffle our chips and ponder if it’s time to hop back in.
Perhaps, Todd Harrison won’t owe me those two steak sandwiches after all.
Macro: The Macro Themes Surrounding Equities
China Evergrande raised more than $50 million last month by selling two of its private jets (WSJ)
Pfizer’s Covid antiviral pill slashes hospitalisation risk, trial shows (FT)
U.S. Trade Deficit Hits Fresh Record on Goods Demand, Higher Inflation (WSJ)
Investors Spent Millions on ‘Evolved Apes’ NFTs. Then They Got Scammed (Vice)
Large-Cap News We Can’t Ignore
Meta Company claims Zacks stole their name (Meta.Company)
Cathie Wood’s ETFs bought ~289k shares of Zillow (BBG) then sold 3.9M shares the next day (BBG).
Braden Maccke takes on Rogers with “The Rogers Anti-Pope Showdown” (TDD)
Small Cap News
Glass House Enters Legal Battle To Take Control Of Retail Assets (TDD)
New Found Provides Update on Its QA/QC Program (BW)
Tetra Bio-Pharma Cancels $10 Million ATM Financing (TDD)
Canadian Small Caps With Jay Lutz
Canadian cannabis, by all accounts, has been a complete disaster.
Despite the literal billions of dollars thrown at the space by investors from all walks of life, seemingly no one is capable of operating in the space, at least as public names go. This was further demonstrated this morning by Canopy Growth (TSX: WEED), whom despite once having multiple billions of dollars on its balance sheet, can’t seem to figure out how to grow a plant and sell it profitably.
The company this morning posted second quarter results, highlighting $131.4 million in revenue - a figure which declined both quarter over quarter and year over year, while missing consensus estimates. EBITDA meanwhile - you know, that adjusted number that is supposed to exclude everything that makes the company look bad - was an impressive -$162.6 million.
The outlook provided by the company meanwhile further pushed out positive adjusted EBITDA timeline estimates, despite the company last year saying “this year is the year!”
Performance for the quarter, and the sentiment included within the accompanying news release, was so poor that I’m left wondering if the execs over at Canopy read the same report from Stifel earlier this week that I did, where they commented that “With HEXO’s challenges, Canopy is incentivized to frame a more challenging backdrop in the Canadian market.” Of course, they were referring to that the other major Canadian cannabis disaster that is Hexo Corp (TSX: HEXO), whom right now seemingly has limited options to avoid seeing its lenders take the entire company after a p*ss poor convertible debt deal conducted earlier this year.
The humourous part of it all, is that Auxly Cannabis (TSX: XLY), a cannabis operator with a meager 3% of the market cap of Canopy, has now overtaken the “giant” in terms of Canadian market share as per a report by Matt Lamers over at MjBizDaily.
As the saying goes, money can’t buy you everything.
Just ask Tilray about that, who’s combined pre-merger market share in Canada fell from 20% to 12%.