For once, the cannabis sector actually had a good week last week as many of the sector’s biggest names posted gains well into the double digits.
Is this a sign of things to come? Possibly, says Raymond James analyst Rahul Sarugaser, whose sector update to clients on Friday pointed to positive developments in both the retail market in Ontario and the legal framework in the United States.
It’s been a heck of a bad stretch for the pot stocks, as the space has been reeling from an exodus of investors and a capital market that has all but dried up. The bubble seems to have burst on the investment front, with top names like Canopy Growth Corp and Aurora Cannabis dealing with steep declines in share price over the past half year.
The culprit seems to be a lack of market faith in the eventual profitability of licensed producers in Canada, many of whom had promised huge sales numbers and attractive margins as Canada’s pot industry gains its multi-billion dollar footing. But so far the evidence has not been born out, with revenue numbers actually declining over recent quarters, in part driven by a slow rollout of retail stores across the country.
Ontario’s cannabis debut has been a focus of concern, and, in particular, its lottery system which has so far produced only 67 retail licences, a small number for Canada’s most populous province. But last Thursday, the Ontario government announced that it would be doing away with the lottery system and have the open market decide on pot store numbers in the province, with a ballpark figure of a possible 1,000 stores being floated.
Sarugaser says this is the kind of shot in the arm that the Canadian industry needs.
“This massive potential increase in the points of retail cannabis access, we believe, would have a material, positive effect on ailing licensed producers’ domestic cannabis sales, particularly those that suffered from weak Ontario sales during the last couple of quarters,” he wrote.
At the same time, Sarugaser noted movement in the US House Judiciary Committee which last week passed the MORE Act that proposes to remove cannabis from the list of federally controlled substances. The analyst wrote that it’s unlikely that the bill will get a vote in the Senate during the present congress, meaning that the bill’s future chances will depend on the makeup of Congress after the 2020 US elections.
“We suspect that this bill is a response to the SAFE Banking Act passed last month, which eased restrictions on financial firms engaging with legal cannabis entities, but included no provisions for cannabis de-scheduling, or for reconciliation among those ] oppressed by the War on Drugs,” Sarugaser writes.
“While the bill may be largely symbolic, we see it as a positive step in the direction of US cannabis legalization. We suspect the move fueled much of the investor enthusiasm we saw yesterday, especially among US multi-state cannabis operators (MSOs),” he wrote.
As a further update on the sector, Sarugaser relayed that the US Drug Enforcement Agency (DEA) had removed CBD and more than 30 other cannabinoids from the list of controlled substances, so long as the material contains less than 0.3 per cent THC by dry weight, a ruling that could have a positive impact on companies using chemical synthesis or biosynthesis to produce cannabinoids.