Top stocks picks from the U.S. vs Canada Cannabis Showdown included Cronos Group Inc. (TSX:CRON) and Canopy Rivers Inc. (TSX:RIV)
SmallCapPower | September 23, 2019: On Day One of the 2019 MoneyShow Conference in Toronto, we got a chance to listen to the U.S. vs. Canadian Cannabis Showdown with John Zamparo and Steve Hawkins. John Zamparo is an equity analyst at CIBC World Markets and Steve Hawkins is the CEO of Horizons Exchange Traded Funds (ETFs).
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Two significant points stood out from this panel. First, it was the opinion of one of the panelists that Canada “screwed up” the roll out of recreational legalization from a regulatory standpoint, citing the different regulations in each province and saying it puts Canadian LPs at a real disadvantage when competing with the U.S. players on a global scale. Second, that U.S. Multi-State Operators (MSOs) were lobbying against the federal legalization of cannabis in the United States, since they have already spent so much money on their operations on a State level, federal legalization could challenge their competitive advantages.
The panelists mentioned that the reason for the decline in cannabis stock prices since March 2019 has been twofold. First, there has been a change in sentiment. Up until legalization in Canada, share price appreciation was being driven by news of licenses or funded greenhouse capacity, with promises of ‘hockey stick’ revenue growth. Now investors are looking for execution and profitability. Second, a lot of profit taking has occurred and much of the fast money has left the sector.
The good news, according to the panel, is that cannabis is a $100B+ global opportunity in the next three to four years and Canadian cannabis companies have a fantastic opportunity because they are fully recreational legalized and are building intellectual property (IP). Big Tobacco, Pharma, and Alcohol are interested in this sector, as their own sales are getting cannibalized by cannabis companies. However, Big Pharma and Tobacco are not going want to apply for their own licenses and cultivate; thus they will invest in companies with IP. Canadian cannabis companies have the opportunity for a big partnership.
The U.S. is the largest cannabis market in the world and the opportunity there could be $30B a year over the next five to six years. The U.S. still has some regulatory hurdles; the SAFE Banking Act, which is going up for vote in the House of Representatives later this month, could be a catalyst for U.S. cannabis companies. The SAFE Banking Act would give protection to financial institutions in states that have chosen to legalize marijuana to do business with cannabis companies without federal intervention. This would allow banks and credit unions to offer loans, credit lines, and checking accounts to cannabis companies without the fear of financial or criminal penalties being levied against them by the DOJ.
Catalysts for Canadian cannabis companies included beating analyst revenue and earnings projections as well as any big CPG partnership and additional global expansion opportunities. A big catalyst on the downside could be the vaping epidemic currently ongoing in the U.S. and Canada. John Zamparo’s top picks were Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) and Canopy Rivers Inc. (TSX:RIV).
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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