Although the Canadian cannabis sector has been trending lower in recent months, there are a number of reasons to be excited about this market.
First, the recreational market is getting a much-needed boost from an acceleration of retail outlets coming online. Second, the types of cannabis products that can be sold to medical and recreational users will increase and the margins associated with these products are much more attractive than cannabis flower. Finally, Canada has been dominating the international cannabis market and has a first mover advantage in many of these markets.
Today, we are publishing the first piece in a series of three articles that cover the Canadian cannabis industry. The first piece will cover the retail focused companies that are poised to benefit from the increasing number of retail outlets. The second piece will cover Canadian Licensed Producers (LPs) that are poised to benefit from the change in type of products that can be sold to consumers. And the final piece will cover companies that have been focused on the international side of the business and have been expanding into new cannabis markets.
The Canadian cannabis retail market is an overlooked opportunity and we believe that the slow start to the recreational market (thanks to Health Canada) impacted the performance of companies that are focused on this vertical. As the number of stores allowed in each province increase and as the types of cannabis products that are allowed to be sold increase, we expect Canada’s retail market to become a much more significant opportunity and will continue to monitor this.
WeedMD: An Emerging Canadian Cannabis Retail Opportunity
WeedMD (WMD.V) (WDDMF) is a large-scale Canadian LP that has also been focused on the retail opportunity. During the last few months, the company has reported several significant developments and has become highly levered to the outdoor cultivation and the cannabis concentrate opportunity. When you combine these initiatives with the work WeedMD is doing on the retail side of the business, you have an attractive recipe for growth and believe that the market underestimates this opportunity.
Earlier this year, WeedMD announced a strategic partnership with Pita Pit to launch Pioneer Cannabis Co., a retail cannabis platform with plans to roll out a coast to coast retail strategy. Pioneer has already signed an agreement with a winner of the Ontario cannabis retail lottery and expects to open its first store in Burlington, Ontario.
Pita Pit represents a strategic partner for WeedMD due to the low-cost nature of the initiative and the scale (Pita Pit has 225 stores in Canada and 600+ globally). The company understands the retail landscape giving WeedMD a strong partner for the future. According to the agreement, WeedMD owns 9.9% of Pioneer (the province maximum) with an option to increase its ownership stake. We believe that significant synergies can be found through the relationship of a vertically integrated retailer and producer.
When it comes to having distribution at the Provincial level for Canada’s recreational market, WeedMD has been executing as well as the leading Canadian LPs. Demand for the company’s recreational cannabis products has been very strong and we are favorable on the launch of the new brand, Colour.
Something that is interesting to reference when it comes to WeedMD, pertains to the performance of the company’s products on the Ontario Cannabis Store (OCS). When WeedMD released cannabis products under the Colour brand for the recreational market, the products tend to be first to sell-out on the OCS and this is major aspect of the story. When you compare the product that is being offered by WeedMD to other Canadian LPs, the difference in quality is very significant and we can understand why the product sells out quickly.
Over the last few weeks, WeedMD has received coverage from leading Canadian broker-dealers and we find this to be significant. The company is trading at a significant discount to the price target that was issued by Eight Capital and we are favorable on the risk-reward profile. WeedMD is led by some of the best executives in the business (especially as it relates to the production of premium cannabis) and this is an opportunity to be watching.
Aurora Cannabis: An Acquisition Story to be Watching
Aurora Cannabis (ACB.TO) (ACB) is one of the leading global cannabis producers and has been focused on creating a business that is levered to all aspects of the industry. When it comes to the Canadian cannabis retail opportunity, Aurora Cannabis has made significant investments in leading operators and is highly levered to this burgeoning market.
It makes sense for Aurora Cannabis to be focused on the Canadian retail opportunity since it is one of the largest cannabis producers in the country. By investing in the cannabis retail market, the company has secured some of the most strategic relationships when it comes to this aspect of the industry and these relationships will ensure that the company’s products have significant shelf space at these retail locations.
The Canadian cannabis producer made an initial splash in the Canadian cannabis retail market by investing in Alcanna Inc. (CLIQ.TO) in 2018. This is proving to be a strategic investment as Alcanna has been able to establish a significant position in the Canadian cannabis retail market. Over the next year, we expect to see Alcanna open additional retail locations and expect Aurora to benefit from this. We will monitor how the relationship continues to evolve and are favorable on this aspect of the story.
Months after announcing the investment in Alcanna, Aurora Cannabis announced an investment in Choom Holdings (CHOO.CN) (CHOOF) which is also focused on the Canadian cannabis retail market. The Canadian cannabis producer ended up increasing the size of its investment in Choom and we are monitoring how this relationship evolves as well.
Based on the historical track record of Aurora when it comes to acquisitions, we would not be surprised to see both these companies acquired and will monitor this aspect of the story on a going-forward basis. Aurora Cannabis is a company that has significant catalyst for growth and we will monitor how the story continues to evolve.
Canopy Growth: Accelerates Strategy Through Acquisition
Canopy Growth Corporation (WEED.TO) (CGC) has been one of the most talked about names in the cannabis industry. The company has recently been making headlines for the wrong reasons and this is an opportunity that we continue to be excited about. Following a weak quarterly earnings report, Bruce Linton was ousted as CEO by Constellation Brands (STZ) and this took the market by surprise.
Although there are a number of questions facing the leading cannabis producer, today we are going to focus on the company’s leverage to the Canadian cannabis retail market. Last year, Canopy Growth accelerated its strategy with the acquisition of Hiku Brands (Tokyo Smoke) for north of $300 million (CAD) and this is an interesting aspect of the story. So far, the acquisition has not paid off like Canopy Growth has expected but we are still in the very early innings as it relates to the Canadian retail market.
The last month has been rough for Canopy Growth and we will monitor how the company continues to execute on the Canadian cannabis industry. Canopy is also leading the push when it comes to the international cannabis opportunity and we are bullish on this aspect of the story. Even if the bet on the Canadian cannabis retail market does not pay off, the company has several major potential catalysts for growth and is an opportunity to be watching.
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