Although 2020 has been a banner year for the Canadian cannabis industry, the market has been under pressure and this is a trend that our readers need to be aware of.
The Canadian cannabis sector has come well off its 2020 lows and has recently been trending to the upside. We believe that the recent weakness has been overstated and expect to see increasing interest in companies that are capitalizing on the Canadian market.
Earlier this month, Health Canada published sales numbers for the Canadian recreational cannabis market. The growth on a month-over-month basis has been impressive to the extent that the sector appears to be reaching an inflection point.
During the first three months of the year, Canadian cannabis retail stores recorded $487 million of revenue. In March alone, stores recorded $181 million in sales which is substantially higher than the $60.9 million that was reported in March 2019. In the last quarter of 2019, stores were generating approx. $120 million in sales per month. In the first quarter of 2020, this number has spiked higher and we believe that the industry has broken out into a new range.
After a few successful initial public offerings (IPOs) in 2014, we became highly focused on the Canadian cannabis industry. During this period, the sector has recorded incremental growth on almost all key metrics (i.e. amount of product sold, type of products sold, international market opportunities, and the amount of production capacity). The last twelve months have been challenging for the Canadian cannabis sector and we believe that the industry has reached an inflection point.
Today, we want to highlight 3 Canadian cannabis producers that have benefited from the growth of the market. We believe that these opportunities are well positioned to capitalize on the changing landscape of the Canadian cannabis industry and will be closely following them on a going forward basis.
Aleafia Health: A Canadian Growth Story to be Aware Of
During the last year, Aleafia Health Inc. (ALEF.TO) (ALEAF) has been nothing short of an execution story and has been successfully advancing several verticals of the business. The company operates a state-of-the-art cultivation and processing facility as well as one of the largest outdoor cultivation facilities in the country.
Earlier this month, Health Canada granted Aleafia Health a license amendment for its Phase II expansion that significantly expands the size of its indoor cultivation and processing footprint. The expansion will result an exponential increase in the company’s ability to produce and sell high-margin cannabis health and wellness products in domestic (medical and recreational) and international markets. The state-of-the-art facility is entirely dedicated to the extraction, production, packaging and distribution of finished cannabis products.
The granting of the license amendment represents a major milestone as it will accelerate Aleafia Health’s cannabis 2.0 strategy and will allow it to produce new differentiated product formats. The company has been preparing for this amendment and has built up a large inventory of cannabis extracts to be used as input material for new product formats. We are favorable on the direction that the management team is bringing the business and are bullish on the growth prospects that are associated with the expanded facility.
One of the most significant accomplishments for Aleafia Health over the last year has been the growth in the number of medical cannabis patients that it serves through Emblem, a wholly owned subsidiary. Last year, Aleafia Health acquired Emblem and this was a transaction that we were bullish on when it was announced. Emblem has proven to be an accretive acquisition for Aleafia Health and we believe that the market under-appreciates the growth prospects that are associated with it.
Another significant accomplishment for the business is related to the outdoor cultivation facility. Although many Canadian LPs have attempted to execute on the outdoor opportunity, few have been successful. Aleafia Health would fall into the category of companies that were successful and we expect the outdoor cannabis market to prove to be a major value driver for the business.
When compared to the outdoor opportunity in 2019, we believe that Aleafia Health is better positioned this year and find this to be significant. Health Canada has granted the company license amendments that will allow it to cultivate on more than 2 million sq. ft. and we find this to be significant. Based on its success in 2019, we believe that Aleafia Health is well positioned to execute on the outdoor cannabis market and are of the opinion that the market does not fully appreciate this aspect of the story.
Aleafia Health is a company that has significant potential catalysts for growth and is an opportunity that we are bullish on. From the cannabis 2.0 market to international markets, the business is well positioned to be a beneficiary of the growth of the Canadian cannabis market and is an opportunity to be aware of.
Canopy Growth: A Domestic and International Growth Story
When it comes to the Canadian cannabis sector, Canopy Growth Corporation (WEED.TO) (CGC) is one of the first companies that comes to mind. The company has benefited from having an early mover advantage on the Canadian cannabis market and has made a number of acquisitions over the last few years.
During the last year, Canopy Growth has come under heavy pressure as it has been forced to write down assets and shutter cultivation facilities. Fortunately, the Canadian cannabis producer has the strongest balance sheet in the sector and we are favorable on this aspect of the story.
Although 2020 has been a challenging year for Canopy Growth, we are bullish on the growth prospects that are associated with the business. The company has been highly focused on the international cannabis opportunity and recently had to pare back its focus on this side of the business. Canopy Growth is still considered to be a leader in the international cannabis market and we will continue to closely follow the opportunity.
Aurora Cannabis: Expands into the US via Acquisition
In 2018, Aurora Cannabis Inc. (ACB.TO) (ACB) was considered to be one of the top Canadian cannabis companies. A lot has changed over the last two years and Aurora Cannabis has been under substantial pressure during this time.
When it comes to the Canadian cannabis market, Aurora Cannabis has been a major beneficiary of the growth of the industry. The company is still considered to be a leader in Canada and is an opportunity that we continue to follow. From a management team standpoint, there have been a number of changes at Aurora Cannabis and will monitor how the team is able to drive the story forward.
Aurora Cannabis has been highly focused on the cannabis 2.0 opportunity in Canada. Earlier this month, the company released better-than-expected quarterly financial results and this helped turn the tide as it relates to momentum. Aurora Cannabis has come significantly off its May lows and we will keep an eye on the trend from here.
After the company released impressive quarterly financial results, it announced the acquisition of a large CBD brand in the US. The market initially responded very favorably to the transaction and we will monitor how it is able to capitalize on this vertical. We believe that Aurora Cannabis wants to create a footprint in the US (ahead of the potential legalization of cannabis) and will monitor how the story evolves from here.
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