Custom Search 1
Canadian cannabis companies continue to raise capital and report new financing agreements. This trend looks similar to what we saw last year and are monitoring how this trend continues.
Last year, the Canadian licensed marijuana producers were under pressure after a few product recalls, resulting from the use of prohibited pesticides during the cultivation process. Although this was a setback for the Canadian cannabis industry, a lot has changed since then.
2018 Is Starting to Look Like 2017
We are favorable on Canadian marijuana producers that continue to execute on previously announced initiatives and offer a differentiated opportunity. Investors need to make sure to be focused on higher-quality names and avoid companies trading at valuations that cannot be justified.
In the first quarter of 2017, several Canadian cannabis producers were raising capital at high valuations and we are noticing a more pronounced trend this year. These marijuana producers are taking advantage of the high valuations and raising capital through bought deals.
We are monitoring this trend closely and continue to prefer companies that are using this capital for specific growth initiatives. Last year, the influx of bought deal financings should have been a sign that the market was reaching a top and we will monitor how this trend continues.
Investors Need to Focus on Quality
One of the biggest differences from this time last year is the focus on international opportunities, especially Germany. Canadian licensed marijuana producers are also very focused on increasing production through construction initiatives or mergers and acquisitions.
The recent increase in M&A activity has been a catalyst for the sector and we do not expect this trend to end anytime soon. In fact, we expect to see more M&A activity throughout the next year.
The question that many investors have on their minds is who will be acquired next. We believe that the most likely candidates are the companies that have an attractive valuation or a differentiated opportunity.
Capital Continues to Pour into Cannabis
Over the last few months, we have seen several licensed producers announce bought deals that are greater than $100 million and the market has become less surprised by these eye-popping deals.
In late October, Canopy Growth Corp. (WEED.TO) (TWMJF) reported a $250 million investment from Constellation Brands (STZ) and this really caught the market by surprise. This announcement provided a sense of legitimacy to the Canadian cannabis industry and was a catalyst for the sector.
Aurora Cannabis (ACB.TO) (ACBFF) has a war chest of cash and the company has also been using its stock as a currency to make strategic acquisitions. The licensed marijuana producer has been also using its cash for strategic investments and we are bullish on the company’s recent announcements. From an investment in a Canadian organic marijuana producer to an extraction technology company, Aurora has made several exciting investments.
In early January, Aphria (APH.TO) (APHQF) raised more than $115 million through a bought deal and the Canadian marijuana producer continues to be a top performer. Yesterday, Aphria reported very strong second quarter earnings and we are bullish on the long-term outlook. The marijuana producer has made several strategic investments and we expect Aphria to record very strong growth this year.
We consider Organigram Holdings (OGI.V) (OGRMF) to be a differentiated opportunity and are favorable on the company’s long-term outlook. Yesterday, Organigram announced a $100 million bought deal and these types of transactions are becoming more common. We continue to view Organigram as an undervalued opportunity and this is a stock to watch.
Earlier this week, MedReleaf (LEAF.TO) announced a $132.5 million bought deal and the shares traded lower on this development. The marijuana producer plans to use the capital to finance the acquisition and/or construction of additional cannabis production and manufacturing facilities in Canada and abroad. LEAF.TO is trading slightly below the pricing of this offering and we continue to view the shares as an attractive long-term opportunity.
Although WeedMD (WMD.V) (WDDMF) is a smaller Canadian marijuana producer when compared to Aurora and Canopy, the company raised $30 million to expand production capacity within its existing 14-acre greenhouse footprint. WeedMD is laser focused on increasing production capacity before Canada’s recreational marijuana market opens and we are bullish on this initiative.
On Tuesday, CannTrust (TRST.CN) (CNNTF) reported strong preliminary earnings for the fourth quarter and we are bullish on this Canadian marijuana producer. The company has more than 30,000 registered patients and is focused on expanding production capacity. In late November, CannTrust closed a $20 million bought deal and the proceeds will be used to fund the Phase 2 build out of the Niagara greenhouse facility.