Based on pre-market trading, Canadian cannabis stocks look poised for a strong pullback this morning. The move lower follows a period of strength for Canadian Licensed Producers (LPs).
One of the reasons we were surprised by the recent trend is because the sector really started to surge higher after the 2020 US general election. Many Canadian LPs have performed better than US multi-state operators (MSOs) which is surprising since the legislations that were passed are beneficial for US cannabis industry.
Although we have seen a wide variety of Canadian LPs enter the US market via acquisitions and investments, most of these assets are levered to the CBD market. We believe that the logic behind this strategy is based on these operators being positioned to capitalize on a change in cannabis legislation at the federal level.
The US cannabis industry represents the most attractive cannabis market over the long-term and MSOs have reported impressive growth on a quarter-over-quarter basis. This is a trend that we expect to become more significant after four additional states legalized recreational cannabis in the 2020 US general election.
The post-performance of the Canadian LPs that we follow has been volatile. Some operators have rallied more than 100% since the election, while others are up a couple of percent. Today, we want to highlight 3 of the top performers in a post-election market and will continue to closely follow the trend from here.
HEXO is in Rally Mode and Beverages Could be the Reason as to Why
HEXO Corporation (HEXO.TO) (HEXO) has rallied more than 65% off its November lows and has been a major beneficiary of the recent trend. During the last two quarters, the Canadian cannabis producer has started to communicate much better with the market, especially as it relates to the relationship that it has with Molson Coors (TAP) (TAP.CN) to capitalize on the cannabis beverage market under the brand Truss Beverages.
Through Truss Beverages, the companies are selling THC infused products in Canada and CBD infused beverages. We believe that the recent rally is related to the Truss developments and will monitor how this vertical impacts HEXO in the near and long-term.
As a result of the rally, HEXO’s leadership team is working on changing the terms of a planned reverse stock split. The company plans to vote on an amendment for a 4 for 1 reverse split. Previously, the company planned to conduct an 8 for 1 split and we will monitor how the company continues to perform.
Sundial Growers has rallied More than 200% since the Election
Sundial Growers Inc. (SNDL) has been the biggest beneficiary of the recent trend and the shares have rallied more than 250% (as of December 4th). The last month has been very volatile for Sundial and the chart looks like roller coaster from hell. Due to the volatility, we are cautious with the Canadian LP and will monitor the trend from here.
Last week, Sundial plunged lower after it reported to have filed a registration statement with the US SEC to allow for the offering and sale of up to $200 million of various securities. Concurrent with the announcement, Sundial filed a preliminary prospectus supplement with respect to an at-the-market equity program for up to US$150 million of common shares.
Sundial is pointing considerably lower this morning and this is a trend to be following. The stocks look poised for a major correction and will monitor how it performs this week. Going forward, we plan to remain on the sidelines with the Canadian LP and will monitor on how the story evolves from here.
Aurora Cannabis Inc. (ACB.TO) (ACB) is another Canadian LP that has rallied more than 100% since the election and this is a trend that we continue to closely follow. Like Sundial, the recent trend has been volatile, and we are cautious with the opportunity in the near and long-term.
Last week, Aurora Cannabis come off its highs and this is a trend that is expected to continue this morning. There are a lot of questions surrounding the company’s focus on the US CBD market and we are not the most excited about this focus. The CBD is a saturated market, and we believe the primary reason for the rally is related to the potential it has to expand into the US.
Going forward, the name of the game for Aurora Cannabis is execution and the new management team needs to show its ability to execute on major growth initiatives. During the last year, the company has been forced to close several facilities in an effort to lower costs and this is a story to be aware of.