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Will Canadian Licensed Producers Sink or Swim In 2021?

Jan 4, 2021 • 7:31 AM EST
4 MIN READ  •  By Michael Berger
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For the cannabis industry, 2020 was a year for the record books and we are excited to see how the sector advances this year.

Today, we are publishing the first story that is part of a series of articles that cover specific verticals of the cannabis sector as well as the companies that are best positioned to capitalize on it.

The first topic will cover Canadian Licensed Producers (LPs) which is a vertical that came under pressure during the last few trading days of 2020. Last year, many analysts became less bullish on Canadian LPs and several companies were downgraded by several leading broker-dealers during this time.

One of the reasons which explains the less than favorable trend on Canadian LPs is related to the international market. In 2020, several leading Canadian LPs wrote off more than $1 billion worth of international cannabis assets that were previously acquired. The market punished these operators for these bad investments, and we will monitor how sentiment changes for Canadian LPs this year.

Canopy Growth Corporation (WEED.TO) (CGC) is considered to be a global cannabis leader and owns cannabis assets that are located in strategic markets. Through a series of investments and acquisitions, the company quickly became levered to markets such as South America and Africa. So far, these investments have not proved to be successful and we believe the management team is working to bring the company in a different direction.

In 2019, Canopy Growth made major changes to the management team and to the board of directors. The company replaced many of the founders with executives that have a proven track record of success in the alcohol industry and the business seems to be heading in the right direction.

Canopy Growth has found success with the cannabis beverage vertical and this is a trend that we are favorable on. When compared to every other cannabis company, Canopy Growth has the strongest balance sheet and has enough cash to weather the COVID storm. We believe the company is well positioned to record growth over the long-term and is an opportunity that we will continue to closely follow.

Aurora Cannabis Inc. (ACB.TO) (ACB) had an extremely challenging 2020 and we believe that 2021 is a make-or-break year for the business. During the last year, the company made announcements that made us question the judgement of the management team and we are cautious with the opportunity in 2021.

Last year, Aurora Cannabis acquired a US cannabidiol (CBD) brand and this transaction had us scratching our heads. The US CBD industry is one of the most saturated markets in the cannabis industry and we did not recognize the brand that was purchased by Aurora Cannabis.

Going forward, we expect Aurora Cannabis to remain highly focused on the Canadian cannabis market and believe that the US CBD asset will be used as a way to capitalize on the market once cannabis is no longer considered to be illegal by the federal government.

Aurora Cannabis recently completed a reverse split in order to remain listed on the Nasdaq and we are cautious with the opportunity in 2021. We hope the new management team can help turn the operation around but continue to be believe that there are much more attractive operators than Aurora Cannabis.

HEXO Corporation (HEXO.TO) (HEXO) is another Canadian LP that was forced to conduct a reverse stock split to remain listed on the Nasdaq in 2020. Although the trend has been to the downside, the company has a strategic relationship with Molson Coors (TAP.CN) that is focused on the cannabis beverage vertical and are favorable on the way the relationship has advanced.

We consider HEXO to be one of the most significant turnaround stories of 2020 and will monitor how the story advances this year. The market became more favorable on HEXO once the company started executing on the relationship with Molson and this is a trend that we are closely following.

Through this relationship, HEXO is well positioned to capitalize on the US cannabis market when federal law changes and we find this to be an attractive aspect of the story. Although HEXO has an ugly chart, the recent developments have been significant and this is a story that we will continue to closely follow.

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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