October 17th is fast aing and action in Canada and accordingly the apple continues to abound about the aboriginal federal amends of cannabis by a G-7 nation. The action and apprehension of acknowledged cannabis in Canada has spurred able-bodied advance for Canadian Accountant Producer’s stocks in a abbreviate aeon of time. The advance they accept apparent has fabricated them a cogent talking point of abounding advance communities. An archetype of the accelerated advance in Canadian cannabis companies can be exemplified by Tilray (TLRY), which with beneath than bisected of Awning Growth’s (CGC) acquirement became the bigger cannabis aggregation in Canada by bazaar capitalization. At one point in the bubble-esqe acceleration of Tilray, the aggregation had a beyond bazaar cap than American Airlines (AAL), Clorox (CLX) and CBS (CBS). Though the bazaar has collapsed from its aiguille value, Tilray and added producers in Canada accept had an ample acceleration in value, that seems to abate a affair for fundamentals. This has additionally resulted in US cannabis companies actuality somewhat abandoned by the accepted market. As can be apparent below, the 1-year advance in allotment bulk for the US cannabis bazaar vs the Canadian cannabis bazaar can be advised analogously in Bazaar Cap Weighted Index values.
Source: Capital IQ
While the bulk of Canadian cannabis firms has been active away, the US bazaar has apparent basal appulse from the cannabis aberration affecting firms operating in the Great North. As abysmal bulk investors, we accept that there is a able befalling yet to be absolutely able in the US cannabis market. Although it is still federally illegal, added regulated, complex, and carries a cogent bulk of risk, we feel the US cannabis bazaar may still be beneath chancy than the Canadian bazaar at their corresponding valuations. Moreover, if you beam below, there are US cannabis assembly firms accessible at a decidedly cheaper bulk for the acquirement produced compared to Canadian companies.
Source: Author’s Calculations
Source: National Cannabis Industry Association
There are several states in the US area cannabis is beheld as a artefact agnate to alcohol. For 9 states beyond the country, actuality 21 years old is the abandoned claim to buy acknowledged cannabis in a storefront. Moreover, as November approaches, we may see the cardinal of recreationally acknowledged states abound as Michigan’s cannabis amends amendments are offered alongside the aldermanic midterms. Michigan would be the tenth developed 21 recreational accompaniment in the country, authoritative recreational cannabis acknowledged in one-fifth of the US. While the acceleration of recreational cannabis has been apathetic in the United States, there are alike added states that accept amorphous to admit the alleviative qualities of cannabis and legalized it for medical use, with capricious degrees of freedom. The cardinal of states with legalized cannabis may additionally abound during the midterms as Missouri and Utah accept added referendums for medical cannabis amends to ballots. Although the cardinal of states with acknowledged cannabis is growing, anticipate tanks and cannabis advancement groups beyond the country always altercation the cardinal of medical states we currently accept depending on the analogue you accede with it. This is because the United States has no set framework for ambidextrous with cannabis and accordingly anniversary accompaniment has the adeptness to accomplish their own altered laws and regulations. By accomplishing so, states accept created a check of differing regulations, that accomplish it acutely adamantine to holistically assay the US cannabis industry. We accept that the circuitous differing sets of regulations and ambiguity of federal amends are attached advance acknowledgment in US operating firms and thereby befitting valuations low, in a aerial advance opportunity.
The contempo advances in federal amends efforts by affecting politicians and account organizations can be beheld above. The change in politicians opinions to cannabis could be for a cutting bulk of altered affidavit but the abandoned constant trend for any baby-kisser is the pressures from their constituents, which we accept is best acceptable active the about-face in their angle on cannabis. Below, one can see the changes in crawling assessment in the United States over the able 4 decades.
Source: Pew Research
At this point in time US citizens are added in abutment of acknowledged cannabis again they are adjoin it and that’s a big footfall advanced for the industry. As abutment continues to grow, the likelihood of authoritative cogent advance appear amends does as well. Currently, we accept apparent a bipartisan accumulation of politicians acknowledging legalization, including Bernie Sanders and Donald Trump. Beneath the acceptance that we are headed appear legalization, it is important to agenda that the firms discussed in this commodity will accept accustomed able first-mover advantages and will be bigger able to capitalize on developments in amends beyond all levels of the US government.
MedMen Enterprises (OTCQB:MMNFF) is a fully-integrated cannabis aggregation that is accountant for the cultivation, production, and auction of cannabis articles in California, Nevada, and New York with a awaiting authorization appliance in Massachusetts and a awaiting dispensary/related assets accretion in Florida. Currently, MedMen owns the licenses for or has administration affairs for The aggregation operates 8 food in southern California, 3 in Nevada, and 4 in New York with agronomics accessories operating or beneath architecture in all aloft states.
Source: MedMen Broker Presentation
The aggregation is anticipating accepting 45 storefronts and over 300,000 aboveboard anxiety in agronomics amplitude beyond 5 accessories by 2020 (assuming their Florida accretion affairs go through). MedMen believes acerb in the aboriginal mover advantages for the cannabis industry and aims to advantage that advantage through their highly-regarded retail locations.
In accession to their US operations, MedMen has anchored acknowledgment to the Canadian cannabis bazaar through their MedMen Canada collective adventure with Cronos Accumulation (CRON), a Canadian Accountant Producer with over C$2BB in bazaar cap, to accessible and accomplish MedMen retail locations throughout the country. While Cronos allowances from MedMen’s adeptness and acquaintance in cannabis retailing, MedMen obtains absolute administration channels into Canada after disturbing with abounding of the authoritative issues that analyze any cross-border operations.
MedMen IPO’d in backward May 2018 at a bulk $3.38 per share, has able highs and lows of $5.12 and $2.78 respectively, and currently sits about $4.45 per share. They are trading at a bazaar cap about $1.9BB authoritative them one of the bigger accessible US cannabis companies in operation today. MedMen has pulled in C$15.6MM in LTM revenues but still abide heavily in the red due to their amplification efforts.
They angle to account from the developing US cannabis mural primarily through their berth operations. MedMen dispensaries are amid the best well-known, appear on, and visited dispensaries in the US. They are frequently referred to as the Apple Food of Weed due to their arresting affinity to the blueprint of Apple retail locations. While MedMen is still bound by the above authoritative acquiescence standards as their competition, they are assertive to capitalize on the beginning industry by establishing themselves as the consumers aboriginal best alike afore cannabis sales begin.
Photo Sources: MedMen Las Vegas Opening Media Kit
Liberty Health Sciences
Liberty Health Sciences (OTCQX:LHSIF) is a Canadian cannabis company, specializing in the assembly and administration of medical cannabis in the US. Their accepted bazaar focus is the medical patients in Florida. The aggregation prides itself on its access to the cannabis bazaar which is founded on the assumption of abbreviation broker risk. They accomplish this assumption through their altered accompaniment alternative action which identifies states with the safest belief for investment. Their belief for a safe accompaniment includes able-bodied accompaniment legislation, no awning restrictions, a ample citizenry of users and a continued account of condoning medical conditions.
While the industry is exploding with advance overall, we accept that LHS is one of the bigger plays in the American cannabis market. As can be apparent beneath the acknowledged bazaar internationally is growing consistently and forecasts appraisal the industry will accomplish a 330% access in bulk amid 2016 and 2020. That’s an adorable advance proposition, but its additionally a hypothesis that could leave abounding investors austere back the leaders of the industry are accustomed and others abort completely. With this accident in mind, we are assured that the Liberty Health Sciences Administration Team, as able-bodied as Board of Directors, are bent to abound this aggregation at a acceptable amount with able advance and amount management.
Source: Liberty Health Sciences Broker Presentation
Liberty Health Science’s accepted advance action for the rapidly growing cannabis bazaar is extensive and absolute in nature. Currently, they absorb a authorization to advertise medical cannabis in Massachusetts and Florida with the abeyant upside from a first-mover advantage d an all-embracing recreational bazaar is adopted in Massachusetts. Moreover, they additionally accept a berth in Ohio which is awaiting approval for extraction, and two authorization applications currently beneath analysis in New Jersey and Michigan. To put the admeasurement of Florida’s medical bazaar in perspective, LHS compares it adjoin the Canadian market.
Source: Liberty Health Sciences Broker Presentation
As can be apparent above, Florida’s alleviative cannabis bazaar will be beyond than Canada’s in aloof over two years. This is abandoned one of their abounding states of operation, and d around-the-clock befalling for new legislation in favor of cannabis in the US, the bazaar admeasurement will eventually outdistance Canada in size. Yet, these companies barter at decidedly lower multiples than the Canadian operators, advertence a bulk proposition.
Liberty Health Sciences accepted Florida operations are run through a 25,000 sqft adeptness which has a accepted accommodation of 1,600kg of cannabis per year. For distribution, they own and accomplish four medical dispensaries beyond Florida, with three added commitment hubs. The map beneath shows all the accepted locations of operations as able-bodied as the amplification affairs they are pursuing.
Source: Liberty Health Sciences Broker Presentation
Since Aphria invested in Liberty Health Sciences, things accept been attractive up. LHS has broadcast its assembly accommodation by 20% which is about wholly attributable to the adeptness Aphria provides in cannabis agronomics operations. Moving advanced LHS affairs to accomplish abundant advance through accommodation expansion. By December 2018, LHS affairs to accept a 225,000 sqft adeptness with a accommodation of 14,600kg of cannabis. This cogent access in cannabis assembly should acquiesce the aggregation to move advanced with its advancing amplification and sales approach. They plan to breach operations into two administration strategies, the aboriginal a vertical access that utilizes their arrangement of dispensaries and the added through broad distribution. With the apprehension that broad will become acknowledged in 2019, the aggregation affairs to accomplish a 60% allowance on sales able through wholesaling. Furthermore, the aggregation projects that vertical sales through dispensaries will gross a 70% margin, with abandoned 30% of the costs actuality activated beneath the top line. Both strategies accommodate awful assisting approaches to the market, which we are actual aflame to see them advance for balance advance activity forward.
The bazaar has taken apprehension of the able developments and LHS has accomplished over 100% advance in their allotment bulk back mid-August and currently sits about $1 per allotment at a $300MM bazaar cap. While the abundant acknowledgment in allotment bulk has amorphous to air-conditioned hardly this able week, LHS charcoal a able cannabis aggregation that is attractive to defended their atom amid the top US cannabis producers.
Note: Aphria has been affected to abandon their shares in Liberty Health Sciences which will be captivated in escrow with a Promissory Agenda Due in 2023. Although they were affected out of the American bazaar because it is still federally actionable to abound cannabis, Vic Neufeld the CEO of Aphria has said that Aphria’s abandonment from the American bazaar is abandoned acting and they plan to acknowledgment already federally legal.
Sunniva (OTCQX:SNNVF) is one of the few cross-border cannabis producers with agronomics operations in both British Columbia and California. The aggregation is in the action of architecture out their California operations to aftermath 87,000kgs of cannabis annually throughout their 589,000 aboveboard basal adeptness and is assured their aboriginal autumn to appear in their aboriginal analysis of 2019.
Source: Sunniva Broker Presentation
Construction on the British Columbia area began in May of this year and aloft completion, Sunniva will be cultivating 100,000kgs in their 759,000 aboveboard basal facility, bringing their absolute anniversary assembly accommodation up to 187,000kgs. Sunniva has additionally been advancing developments in the aerosol area through their Vapor Connoisseur division. Vapor Connoisseur offers over 80 assorted vape brands but all 80 are clandestine label. While this does not absolutely affirm that Sunniva is bearing the articles for Vapor Connoisseur, it is commodity account advertence and could be a abundant disciplinarian d vape articles abide growing at their accelerated contempo rates.
Despite their capital locations of operation still beneath construction, Sunniva appear C$4.5MM in revenues for Q2 2018 at a gross allowance of 62%. While their SG&A was 100% of their anniversary sales, bound blame them into the red overall, they are best acceptable spending to body cast acquaintance for the alpha of recreational sales; and their adeptness to abound and advertise C$4.5MM of cannabis at such a able gross allowance is a able indicator that their $130MM bazaar cap is not cogitating of the backbone of the company’s outlook.
Sunniva offers investors a altered adeptness to accretion acknowledgment to both the US and Canadian cannabis markets. The aggregation currently has a accumulation acceding to accommodate Awning Advance (CGC) with 90,000kgs cannabis over the aing 2 years and acquired Natural Health Services, which owns 8 clinics beyond Canada and has a accommodating abject of about 100,000 patients. While the Natural Health currently connects patients to cannabis producers and collects a barometer fee, it can be accepted that Sunniva intends to advance Natural Health’s accommodating abject to advance their own products, acutely accretion their ability for Canadian medical sales.
Source: Sunniva Broker Presentation
While their cross-border action currently has them in an advantageous position about to abounding of their analogously admired peers, Sunniva does authority added authoritative risks that could materially appulse their operations and investors should acerb accede their altruism for added accident in an already chancy advance in cannabis.
Sunniva is currently trading aing to the basal of their 52-week ambit and has absent about bisected of their bulk back they IPO’d in aboriginal January and has been steadily trending bottomward back an antecedent acceleration afterward their IPO. Admitting the poor allotment performance, we accept Sunniva is undervalued about to their accepted assembly accommodation alone. With accustomed and adjourned architecture affairs already underway, Sunniva is actively aing an anniversary assembly accommodation of 187,000kgs. This accommodation rivals some of the mid-scale Canadian producers that currently authority near-billion dollar valuations. At the least, we see Sunniva as a able takeover ambition for a beyond Accountant Producer attractive to access their acreage and agronomics assets.
The US cannabis bazaar is generally disregarded with all the absorption actuality focused on Canada. While this is barefaced accustomed the awe-inspiring footfall the nation fabricated by federally legalizing the recreational use and auction of cannabis, it has led to the bazaar acceptable almost over-inflated and big-ticket for investors to access into appropriate now. Though the authoritative ambiance for the US is far beneath assertive and abiding than Canada, there are still abundant state-specific markets and a majority appeal for amends beyond the populous. To abounding investors, this may present an ambiguous and abstract industry; which it is. But so is the absolute cannabis industry appropriate now. The ambiguity in the approaching mural has led to valuations that would be advised bargain in the cannabis industry admitting actuality accomplished with opportunity. The able 2 years accept apparent us what happens to cannabis stocks back amends efforts advance and the accepted accord is that the US will eventually approve as well. The aloft companies are currently breeding revenues, accretion their footprints, and should be accepted to chase a agnate allotment bulk aisle as their Canadian counterparts as either alone accompaniment abide to legalize, or as federal amends efforts activate to accomplish abundant progress.
Disclosure: I am/we are continued LHSIF.
I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.
Editor’s Note: This commodity discusses one or added balance that do not barter on a above U.S. exchange. Please be acquainted of the risks associated with these stocks.
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