This Week in Cannabis Investing August 2nd

This week marks a shift in editorial content at The Seed Investor. Going forward, the focus will be on significant developments in the cannabis industry, major news surrounding individual companies – and analysis around these events. Less focus will be given to individual company releases.

Monday, The Seed Investor started the week with three new items. We noted with concern the decision by California’s government to attempt to “stamp out” its cannabis black market, War-on-Drugs style. In other words, relying upon failed policy. We pointed out that Colorado had already shown states how to reduce the black market – with its Capitalist Solution.

The Seed Investor looked at cross-state cannabis shopping. A new cannabis retail store opened on the Oregon-Idaho border, in cannabis-legal Oregon. Idaho residents (where strict Prohibition still reigns) immediately began flocking there to shop. That’s more cannabis revenues and cannabis taxes for Oregon – while Idaho gets nothing from this commerce. The Seed Investor asked the question: is economics going to force reluctant state governments to legalize cannabis sooner rather than later?

As Canada’s retail cannabis sales soar and Phase 2 of legalization approaches, The Seed Investor covered the appointment of a retail sector heavy-hitter as the new President of Choom Holdings (CAN: CHOO / US:CHOOF). Corey Gillon cut his teeth at Walmart, leading the company’s Western Canadian retail operations. Gillon then moved to iconic clothing retailer, Aritzia. There he served as Senior Vice President of the Retail Division.

Tuesday, The Seed Investor followed up its coverage of Canadian cannabis extraction specialists by drawing attention to “the next wave” of Canadian extraction companies. We offered investors several suggestions and then explained why we see continued strength in this segment of the Canadian cannabis industry.

We reported on the Q3 earnings of National Access Cannabis (CAN:META). The company announced a modest rise in quarterly revenues and Adjusted EBITDA. However, with many new stores opening, META is positioned for stronger results going forward.

The Seed Investor was critical of the decision by the province of Quebec to create even more restrictive rules for the new cannabis products due to be legalized in Canada in Phase 2. We noted both the hypocrisy and lack of understanding displayed by that announcement.

We then took a deeper look at Choom Holdings and its previous announcement of a new President. Choom recently opened a new cannabis retail store in Ontario, one of only 22 in the province. The Company is already one of the retailing leaders in Alberta, with plans to continue its expansion there. With retail sales suddenly soaring and a cannabis retail “pot of gold” in the distance, we saw Corey Gillon’s appointment as not only a message about Choom but about the potential of retail cannabis in Canada, in general.

Wednesday, we did some more connecting-the-dots, this time with National Access Cannabis. As Canada’s largest private retailer of cannabis, it’s somewhat representative of Canadian cannabis retail as a whole. The story with National Access is that with 10 new cannabis stores opening, there is every reason to expect strong revenue growth going forward. With Canada’s provinces now (finally) opening new cannabis stores at a reasonable rate, there is every reason to expect strong revenue growth going forward for the Canadian cannabis industry as a whole.

The Seed Investor then looked to the U.S., and news that IONIC Brands (CAN:IONC / US:IONKF) has just launched its Zoots Premium Cannabis Edibles in Illinois dispensaries. Illinois is the latest state to fully legalize cannabis. IONIC just closed on its acquisition of Zoots on July 24, 2019.

We then provided additional coverage of California’s new War on Drugs – against its cannabis black market. California has called in the National Guard and is squandering enormous tax dollars in major policing operations that will ultimately fail. Meanwhile, Colorado is winning this same war without spending a penny, just sensible (free enterprise) regulations.

Thursday, The Seed Investor shone its spotlight on the incredibly cheap valuations of cannabis stocks – especially in Canada. In alerting investors to this “disconnect” we focused on two factors. Canadian cannabis stocks have currently retreated to their previous low in December 2018, even as Phase 2 of legalization looms. We then reminded investors of (a) three consecutive months of double-digit sales growth for Canadian cannabis retail sales and (b) a recent acceleration in new cannabis store openings and licenses by Canadian provinces.

U.S. cannabis valuations are also very compressed. This is despite continued movement toward cannabis legalization at the state level and a multitude of regulatory developments in the works at the federal level. What does this all add up to for North American cannabis stocks? Can you say “Merry Christmas”?

Friday, Aphria Inc (US:APHA / CAN:APHA) soared on news of a sharp improvement in revenues that allowed the company to post a profit. While a number of skeptics in the media questioned whether this turnaround was sustainable, The Seed Investor explained why investors should be more optimistic.

Finally, The Seed Investor concluded the week with big news in the U.S. Key Republican banking Senator Mike Crapo has publicly indicated his support for positive reforms of U.S. banking laws regarding cannabis. We explained some of the potential ramifications in the U.S. and suggested that even Canada’s cannabis industry might benefit from such reforms.

DISCLOSURE: Choom Holdings and IONIC Brands are clients of The Seed Investor.