Cannabis stocks had a difficult 2019. Besides cannabis companies losing out on revenue and profitability, many external factors also affected the sector. While pessimism drove the industry this year, a Raymond James analyst predicts things can turn around in 2020. Let’s take a look.
Raymond James feels the cannabis sector could rebound
On December 16, in a Cantech Letter, Raymond James analyst Rahul Sarugaser stated that he feels the cannabis sector’s prospects look brighter in 2020. The analyst feels Ontario’s approach toward a more lenient retail market could drive this rebound. However, it could take a while. The analyst said, “It is important to note, however, that we expect this system-opening to only begin relieving Ontario’s sales bottleneck during the back half, or even last quarter, of 2020.”
Ontario’s government has always been strict when it comes to cannabis laws. However, on December 12, Ontario’s government announced the start of an open retail market for cannabis. The intention is to help consumers with easy and safe access to marijuana products.
I feel this announcement could take care of a lot of concerns about illegal sales that have been weighing down Canada’s legal cannabis market. Legal cannabis sales in Canada declined in 2019. Ontario Attorney General Doug Downey also said in a statement, “We have said all along that opening more legal stores is the most effective way to combat the illicit market, protect our kids and keep our communities safe. That is our number one priority.”
Ontario’s new approach to the retail marijuana market
The new open market will allow 20 store licenses to be issued per month. It will also let retailers sell marijuana-related items such as magazines and recipe books.
The AGCO (or Alcohol and Gaming Commission of Ontario) has already authorized some of the 42 proposed cannabis stores to open this month. Additionally, retailers can own a maximum of ten stores up to August 31, 2020. The number could increase to 30 by September 2020 and to 75 by September 2021.
It is this kind of slow store rollout in Canada that has been one of the main reasons why most cannabis companies, including Hexo, have been reporting disappointing results. Recently, Hexo (HEXO) reported its fiscal first-quarter 2020 results, which weren’t up to the mark. Also, lower legal sales affected cannabis companies’ revenues this year.
Raymond James analyst is optimistic about OrganiGram
The Raymond James analyst, Rahul Sarugaser, is also confident about OrganiGram (OGI) stock. Recently, OrganiGram received licensing from Health Canada for the production of chocolates. The approval will grant OGI 16 additional cultivation rooms. These additional rooms will bring the cultivation capacity to 89,000 kg per year from about 76,000 kilograms per year, which is in line with the Raymond James analyst’s expectations. The analyst said, “We expect 2020 to be a transformative year—positively so—for strong cannabis operators like OGI, and a very, very difficult one for operators that have not yet differentiated themselves on the bases of high-efficiency, low-cost manufacturing processes, and technology-driven product innovation.” OrganiGram stated in the press release that it expects chocolate sales to start in the first quarter of the calendar year 2020. To learn what other analysts think about OrganiGram, take a look at What Do Analysts Think About OrganiGram in December?
Focus on profitability
For a growing sector like marijuana, all eyes are on profitability. However, cannabis stocks have struggled to hit their profitability marks in 2019. Adjusted EBITDA is an essential measure of profitability. Aurora Cannabis, Canopy Growth (WEED) (CGC), and Cronos have reported negative EBITDA in their recent quarters. Meanwhile, Aphria is the only cannabis company that has reported positive EBITDA. We feel Irwin Simon’s leadership had a role to play in driving revenue and profitability growth for the company.
Recently, I discussed how 2019 went for the cannabis sector in Cannabis Sector 2019 Review and 2020 Outlook. I also explained what analysts expect from marijuana stocks in 2020.
Where is the cannabis sector heading in 2020?
An InvestorPlace article also discussed how the marijuana sector is heading for a rebound after a tough 2019. The article explained that the Canadian government is now more aware of the illegal cannabis market and is taking steps to tackle the issue. Furthermore, as production increased sharply in 2019, supply issues won’t be a concern in 2020. Additionally, the variety of new marijuana edibles and beverage products could drive the marijuana market.
- Marijuana sales will increase.
- There will be a more diverse range of customers for marijuana products.
- There will be more research and knowledge about marijuana products.
- The legalization movement will grow at the state and federal levels.
- A wider variety of marijuana products will be available.
- The medical cannabis industry will boom.
- Cannabis stocks will be a good investment.
Why are cannabis stocks trading low as the year ends?
There were hopes for the Cannabis 2.0 products like edibles and beverages that would hit the market in December. Consumers were interested in trying cannabis-infused edibles and drinks during the holiday season. However, stricter regulations in some of the provinces in Canada are causing a delay. The three largest provinces, Ontario, Quebec, and Alberta, won’t see edibles until January. This could be one of the reasons why cannabis stocks are down. To find out more, take a look at No Cannabis Edibles in Three Provinces for Christmas. However, Manitoba can expect cannabis edibles this week. Read Manitoba to See Cannabis Edibles Soon to learn more.
As the year comes to an end, we see cannabis stocks still trading in the red. On December 24 at 9:52 AM ET, Aurora Cannabis (ACB) stock was down 4.2%. CGC stock was down 1.4% while Aphria (APHA) was down 1.5%. Cronos (CRON) was down 1.5%, while Hexo (HEXO) was trading 1.5% lower. The Horizons Marijuana Life Sciences ETF (HMMJ) was also trading at 0.57% lower.
If Cannabis 2.0 revenues pick up, things can look brighter for the industry. Meanwhile, Cannabis 3.0 discussions are on the horizon.
Will 2020 provide a ray of hope for the marijuana sector? Stay tuned with us through 420 Investor Daily to get the latest updates on the industry.