Beyond the Bong

Arizona’s Medical Cannabis Success Story

There are markets out there humming along.

Despite years of success, they go largely unnoticed.

They don’t grab headlines, earn fanfare or draw the attention of table-pounding cheerleaders.

Nonetheless, they keep chugging along.

Well, today, I’m going to share a chart with the data that finally ignited a market frenzy in 2019.

After years of under-the-radar growth and hundreds of millions in sales, companies finally woke up to this market’s true potential. And the race for dominance was on.

In 2011, Arizona became the 14th state to legalize medical cannabis.

That makes it an old dog in this nascent industry.

The state’s medical market is overlooked by many, but has been moving in one direction: up. And it’s a steep takeoff.

Chart - Arizona Annual Medical Cannabis Sales

Since 2013, the total pounds of cannabis sold in Arizona have skyrocketed from 5,954 to 165,722.

That’s a compound annual growth rate of 60.8%!

It’s been year after year of double-digit gains. And it’s not just dried flower flying off the shelves.

The amount of edibles sold has rapidly doubled. Since 2015, the total pounds of edibles sold have increased from 2,955 to 5,977.

And all of this is driven by the state’s increasing number of patients.

At the end of December 2019, Arizona had 232,428 qualifying medical marijuana patients. That’s roughly 3.2% of the state’s 7.27 million residents participating in the program.

But here’s what most investors fail to realize… Arizona is one of the 10 largest cannabis markets in the U.S.

In 2019, the state brought in more than $700 million in marijuana sales. That’s good enough to rank as the eighth largest American legal weed market. And it earns Arizona the distinction of being one of only four states in the top 10 that rely solely on medical sales.

But that may soon change.

In Arizona, the Smart and Safe Arizona Act is looking to greenlight recreational adult-use sales. To make it on the ballot in November, the initiative’s campaign needs to turn in 237,645 signatures by July 2. And that goal appears well within reach, as the campaign is ahead of its projections.

The addition of recreational sales will ignite a new firestorm of growth for Arizona cannabis.

In fact, some believe it could catapult the market’s worth to nearly $1.5 billion by 2024. That level means Arizona would be vying for a top five spot.

Of course, to reach that high mark, the state would have to add more dispensaries. Currently, there are only 130.

But that hasn’t halted multistate operators like 4Front Ventures Corp. (OTC: FFNTF), Cresco Labs (OTC: CRLBF), Harvest Health & Recreation (OTC: HRSVF) and Vireo Health (OTC: VREOF) from inking acquisitions.

With possible adult-use legalization on the ballot in 2020, Arizona is poised to be even more of a pot success story than it already is. So investors should ensure they have exposure to this hot market.

The High Five

Below are our High Five, where each Monday I cover the five pot stocks I believe will make major moves – up or down – in the week ahead.

1) Charlotte’s Web Holdings (OTC: CWBHF) was the fifth most actively traded stock on the OTCQX market last year. And it was one of four cannabis companies in the top 20 most traded OTC shares in 2019.

But despite being the No. 1 CBD brand by market share in the U.S., Charlotte’s Web shares are near 52-week lows. They’ve been on a roller coaster in 2020, hitting $9.17 on January 17 and then falling to $6.21 by February 11.

2) Aphria (NYSE: APHA) announced in its third quarter results in mid-January that adult sales increased 46% to CA$29 million. This record for the company led to a 155% increase in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to $3.4 million. But the company slashed its full-year forecast because of the vape ban in Alberta.

For a couple of weeks, shares pushed higher despite this. Though they’ve since been cut in the buzz saw of negative industry headlines, like Aurora Cannabis (NYSE: ACB) CEO Terry Booth’s exit.

3) 48North Cannabis Corp. (OTC: NCNNF) is scheduled to release second quarter results before the opening bell on Friday. The company recently inked a partnership with the Canadian online gift platform Thoughtfull. The exclusive deal is to provide consumers with premium cannabis accessories.

4) James E. Wagner Cultivation Corp. (OTC: JWCAF) will report first quarter earnings on Friday at 3 p.m. Expectations are for a 161% increase in revenue to CA$1.4 million. And next quarter, analysts believe the medical cannabis cultivator will see sales surge 347.8% to CA$2.4 million.

5) Tilray (Nasdaq: TLRY) announced a couple of weeks ago that it was laying off 10% of its workforce. This triggered a pop in its shares. As did the announcement that it was replacing its CFO and COO in mid-January. But like the rest of the sector, it has been under pressure since.

Year to date, Tilray is outperforming our benchmark, the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF)… though that’s not saying much.

Chart - The High Five

Tilray has merely suffered a smaller loss than the index itself.

After a lot of positive momentum to kick off 2020, cannabis shares have faltered. There are a few currents creating the undertow.

First, there’s the ongoing C-suite turnover. Which, considering how pot stocks performed in 2019, could arguably be a welcome change.

Second, expectations for cannabis companies are sky-high. In Canada, the legal adult-use market is just over a year old.

Third, I believe the uncertainty triggered by the Wuhan coronavirus isn’t helping. Investors are plowing into liquid large cap growth stocks and fleeing more speculative plays. That’s an unnecessary drag on pot stock shares.

We’re looking for the optimism the sector enjoyed in mid-January to return. But it looks like we’ll be in for another tumultuous ride for now.

If you have a pot stock in mind that you’d like me to discuss here, leave a comment below.

Here’s to high returns,

Matthew