Beyond the Bong

Cannabis 2.0 Sales Launch Today in Canada

Today’s the day!

Cannabis 2.0 sales finally kick off in Canada!

These are high-margin products – beverages, edibles, topicals, vape pens and more. And as I’ve been telling investors for years, once these products hit the shelves, they’ll buoy the earnings and revenue of Canadian licensed producers.

So… just how big of an impact will Cannabis 2.0 have?

Well, projections are for Canada’s marijuana market to be worth $3.7 billion in 2020. That’s more than double the $1.6 billion in 2019.

And, as we’ve closed in on today’s national rollout, Canada’s “Big Seven” have rebounded…

Chart - Canada's Big Seven

Canopy Growth Corp. (NYSE: CGC) is leading the pack, up nearly 35% over the past month.

Constellation Brands (NYSE: STZ) chief financial officer David Klein was named the Canadian producer’s new CEO. This Cannabis 2.0 opportunity is why Constellation poured $4 billion into Canopy. And why it’s taking the helm.

But now that Canadian shelves are stuffed with all kinds of new cannabis products – drawing in new customers and offering new opportunities – what should investors really expect?

Lowered Expectations

There’s a saying, “History doesn’t repeat itself, but if often rhymes.”

Well, there was a great lesson to be learned in 2019 that didn’t rhyme but shouldn’t be repeated.

“Euphoria is the enemy.”

Investors must temper their expectations.

In 2019, pot stocks dropped like stones because of lofty projections. As companies ramped up spending, they failed quarter after quarter to meet Wall Street’s forecasts.

This scenario might do more than just rhyme in 2020 as Ontario continues to be worthy of pot stock scorn.

Ontario is the most populous province in Canada. It’s home to roughly 40% of the country’s population. But it has a mere 24 dispensaries – one for every 600,000 residents.

Now, the province announced it would begin authorizing 20 new stores per month starting in April. And companies will be allowed to operate 75 dispensaries each by September 2021.

Obviously, this news received a thumbs-up from investors. Canopy has blamed the lack of Ontario stores as one of the biggest drags on earnings.

But before we’re guilty of putting the cart before the horse, those 20 new stores per month starting in April are below the 40 new store openings per month starting in January that Canopy forecast.

So keep that in perspective.

Out of the gate, edibles and vape pens are poised to win big.

Vape pens could capture 20% of the market, as edibles snag 10% to 15%.

For now, dried flower will remain the dominant force though, accounting for 50% of sales.

But there’s an important piece to keep in mind.

For now, alcohol infused beverages won’t be available. Nor will infused energy drinks or any high-potency product.

In the U.S., infused beverages account for less than 1% of the market. In Canada, the current forecast is that beverages might grab 2% to 3% of the market early on. And then it’s a game of wait-and-see.

Don’t expect Cannabis 2.0 to right the ship overnight.

We have a tremendous opportunity. But I am skeptical of the market’s reaction to those first earnings reports after Cannabis 2.0 launches with the obstacles in the road.

It’s hard for me to view any Canadian licensed producer as overvalued at current prices. I’m merely warning, don’t get caught chasing. Pick your spots and err on the side of caution.

The High Five

This week, we’re going to do something a little different for our “High Five.”

My team and I traveled to Las Vegas last week to attend the 8th annual Marijuana Business Conference and Expo (MJBizCon). This is the largest cannabis conference in the world and is attended by roughly 30,000 industry professionals. So today, we’re going to share with you our top five takeaways from this year’s event…

1) The 2020 Diet: “Losing weight” is the most common New Year’s resolution. Look for pot stocks to make this their focus in 2020 too. In 2019, companies were all about growth at any cost. Now belt tightening is coming. We’ve already seen several mergers and acquisitions renegotiated or abandoned. Expect that to continue.

2) CBD Crackdown: The legality of CBD is hazy. And the Food and Drug Administration (FDA) cited the need for more research be done into the safety of CBD consumption. The FDA will be forced to make a ruling on CBD. And the agency will likely begin targeting CBD-infused food and beverage products, as well as supplements. Any health benefits and claims will see increased scrutiny and warnings.

3) Illinois Gets It Right: We’ve seen failure after failure when it comes to new marijuana market launches. California stands out as the biggest dud. Its rollout was mired in missteps and red tape. But there is hope – though tempered – that when Illinois adult-use sales kick off to start the new year, it’ll be one of the few success stories, like Colorado or Nevada.

4) Show Me the Money! For cannabis companies, 2020 will be all about profitability, not growth or expansion. And that will mean focusing more on efficiencies. Expect big investments into enterprise resource management software and platforms. And I think those multistate operators that have remained laser-focused on only one or two markets will have the advantage.

5) Which Side Do You Choose? On one hand, there’s the medical marijuana market. On the other, there’s adult-use or recreational. Very few companies will be able to successfully conquer both. Most companies in the U.S. and Canada are going to have to make a choice. Are they going to focus on recreational or medical? 2020 will see the beginning of those distinctions.

Over the past month, our benchmark, the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF), is in the green!

Horizon Lifesciences Marijuana ETF

It’s been quite some time since we’ve been able to celebrate that.

We can thank the Cannabis 2.0 optimism for helping pot stock shares push off from their multiyear lows.

Now, despite all the turbulence and share price declines in 2019, most people at the world’s largest cannabis conference shrugged it off.

Because the reality is that this is a nascent North American industry. As the adage goes, “You have to learn to walk before you can run.”

Canada’s national, legal adult-use market is only 14 months old.

It’s suffered its share of bumps and bruises. But like any 14-month-old, it’s still learning how to walk on new legs.

In the U.S., the market fractured.

There are 33 states that have legalized medical use and 11 that have legalized adult-use.

The race was on in 2019 for companies to expand their footprint to as many of those markets as possible. And they stumbled. They tried to run before they could walk.

Cannabis is both a marathon and a sprint. We know a change at the federal level is coming to the U.S. It’s merely a matter of when. And we know that Canada has high hopes for Cannabis 2.0 legalization. But it won’t be the savior overnight.

In 2020, pot stocks will be making long-measured strides, pacing themselves for the marathon ahead.

The sprint is over. Now the endurance race begins.

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,