Cannabis Investment Club

[JohnCM]

Weekly Cannabis Report: Should You Buy The Dips After Equity Offerings?

May 13, 2019
Cornerstone Investments - Seeking Alpha

Summary

The cannabis sector tumbled last week as global equity markets dropped amid trade concerns between the U.S. and China.

Major cannabis ETFs dropped ~3% last week while the U.S.-focused index dropped 5.1%, dragged down by Charlotte's Web's 22% drop.

Both CannTrust and Charlotte's Web recently announced large equity offerings and we will discuss why investors need to discern good buying opportunities from traps.

Trading Summary

Cannabis stocks tumbled last week as the broader market fell on trade concerns. The Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF) dropped 3.1% and the ETFMG Alternative Harvest ETF (MJ) dropped 3.2%. U.S.-focused Horizons U.S. Marijuana Index ETF also slumped 5.1%.

Canadian Large-Cap: Canopy (CGC) dropped 3% along with the cannabis market. Cronos (CRON) dropped 7% after reporting weak 2019 Q1 results and giving a bleak outlook for the rest of 2019. Aurora Cannabis (ACB) dropped 5% after announcing a second exclusive medical cannabis supply agreement with Luxemburg. Tilray (TLRY) was flat without news.

Canadian Mid-Cap: Aphria (APHA) rose 4% without news. HEXO (HEXO) dropped 8% after a period of strong gains. OrganiGram (OTCQX:OGRMF) dropped 1% which outperformed the general sector. CannTrust (CTST) dropped another 4% after completing a US$200 million stock offering. Green Organic Dutchman (OTCQX:TGODF) dropped 8% after announcing a U.S. beverage JV and a supply deal with British Columbia.

Canadian Small-Cap: Wayland (OTCQB:MRRCF) was suspended for trading after the OSC imposed a trading restriction for failing to file its financials on time. Aleafia (OTCQX:ALEAF) jumped 27% after announcing a cannabis oil distribution JV in Germany. MediPharm (OTCQB:MEDIF) jumped 10% after reporting strong 2019 Q1 revenue of C$22 million. VIVO (OTCQB:VVCIF) dropped another 20% after falling 12% during the prior week due to weak 2018 Q4 results.

U.S. Large-Cap: Curaleaf (OTCQX:CURLF) bucked the trend and rose 4% after announcing its entry into the pet CBD market. Acreage Holdings (OTCQB:ACRGF) dropped 8% after a major shareholder said it will vote against the Canopy offer. Green Growth (OTCQB:GGBXF) dropped 6% despite announcing a partnership with Abercrombie to sell CBD products. Charlotte's Web (OTCQX:CWBHF) slumped 22% after its founders and insiders decided to sell C$140 million worth of stock at C$20 per share.

U.S. Small-Cap and International: TILT Holdings (OTCQB:SVVTF) dropped 3% after naming an interim CEO. MJardin (OTCQX:MJARF) dropped 36% after it was suspended for trading and reinstated later in the week. Khiron Life Sciences (OTCQB:KHRNF) dropped 4% after announcing a C$25 million equity offering at C$2.90 per share. We also initiated coverage of Australian-based CBD company Elixinol (OTCQX:ELLXF) with a favorable outlook.

Industry News

Cronos reported weak 2019 Q1 earnings with only C$6.5 million in sales with a 54% gross margin; Q2 outlook was also disappointing.
Charlotte's Web announced a secondary offering whereby its founders sold 7 million shares at C$20 per share; the company IPO'ed at C$7.0 per share in August 2018 to raise C$100 million.

Charlotte's Web pre-announced its 2019 Q1 revenue of $21-$22 million which did not grow from last quarter; management expects sales to ramp up and reiterated 2019 revenue guidance of $120-$190 million.

MediPharm reported 2019 Q1 results and revenue more than doubled to C$22 million from last quarter; EBITDA was a positive $4.3 million.

Village Farms (NASDAQ:VFF) shares jumped after reporting 2019 Q1 results including $4.3 million from its Pure Sunfarms cannabis JV (based on 50% interest).

Aurora Cannabis was selected by the Luxembourg Health Ministry as its exclusive medical cannabis supplier for the second time.
Canopy Growth announced an offtake agreement with PharmHouse to take productions from 30% of the 1.3 million sq. ft. of greenhouse space.
Health Canada has revamped its cannabis licensing system; applicants now need to have their facilities fully built before submitting an application which could benefit larger corporations.

Green Growth Brands announced a partnership with Abercrombie to sell CBD-infused body care products in a limited number of stores.

The Green Organic Dutchman announced a supply agreement with British Columbia and also set up a new JV to develop beverages in the U.S.
Cronos opened a new R&D lab equipped with a 23-people team in Israel to develop cannabis vaporizer products.

Looking Ahead

In the last few weeks, we have seen an increasing number of equity offerings from cannabis companies after the sector got off to a hot start in 2019. More importantly, sellers included the founders of these companies which caused concerns among investors. We think this is a natural occurrence for the industry as it evolves to a more mature industry. Two of the most notable recent equity offerings are CannTrust and Charlotte's Web.

CannTrust priced its US$200 million stock offering on May 2 at US$5.50 per share. The offer price represents a 25% discount to the closing share price on April 22 when the offering was first announced. Company insiders sold $30 million shares as part of the offering at a share price that is 50% lower than prices just one month ago.

Last week, Charlotte's Web also announced a C$140 million equity offering that comprises entirely of existing shareholders including its founders. The offering price was C$20 per share which is 20% below the share price before the announcement.

While many retail investors will be disappointed by the short-term drop in share price as a result of the large discounts in these equity offerings, we think investors should look beyond the near-term troubles. Entrepreneurs spent years building these businesses while carrying significant financial and sometimes regulatory risks. We think it is totally reasonable for them to realize benefits at some point. Due to the nature of the cannabis market, large bought deals often require substantial discounts to trading share prices.

In the long term, we think fundamentals should drive share price performance. Investors who believe in the long-term potential of these companies could consider using short-term blips to accumulate additional shares.

In the case of CannTrust, we think the company is facing fundamental headwinds and would not view the current share price weakness as a buying opportunity.

However, we think Charlotte's Web remains the leader in the U.S. CBD market and thus would recommend investors with long investment horizons to consider using this opportunity to accumulate additional shares.