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Several weeks ago, we explained why the Canadian LPs could get a lift from the U.S. elections, suggesting that financial media are misleading their audiences by including Canadian companies in their stories inappropriately. We also explained how the largest ETFs include primarily Canadian LPs and that investors don’t seem to understand the bet they are placing. Finally, we projected that any move towards legalization would be perceived as a potential benefit to the large LPs, who might finally be able to enter the U.S.
A look at the four largest Canadian LPs and the four largest MSOs by market cap shows that American cannabis companies are benefiting less from the election wins than the LPs, with only GTI, which posted a monster of a quarter last week, able to beat any of the Canadian LPs:
Volumes for the Canadian LPs have been off-the-charts. In fact, ahead of last week’s equity offering from Aurora Cannabis, the stock traded 460 million shares just in the U.S. on November 16th, which is way more than the number of shares outstanding and represented a stunning $4.7 billion in traded value. Canopy Growth’s traded value that day in the U.S. was $806 million as it traded 4X its normal volume. The volumes for these stocks have remained quite high.
We think investors who are betting that the U.S. market will soon open up to Canadian LPs are making a big mistake. First, it’s not a foregone conclusion that the Democrats will win control of the Senate in January when Georgia conducts its run-off elections, but, even if they do, this is an extremely complex process. We remind our readers that Canada, where medical cannabis was already legal, took a full three years from the time Trudeau was elected in 2015 to launch adult-use sales. It’s been over two years since CBD was thought to be legalized in the U.S., and we still haven’t figured that out! There are many issues that would slow any potential move towards legalization in the U.S., especially interstate commerce.
Even if we are wrong about the timeline to legalization, we think that any door that would open to a large Canadian LP would also open to many other companies. The results thus far in terms of growth and profitability for the largest Canadian LPs have greatly lagged their American peers, and we remind our readers that most of them have no retail experience due to limitations by the various provinces. We think that CPG companies and retail companies, all with substantially more resources than the large Canadian LPs, would walk through that theoretical door opening and partner with leading American operators or just buy them. Let’s not forget, as well, that the American operators, who have already proven that they know how to satisfy their consumers and earn a profit at the same time, would have greatly enhanced access to capital.
It seems clear that the sudden surge in interest and prices for Canadian LPs is due to the American elections, as we expected. For those making the bet that these companies will actually benefit, we think that any potential payoff is a long way out.
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Alan & Joel