Cannabis Stocks Crashing Across The Board

Canadian Business Says...Investors are delusional

Provincial buyers are going to want to deal with licensed producers that can supply large amount of product at low prices. At present the average price of medical marijuana is roughly $10 per gram. Some publicly traded companies have boasted that their all-in costs are in the range of  70 cents to $1.75 per gram which translates into profit margins of more than 80 per cent. However, we can expect provincial agencies will severely cut into these margins. The Ontario wine industry provides us with some idea of profit margins that LPs might reasonably expect. In a recent study on Ontario Wine and Grape Industry (2015), for large scale operations the profit margins are just under 15 per cent and in fact many smaller vineyards were posting losses.

Allan Gregory is a professor of economics at Queen’s University.

As the July deadline for the provinces to legalize marijuana approaches, the stock prices of Canadian publicly-traded weed producers have been on a tear. On Monday alone shares in Canopy Growth Corp., soared nearly 20 per cent. The surge in market value comes as firms try to position themselves with sufficient product to meet anticipated demand. But as these companies, some valued in the billions of dollars despite generating no profits, continue to attract starry-eyed investors, it’s worth examining what kind of opportunities will exist for these firms when provinces regulate retail pot sales. It is not difficult to predict profit margins will fall under regulation and that current market cap valuations are predicated on unrealistic expectations.

While there are some variations across provinces in their distribution plans for legalized marijuana, the largest two provinces, Ontario and Quebec, intend to have provincial run outlets modelled on their government-controlled alcohol sales. Indeed, the alcohol model gives us an important clue as to how the industry is likely to shake out—and why marijuana producers face tough times ahead. Keep in mind that there will still be online purchases and the proportional divide between physical store and e-commerce is unclear. Ontario with only a planned 150 outlets might give us an early indication as to online traffic. But let us consider the possible ramifications from only the government outlets.

The Ontario Liquor Control Board (LCBO) and Société des alcools du Québec (SAQ) effectively have a monopoly on the sales of most alcohol products in their respective provinces (with the exception of beer and some wine). The LCBO is one of the world’s largest buyers and demands much from its suppliers in terms of large quantities and price discounts. Minor producers, even in Ontario, who are unable to meet the demands of the LCBO must sell their products elsewhere.

Giant provincial alcohol buyers with market power drive tough bargains in terms of price and quantity which dissipates suppliers’ profits. Of course, having a virtual monopoly on the retail side has meant that these pricing discounts are rarely passed onto its customers. I see the same tactics for recreational marijuana. There is the false belief that the licensed producers (LPs) of marijuana will get the same price from the provinces they have enjoyed in the retail-based medical market business.  However, aggressive bulk buying by large provincial authorities will whittle the producer price down markedly.

Provincial buyers are going to want to deal with licensed producers that can supply large amount of product at low prices. At present the average price of medical marijuana is roughly $10 per gram. Some publicly traded companies have boasted that their all-in costs are in the range of  70 cents to $1.75 per gram which translates into profit margins of more than 80 per cent. However, we can expect provincial agencies will severely cut into these margins. The Ontario wine industry provides us with some idea of profit margins that LPs might reasonably expect. In a recent study on Ontario Wine and Grape Industry (2015), for large scale operations the profit margins are just under 15 per cent and in fact many smaller vineyards were posting losses.

Meanwhile at implementation this will likely mean only the largest producers will be entering into contract with the provincial authorities. The notion of boutique suppliers of cannabis will have to wait, just like craft beer producers waited in alcohol sales. Establishing reliable supply lines will dominate initially any gourmet pot considerations.

Will provinces favour producers in their own backyards? Of course they will. Just as Ontario has favoured its own wine industry and shelves mostly their products for the domestic lines in their stores, so will it be true for provincial distributors. For instance, if you are a cannabis producer hoping to sell in Canada’s biggest markets, you will likely need a physical grow-op in Ontario or Quebec. This means regional producers will face additional barriers to growth. At present only the government of New Brunswick has announced a commitment to Organigram, a Moncton-based producer, to buy five million grams a year. The company, which has seen its shares soar 31 per cent in value so far this year, estimates that deal will translate into a retail value of $40 million to $60 million. (At present, Organigram’s market value stands at $630 million.) Other provinces will soon follow suit I believe and strike distribution arrangements for local provincial growers.

As in many stock market interactions, the industry tells a rosy story of growth and opportunity. But I would suggest a careful recall of the dot com bubble offers a somber warning. Canopy Growth Corp. is currently valued at just over $7.5 billion yet loses about 12 cents a share. At the same time, Canadian Tire Corp. has a valuation of $11.5 billion and earns $10 a share—and pays a dividend yield of 2.14 per cent.  What company offers a better long-term investment?

Source Of This Educational Article

House Buys and Sells Aura Cannabis ACB

House Positions for C:ACB from 20180108 to 20180108

House	Bought	$Val	Ave	Sold	$Val	Ave	Net	$Net
13 Instinet	4,362,332	60,935,187	13.968	3,918,373	54,764,036	13.976	443,959	-6,171,151
53 Morgan Stanley	571,361	8,018,948	14.035	142,316	1,988,146	13.97	429,045	-6,030,802
85 Scotia	2,254,439	31,507,038	13.976	1,858,137	25,971,082	13.977	396,302	-5,535,956
33 Canaccord	1,247,780	17,443,537	13.98	883,080	12,327,678	13.96	364,700	-5,115,859
39 Merrill Lynch	1,192,221	16,675,692	13.987	938,518	13,106,623	13.965	253,703	-3,569,069
80 National Bank	816,104	11,411,956	13.983	606,516	8,485,924	13.991	209,588	-2,926,032
2 RBC	2,776,635	38,833,535	13.986	2,583,428	36,146,504	13.992	193,207	-2,687,031
89 Raymond James	182,508	2,521,519	13.816	29,615	411,496	13.895	152,893	-2,110,023
72 Credit Suisse	130,595	1,828,243	13.999	0			130,595	-1,828,243
143 Pershing	214,430	2,994,877	13.967	88,220	1,234,615	13.995	126,210	-1,760,262
9 BMO Nesbitt	1,426,608	19,911,185	13.957	1,333,209	18,646,182	13.986	93,399	-1,265,003
59 PI	68,833	961,465	13.968	17,152	240,650	14.03	51,681	-720,815
58 Qtrade	164,936	2,311,970	14.017	114,882	1,610,543	14.019	50,054	-701,427
65 Goldman	121,522	1,699,671	13.987	90,083	1,262,981	14.02	31,439	-436,690
14 ITG	33,938	474,180	13.972	4,974	69,787	14.03	28,964	-404,393
15 UBS	30,068	421,386	14.014	2,434	34,086	14.004	27,634	-387,300
88 Credential	54,509	763,524	14.007	30,000	418,837	13.961	24,509	-344,687
99 Jitney	512,900	7,163,453	13.967	493,600	6,905,962	13.991	19,300	-257,491
83 Mackie	95,330	1,335,225	14.006	87,200	1,222,530	14.02	8,130	-112,695
18 Echelon	8,000	111,880	13.985	0			8,000	-111,880
74 GMP	24,890	348,718	14.01	17,550	243,897	13.897	7,340	-104,821
56 Edward Jones	18,472	258,464	13.992	11,486	160,862	14.005	6,986	-97,602
22 Fidelity	14,678	204,685	13.945	7,827	109,232	13.956	6,851	-95,453
77 Peters	3,000	42,080	14.027	0			3,000	-42,080
48 Laurentian	3,150	43,844	13.919	950	13,322	14.023	2,200	-30,522
94 Hampton	935	12,988	13.891	0			935	-12,988
62 Haywood	2,100	29,238	13.923	1,500	20,994	13.996	600	-8,244
25 Odlum	550	7,694	13.989	0			550	-7,694
101 SG Capital	19,100	266,789	13.968	18,700	259,345	13.869	400	-7,444
68 Leede	2,520	35,455	14.069	2,500	35,095	14.038	20	-360
84 Ind Trading	6,000	84,600	14.10	6,000	84,090	14.015	0	-510
3 AltaCorp	7,000	96,870	13.839	7,000	96,996	13.857	0	126
36 Latimer	6,000	83,966	13.994	6,200	86,579	13.964	-200	2,613
70 Manulife	3,257	45,478	13.963	9,151	127,970	13.984	-5,894	82,492
90 Barclays	7,465	103,943	13.924	14,500	202,615	13.973	-7,035	98,672
57 Interactive	11,142	156,021	14.003	26,922	374,849	13.924	-15,780	218,828
28 BBS	86,900	1,210,180	13.926	107,119	1,498,232	13.987	-20,219	288,052
19 Desjardins	327,662	4,582,945	13.987	367,980	5,136,070	13.957	-40,318	553,125
124 Questrade	884,824	12,375,493	13.986	931,994	13,016,027	13.966	-47,170	640,534
1 Anonymous	7,022,544	98,098,558	13.969	7,337,892	102,517,106	13.971	-315,348	4,418,548
76 Industrial Alliance	15,265	213,449	13.983	332,300	4,659,241	14.021	-317,035	4,445,792
7 TD Sec	6,087,669	85,081,786	13.976	6,662,103	93,099,165	13.974	-574,434	8,017,379
79 CIBC	4,191,511	58,530,584	13.964	5,920,272	82,648,950	13.96	-1,728,761	24,118,366
TOTAL	35,011,683	489,238,299	13.974	35,011,683	489,238,299	13.974	0	0

ACB:TSX House Buy and Sells

House Positions for C:ACB from 20180105 to 20180105

House	Bought	$Val	Ave	Sold	$Val	Ave	Net	$Net
7 TD Sec	5,935,773	76,535,539	12.894	5,077,447	65,643,476	12.928	858,326	-10,892,063
79 CIBC	4,715,769	61,024,973	12.941	4,066,313	52,705,174	12.961	649,456	-8,319,799
39 Merrill Lynch	1,241,507	16,134,421	12.996	701,781	8,854,698	12.617	539,726	-7,279,723
2 RBC	2,503,117	32,290,188	12.90	2,026,571	26,165,778	12.911	476,546	-6,124,410
85 Scotia	1,801,621	23,253,775	12.907	1,478,082	18,943,635	12.816	323,539	-4,310,140
1 Anonymous	3,355,343	43,280,655	12.899	3,118,146	40,565,294	13.009	237,197	-2,715,361
124 Questrade	816,468	10,511,290	12.874	650,112	8,438,064	12.979	166,356	-2,073,226
8 Eight	100,000	1,334,913	13.349	0			100,000	-1,334,913
13 Instinet	3,091,577	39,976,996	12.931	3,007,100	38,930,548	12.946	84,477	-1,046,448
65 Goldman	87,240	1,140,584	13.074	23,129	301,296	13.027	64,111	-839,288
80 National Bank	609,204	7,843,335	12.875	545,557	7,032,326	12.89	63,647	-811,009
14 ITG	81,229	1,045,913	12.876	18,474	242,015	13.10	62,755	-803,898
58 Qtrade	165,771	2,143,331	12.929	115,019	1,485,939	12.919	50,752	-657,392
99 Jitney	455,500	5,916,445	12.989	431,600	5,601,817	12.979	23,900	-314,628
83 Mackie	28,375	347,291	12.239	9,300	121,409	13.055	19,075	-225,882
90 Barclays	16,500	220,176	13.344	1,100	14,202	12.911	15,400	-205,974
53 Morgan Stanley	21,850	274,625	12.569	7,135	89,533	12.548	14,715	-185,092
56 Edward Jones	16,038	203,181	12.669	1,837	23,581	12.837	14,201	-179,600
89 Raymond James	18,020	239,626	13.298	5,802	72,435	12.484	12,218	-167,191
59 PI	21,501	269,235	12.522	11,973	154,337	12.89	9,528	-114,898
74 GMP	22,444	294,162	13.106	14,290	190,765	13.35	8,154	-103,397
70 Manulife	3,835	50,003	13.039	200	2,400	12.00	3,635	-47,603
76 Industrial Alliance	8,298	108,808	13.113	5,000	60,941	12.188	3,298	-47,867
22 Fidelity	3,890	50,334	12.939	1,650	21,633	13.111	2,240	-28,701
43 Caldwell	1,000	13,390	13.39	0			1,000	-13,390
48 Laurentian	850	11,406	13.419	0			850	-11,406
25 Odlum	600	7,452	12.42	0			600	-7,452
92 Pollitt	500	6,725	13.45	0			500	-6,725
3 AltaCorp	55,500	714,263	12.87	55,500	717,779	12.933	0	3,516
84 Ind Trading	18,000	228,236	12.68	18,000	231,012	12.834	0	2,776
68 Leede	1,500	19,235	12.823	1,500	19,110	12.74	0	-125
57 Interactive	8,781	111,246	12.669	10,954	143,066	13.061	-2,173	31,820
101 SG Capital	50,800	649,489	12.785	55,700	715,222	12.841	-4,900	65,733
36 Latimer	10,300	133,186	12.931	20,500	268,370	13.091	-10,200	135,184
72 Credit Suisse	13,413	178,942	13.341	29,600	366,931	12.396	-16,187	187,989
28 BBS	99,470	1,277,952	12.848	120,532	1,519,985	12.611	-21,062	242,033
88 Credential	28,728	367,159	12.781	52,049	667,083	12.816	-23,321	299,924
15 UBS	33,875	418,751	12.362	57,822	765,820	13.244	-23,947	347,069
62 Haywood	1,900	24,391	12.837	28,900	377,193	13.052	-27,000	352,802
33 Canaccord	1,826,375	23,696,908	12.975	1,857,014	24,138,882	12.999	-30,639	441,974
19 Desjardins	407,480	5,267,187	12.926	441,691	5,717,590	12.945	-34,211	450,403
143 Pershing	95,747	1,233,696	12.885	133,381	1,722,290	12.913	-37,634	488,594
73 Cormark	0			50,990	679,143	13.319	-50,990	679,143
9 BMO Nesbitt	1,348,852	17,409,182	12.907	4,872,790	62,547,823	12.836	-3,523,938	45,138,641
TOTAL	29,124,541	376,258,595	12.919	29,124,541	376,258,595	12.919	0	0