…After a disappointing 2019, we think the Canadian market will remain challenged in 2020 [with] more failures likely needed before the situation improves materially. [Indeed, of the 319 marijuana and marijuana-related (ancillary) companies trading on the various North American stock exchanges…only 10 companies that are worth taking a look at.
Canada has a population of fewer than 40 million people and, as such, is too small to support more than a few marijuana companies. That’s why we think the top 10 names identified below are most likely the survivors in the long-run. @”Cannabis Central”
The Top 5 Lrge-Cap Marijuana Companies
The 5 large-cap companies mentioned above:
- have access to the largest amount of capital and are building capacities that alone could supply the entire domestic market in Canada.
- have global infrastructure and adjacent opportunities in beverage, pharma, and other applications of cannabis.
- are listed directly on a U.S. stock exchange.
- Aphria and Canopy are the best large-cap stocks within the Canadian large-cap space, due to their balance sheet strength and large installed capacities.
- Meanwhile, we think Aurora Cannabis is the weakest player given its stretched balance sheet and large corporate overhead.
- (For a detailed review if the merits of all 5 companies please visit the original article.)
The Top 5 Small-Cap Marijuana Companies
The 5 small-cap companies mentioned above:
- also have sizable production capacities and meaningful market share in their respective categories…
- also have access to adequate capital although such financings could be more expensive.
- tend to be more regional-focused…
- many of them don’t yet have direct U.S. listings and they
- tend to be viewed as more domestic-focused with less pronounced international expansion plans…
We think the small-cap space is ripe for consolidation in 2020…[and that] there will be only a small number of companies that can survive in the long-run.
- MediPharm and Valens GroWorks are two names with the best growth outlook due to their focus on extraction which is a fast-growing segment within an otherwise challenging Canadian market.
- However, the rest of the group largely depends on the legal market which has seen numerous challenges since the initial legalization in October 2018.
- We also believe that the Canadian market could only support a handful of large-scale players on a sustainable basis which doesn’t bode well for the smaller LPs.
- (For a detailed review if the merits of these 5 companies please visit the original article.)
…We think 2020 will be another tough year for the sector…We see more corporate failures, asset deals, and only a handful of players surviving in the long-term.
We expect an upcoming shakeout period for the Canadian industry, especially the small/mid-cap space, during which weak players will be either eliminated or combined with others. Overall, we think for average investors the U.S. cannabis sector holds much more potential for gains and the Canadian market is likely going to face persisting headwinds during this shakeout period.
We remain of the view that:
- large-caps represent better risk-reward at this point due to their staying power and competitive advantages.
- large exposure to small-cap stocks is not recommended given the challenging growth outlook in Canada and the tough financing market.
- extraction represents one segment of the small-cap space that is worth taking a look.