As investors rush to prepare for the upcoming year, the Investing News Network (INN) offers views from experts and observers of the cannabis industry on what to look out for in 2019.
While the possibility of even bigger deals from players in the pharmaceutical, alcohol and beverage industries continues to capture investors’ imaginations, serious challenges still lie ahead for the sector.
For one thing, companies in the marijuana space will have to deliver on more promises than ever. As Canadian firms combat shortages and prepare for the arrival of edibles, US companies are looking to separate their brands and products from a flood of new items.
Overall, 2019 looks set to be a year when investors start demanding results from cannabis picks in Canada, while the US will continue to gain momentum from key policy drivers. As a result, investors could be motivated to pay more attention below the border.
Read on to learn what cannabis market watchers see coming in 2019. You can also click here to see what companies are looking forward to in 2019, or click here to see our 2018 cannabis trends overview.
Cannabis outlook 2019: More deals on the way
Mergers and acquisitions (M&A) in the marijuana space moved at a relentless pace during 2018, and predictions indicate that the action won’t slow down in 2019.
Dena Jalbert, founder and CEO of Align Business Advisory Services, a firm that helps M&A processes, told INN she sees deals in which intellectual property (IP) is at hand beginning to appear more and more. One of the biggest IP cases of 2018 was Canopy Growth’s (NYSE:CGC,TSX:WEED) acquisition of the IP of Colorado-based cannabis research firm ebbu.
She believes deals for IP will to appeal to companies in 2019 since there is only “so much land and states and geography” to go around. In other words, valuable assets in the future will include ideas and specific product developments.
Another type of deal investors will be anxiously awaiting will be those with established players from industries such as tobacco, alcohol, pharma and even cosmetics.
Charles Taerk, president and CEO of Faircourt Asset Management and advisor to the Ninepoint UIT Alternative Health Fund, and Doug Waterson, CFO and portfolio manager with Faircourt Asset Management and manager of the Ninepoint UIT Alternative Health Fund, shared their thoughts on what these deals will look like in 2019.
“The nature of these investments (limited JV, or more control oriented) will be an important determinant in the evolution of the sector,” the duo from Faircourt said.
One of the reasons these companies are looking at options in the cannabis world is to inject revenues and energy into older businesses.
“I think that consolidation is what we’re going to see … especially in the US, as regulation continues to lighten and those businesses become more risk tolerant,” Jalbert said.
The advisor also explained that she sees the potential for the beauty industry to take a bigger step forward with partnerships in the cannabidiol (CBD) market.
“They’re jumping in because they can take the CBD path in some cases,” said Jalbert. “We’re seeing a lot in the beauty industry.”
Cannabis outlook 2019: How far can the US market go?
The US is a complicated market for cannabis and its investors. While technically illegal at a federal level, companies have entered states that have voted in favor of legalizing marketplaces for medical and even recreational use.
But due to restrictions, public companies are forced to seek capital from Canadian investors through the Canadian Securities Exchange (CSE).
Neal Gilmer, research analyst with Haywood Securities, wrote a note projecting that the US cannabis market could be worth between US$15.9 and US$21.7 billion by 2022.
The analyst highlighted the most direct approach investors have for gaining exposure to this market: multi-state operators. These companies own and operate assets in legal states, but due to the fractured nature of the market they have to manage operations separately.
As such, the more general market of retail investors has yet to find entrance points into these companies.
Gilmer wrote that there are “significant benefits” to some of the new larger operators that have appeared on the CSE in 2018.
“Not only can they leverage and adapt their [standard operating procedures] SOP’s and other ‘know-how’ but can leverage brand awareness, product development, IP, and scale,” he said.
While the US is gaining steam as the prize for cannabis companies due to its population size, capital has still most flowed in from Canada.
During a panel at MJBizCon in Las Vegas, Kevin Murphy, CEO of multi-state operator Acreage Holdings (CSE:ACRG), said Canadians “are leading the capital market race.”
This could change very quickly as regulations in the US continue to gain momentum and the need to evaluate a more efficient cannabis marketplace rises.
Investors will have to follow developments with the STATES Act and its implementation if approved.
This bipartisan legislation seeks to grant protections to states that have legalized the drug and to allow companies to operate more openly — for example, by being able to interact with banks.
Despite the potential of this bill, if approved it still wouldn’t remove cannabis and its derivatives from the controlled substances list they are currently on.
Another wrinkle in the STATES Act could be the transition of US cannabis companies from raising capital on the CSE to more senior exchanges such as the NASDAQ or the New York Stock Exchange (NYSE), according to Murphy.
“A lot of the companies that we’re talking to, yes, they are bigger and some of them are actually [ready to launch on the NYSE or NASDAQ]. But a lot of them are significantly smaller than that. They need to raise additional growth capital to get to that level,” Richard Carleton, CEO of the CSE, told INN.
Carleton still expects to see a lot of US cannabis listings on the CSE, despite the potential approval of the STATES Act.
“To date, US cannabis companies have looked to Canada for access to capital and operational needs. 2019 could be the year where the US wakes up and smells the cannabis,” said Steve Hawkins, CEO of Horizons ETFs.
Brian Schinderle, a managing partner with Solidum Capital Advisors, said the STATES Act could open the doors to US broker dealers and US private equity.
“They are sitting on so much money that they don’t know what to do with, and it’s killing them that they can’t run in here and get involved,” Schinderle said during a panel at the Arcview Investor Forum.
Cannabis outlook 2019: Concerns to watch out for
Cannabis investors have seen the rollercoaster ride this market can offer first hand. Double-digit surges in a day accompanied by cutthroat slashes in value are no novelty in the cannabis market.
But what will investors have to be concerned about in the new year?
When asked about their biggest cause of concern for the space, Taerk and Waterson said the rollout of new recreational products like edibles and infused items could have a messy effect depending on how long they take to hit the market.
The Faircourt duo is also worried about the valuations still seen to this day with cannabis producers.
“Valuations of some producers are very high, and corrections in these names could spill over into the sector more generally,” Taerk and Waterson said.
Hawkins agreed, indicating the optimism surrounding these stocks has led to valuations and share prices that he deems inappropriate. “I’m concerned that some investors that are holding these companies might get burned,” he said.
Cannabis outlook 2019: Hemp and CBD
Gilmer said at the Arcview Investor Forum that he is a big believer of the overall CBD market gaining ground in 2019.
The analyst explained that much of the current growth for this market is due to anecdotal references and recommendations, and once more research is available he expects to see more adoption.
“We remain positive on the CBD market and believe that CBD could be removed from its Schedule I classification driving further adoption across the US and likely driving solid interest and investments from companies outside of the cannabis sector,” Gilmer wrote in a research note.
The hemp industry has been in the spotlight as the latest US farm bill moves closer to law.
Bethany Gomez, director of research for the Brightfield Group, told CNBC the bill would allow the industry to “grow very rapidly and scale on a national level.”
A projection from the researchers shows the new market could be worth US$20 billion by 2022.
Cannabis outlook 2019: Investor takeaway
With another year ending in the rapidly advancing cannabis industry, 2019 appears poised to offer just enough volatility and change for the space.
The resources cannabis investors have continue to expand, but due diligence and research will continue to be key for investors looking to avoid pitfalls in the industry.
Trends such as the evolution of the cannabis industry to accommodate a more global landscape, new products such as beverages and a focus on developing brands will continue into 2019.
Want more details? Check out these articles for more INNdepth coverage.
Want an overview of investing in cannabis stocks? Check Investing in the Cannabis Industry
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.