The Ontario government’s decision to close marijuana retail stores on April 3 has come right when it seemed pot retail in Canada’s largest market was turning a corner. Though the crisis will have deep impacts on the marijuana sector, leading observers disagree on whether the fundamentals of the industry can weather this new hurdle after an already turbulent year.
One leading portfolio manager sees the store closure as a near-term hurdle, the long-term impacts of which will be determined by the wider public health crisis. A marijuana market analyst, though, thinks that with stores still open across much of Canada, delivery now available in Ontario, and a likely increase in demand from consumers stuck at home in need of recreation, the fundamental upturn he was already seeing in Canadian pot will continue, if a little slowed by current conditions.
“For Canadian cannabis companies, this is a significant near-term headwind,” Charles Taerk, co-founder of Faircourt Asset Management and portfolio manager for the Ninepoint Alternative Health Fund, told WP. “We were anticipating Ontario announcing 20 licences per month starting [April]. The licensed producers were anticipating more demand, not less.”
Taerk thinks that the store shutdown will hit retail growth prospects especially hard. While dedicated recreational and medical users will likely still order online, new customers, especially in older generations, might feel more uncomfortable trying new cannabis products without shopping in a store and talking to a clerk first. Without stores to shop in, Taerk thinks that market segment will suffer from a “reticence” to buy.
He doesn’t think the Ontario closures are a death knell for Canadian pot, though, noting that Ontario has relatively few stores to close. Rather, he thinks this will delay the excitement investors were feeling about the planned expansion of retail licences in the province.
Chris Damas still sees that positivity in the broader Canadian market. The President of the BCMI Cannabis Report noted that jurisdictions with more stores, notably Alberta and Quebec, are keeping retail outlets open. As well, Quebec and Nova Scotia are both still expanding their retail licences. Damas also thinks that as consumers shelter in place, they’re more likely to toke up, if only to make their seventh Friends rewatch a little more interesting.
“Now some people think the virus is terrible for the stocks. I am a contrarian and I believe that the virus COVID is actually going to help legal take market share from illicit [dealers],” Damas said. “When you get that box in the mail from an illicit dispensary, it's a brown box with no label. You don't know who's touched it. You don't know if they had COVID. You don't know where it's been. You know, it just shows up on your doorstep. So honestly, I think this argument that legal cannabis had more safety is going to be resonating even more with people.”
He pointed out, too, that cannabis wasn’t exempt from the panic buying that defined retail in March. The OCS has reported a marked increase in sales during that period as people stocked up on pot.
Before the crisis, Damas was forecasting $2.5 billion in retail sales for 2020, up from $1.2 billion in 2019. Now he’s revising his forecast down, but only by $120 million. He thinks, though, that if Alberta, Quebec, and B.C. follow Ontario’s lead and close their stores, the prospects for Canada’s pot industry won’t look so rosy.
Charles Taerk agrees that social distancing is likely to drive demand for pot up during this crisis as consumers look for an escape. He also thinks that the longer this crisis drags on for, the more likely we are to see the ‘reticence’ around purchasing online abate. He thinks consumers will adjust to the new normal and see online shopping as the only option.
Taerk and Damas agreed, too, that the current crisis might be an opportunity for consolidation. They think pot stocks will do better if the market consolidates around three or four large-cap companies. Current strains on cashflow for smaller firms might push them to sell to a larger cannabis company. That market consolidation, in turn, will drive investment. Damas sees opportunity in large-cap companies like Canopy. He thinks that their decision to close all their Tokyo Smoke and Tweed stores across the country will temporarily hit their stock prices without undermining fundamentals, making them a safe buy in the long-term.
Taerk sees more opportunity south of the border. He noted that states have responded to the coronavirus by giving their marijuana stores more latitude for delivery and curbside pick-up. He thinks those companies have a route to more growth in a bigger market.
As for Canada, Damas believes that, though things are uncertain, the Canadian sector could emerge consolidated and stronger than ever.
“I believe that we will get rid of a lot of the pretenders,” Damas said, when asked about his outlook for the industry. “If you stick to a few of the survivors, eventually the others are going to run out of cash and you're gonna end up in a situation where you’ve got the equivalent of Seagram’s, Hiram Walker, and Corby. And that's what you want for these vice stocks that have already shown some resistance to recession with this report that OCS sales are up almost 100% ... I think the overvaluation is almost done and advisors might want to consider buying Aphria and Canopy on weakness.”
Trading Stock | January 28