Marijuana Metrics: Tracking the Pot Landscape

03/01/2018

 

Equity Guru has been tracking the Canadian marijuana landscape for about a year now, and can safely say we’ve never quite seen anything like it. Bull markets are the very best kind of ride, and this pot market especially. It’s the kind of bull market that you’d get if the stock market gods created one by immaculate conception. For a time, it was good.

There are two basic value tiers in this sector.

Cultivators – Companies with One Year of Reported Production

By the grace of government permission, pot companies trade in a product with proven demand that seems bottomless.  For a good 12 months there, as far as anyone was concerned, a license to supply the Canadian marijuana market was a license to print money.

This is the classic parabolic climb. (We’re tracking MC instead of price so that they scale together.) From August of 2017 through January 5, 2018, these companies added a collective $15B in market cap, an average of $2.1B each. That’s the size of a decent Canadian mining company. The highest earner earns $0.17/share. Most lose. The average annualized earnings sector-wide is -$0.19/share. This is a growth rush.

Pre-Cultivators – Fewer than 12 Months Of Reported Production

Naturally, the simple chance at becoming a Canadian LP makes pubcos virtual money machines. Startup LPs grew like mushrooms as soon as Health Canada came out with the first medicinal marijuana framework, and have shown tremendous staying power. By August, many applicants had become LPs themselves, and were well on their way to becoming full-fledged cultivators.

Nobody doubted that these companies, every one of them with facilities that were then and are still today at least partially under construction, would be supplying dank bud to an enormous market. The pre-cultivator LPs and license applicants, as a group, made a jump of $2.7B in market cap in that 6 month period. $185M each. That’s about what Shopify does in quarterly revenue. Not a bad lift for a room with some lights in it, and the prospect of a license to operate it.

 

According to the collective consciousness, anyone who can successfully navigate the maze that ends at a licensed facility is going to be able to sell everything they can produce in the market we have now. As if notionally bottomless current demand wasn’t enough, the prospect of recreational legalization and an export market opening up keep hanging around. It’s the buzz you’d feel in Formula One garage if the Competition Committee was talking about allowing nitrous boosters. Sure, there are going to be more on-track disasters. But is that really a problem? I mean, on an industry level?

Bull markets are paradoxes. The attention and volume allows stocks to find their level in a hurry, but that level always seems inflated. Since it’s inflated sector-wide, the smart (and easy) move was to just ignore it. For all we knew, this optimism may have been undervaluing a license to grow drugs on trees. But water always finds its level.

Nothing Lasts Forever

Chris Perry prophetically wrote on Jan 19 that it was “Time for a Dad Talk” about Weed stocks, and threatened to turn the car around, because this was just getting out of hand. Sure enough…




It’s been one hell of a February. The average cultivator gave back $656M of that market cap in the past month, the average pre-cultivator $85M.

All levels of this pot market are now trying to decide whether or not they want to continue going sideways or collapse altogether. It would appear as though the time when companies could catch a lift just because they have pot in their name may be ending. We’re entering a plateau phase where investors are going to have to be a bit more selective, and look to sort out exactly what these companies are, what they do, and where they fit in. 

Time to Eat Your Vegetables

The days when everything got caught in the same updraft look like they’re over. This market is sorting itself out – the quality is being given a chance to break away. It has the makings of a stock pickers market. That’s not the easy wild fun of a  bull stampede, but it’s the next best thing.

Equity Guru has compiled select operational and market data on Canadian pot producers to try and give our readers a fresh look at these companies in relation to each other. Over the next few days, we’re going to be rolling out posts that look at Canadian pot companies’ production volume, growth in production, how they use their space, how much space they’re planning on building, how that buildout is progressing, and what it’s doing to the value of their equity. We hope to identify what the market is factoring in and what it’s ignoring, and leave it up to you to guess when it’s going to change its mind.

For producers without production data, we’ll be looking at how they take care of their equity, the value that’s been created since their inception, and the many many things they tell us about how much they’re going to matter in the grand scheme of this fabled market.

And it is fabled. The rec-legal drumbeat is still going strong, and enthusiasm continues sector-wide. The largest companies are making deals with US liquor giants, and buying supply lines into Europe. The operating producers reporting operational margins in the 60% and 70% range and even through this value-quake, nobody is doubting that those margins will be able to scale to the planned buildout. Is it possible that one of the largest pubcos could be taken out by a revenue junkie, like a big private equity firm looking to get the jump on sustainable income? Which of the up-and coming LPs who are just coming on line is going to set themselves apart from the pack?

Stay tuned.

A better kind of plateau.

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