Canadian Cannabis Producer Stocks Pull Back 5% in December

The Canadian Cannabis LP Index continued to lag the broader sector in December, retreating 4.8% to 275.16:

The index, which rallied 22.1% in Q4, still fell 30.1% in 2020:

It remains substantially below the all-time closing high of 1314.33 in September 2018, just ahead of Canadian legalization. In March, it posted a new 52-week closing low of 196.10, a level not seen since late 2016, and it closed 40.3% above that level at the end of December:

The Canadian Cannabis LP Index, which is rebalanced monthly, included 35 qualifying publicly traded licensed producers that traded in Canada at the end of November, with equal weighting for each stock. Each of the members was also included in a sub-index, with 5 in the Canadian Cannabis LP Tier 1 Index, 10 in the Canadian Cannabis LP Tier 2 Index and 20 in the Canadian Cannabis LP Tier 3 Index during the month. At the end of June, we revised the rules for inclusion, requiring companies to have a price of at least C$0.20 unless they are generating at least C$2.5 million quarterly from their cannabis production operation. Previously, we required revenue in excess of C$1 million for stocks trading below C$0.20. There are currently about two dozen publicly traded LPs that fail to qualify.

Tier 1

Tier 1, which included the LPs that are generating cannabis-related sales of at least C$20 million per quarter, fell 19.4% to 488.96 after almost doubling in November. In 2019, it declined 38.5%, when it ended the year at 642.23, and Tier 1 dropped 23.9% in 2020. We have increased the minimum revenue required to be included over time. During 2019 and the first half of 2020, companies needed to generate revenue in excess of C$10 million for inclusion. In 2018, we used C$4 million as the hurdle.

This group included Aphria (TSX: APHA) (NASDAQ: APHA), Aurora Cannabis (TSX: ACB) (NYSE: ACB), Canopy Growth (TSX: WEED) (NASDAQ: CGC), HEXO Corp (TSX: HEXO) (NYSE: HEXO) and Village Farms (TSX: VFF) (NASDAQ: VFF).

Among these largest LPs by revenue, Aurora Cannabis was the worst performer, declining more than 30%. Village Farms performed the best, declining 12.9%, with the others falling less than 20%.

Tier 2

Tier 2, which included the LPs that generate cannabis-related quarterly sales between C$5 million and C$20 million, fell 11.4% to 365.19. In 2019, it lost 44.3% after closing at 569.54 and ended down 35.9% in 2020. Prior to July, companies needed revenue in excess of C$2.5 million to be included in this tier.

This group included Auxly (TSXV: XLY) (OTC: CBWTF), Cronos Group (TSX: CRON) (NASDAQ: CRON), Delta 9 (TSX: DN) (OTC: VNRDF), Organigram (TSX: OGI) (NASDAQ: OGI), Supreme Cannabis (TSX: FIRE) (OTC: SPRWF), TerrAscend (CSE: TER) (OTC: TRSSF), Valens Company (TSX: VLNS) (OTC: VLNCF), VIVO Cannabis (TSX: VIVO) (OTC: VVCIF), WeedMD (TSXV: WMD) (OTC: WDDMF) and Zenabis Global (TSX: ZENA) (OTC: ZBISF).

The worst performers were WeedMD and Cronos Group, which declined about 25%, while Supreme Cannabis and VIVO Cannabis, both unchanged, were the best performers.

Tier 3

Tier 3, which included the 20 qualifying LPs that generate cannabis-related quarterly sales less than C$5 million, rose 2.2% as it closed at 66.59. It ended at 96.76 in 2019, declining 45.0%, and was down 31.2% in 2020. The strongest performers were Christina Lake Cannabis (CSE: CLC), RMMI (CSE: RMMI) and Trichome Financial (CSE: TFC) (OTC: TRCIF), which agreed to merge with IM Cannabis (CSE: IMCC) (OTC: IMCNF) late in the month. Emerald Health (TSXV: EMH) (OTC: EMHTF), Flowr Corp (TSXV: FLWR) (OTC: FLPWF) and Green Organic Dutchman (TSX: TGOD) (OTC: TGODF) all fell by more than 30%.

The returns for the overall sector varied greatly, with 5 names gaining more than 20% and 4 declining by more than 30%. The entire group posted a median return of -8.2%:

For January, the overall index will have 34 constituents after the removal of Namaste Technologies, which fell below the minimum price for companies generating less than C$2.5 million quarterly LP revenue. Additionally, we have raised the minimum for Tier 1 to $25 million quarterly LP revenue going forward. Consequently, Village Farms will move to Tier 2 from Tier 1.

In the next monthly review, we will summarize the performance for January and discuss any additions or deletions. Be sure to bookmark the pages to stay current on LP stock price movements within the day or from day-to-day.

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Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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