Raymond James on Cannabis Sector Outlook


Dec. 1 2019, Published 7:10 p.m. ET

After a long stretch of time, the cannabis sector had a good week as some of the companies reported profits. Many analysts see this as a positive sign for investors in the industry. Rahul Sarugaser, an analyst for Raymond James, recently pointed to the improvements in the US legal framework as well as the Ontario retail market.

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Bad stretch for the cannabis industry

The cannabis industry has been through the worst phase. Stocks of some big giants in the industry plunged as investors took flight for the past half-year. Top names in the industry like Aurora Cannabis (ACB) (ACB.TO) and Canopy Growth (CGC) (WEED) reported disappointing financial results. In addition, both Aurora and Canopy are facing lawsuits for possible security scams.

The main reason for the steep decline in the market is due to the lack of faith in industry growth. Many companies promised huge growth in the top lines and margins as the value of the cannabis industry keeps growing. However, the companies have not achieved this yet.

Further, the revenues of the companies have actually been declining in the last few quarters. In addition, the retail stores’ rollout across the country is happening at a very slow phase. This result is a lack of faith in the future profitability of the cannabis companies in Canada.

Sarugaser’s views on the Canadian cannabis market

Recently, the Ontario government announced an open allocation system to decide the number of retail stores. Under this system, the state of Ontario might open 750 to 1000 stores in the next year. Presently, the state has only 67 retail stores. This is proportional very less for the most populous state in the country. Sarugaser said this move of the Ontario government is exactly what the Canadian industry needs.

Rahul Sarugaser said, “This massive potential increase in the points of retail cannabis access, we believe, would have a material, positive effect on ailing licensed producers’ domestic cannabis sales, particularly those that suffered from weak Ontario sales during the last couple of quarters.”

Sarugaser is doubtful the MORE Act will pass

Also, Sarugaser expressed his doubts about the passing of the MORE Act. The MORE Act proposes the removal of cannabis from the controlled substances list. However, Sarugaser said it is highly doubtful that the bill will get a majority vote from the present congress. This situation might change depending on the results of the 2020 US elections. Despite the current anticipation, the bill is a positive step in the cannabis legalization in the country.

Further, Sarugaser added his comments on the US Drug Enforcement Agency’s move on CBD. The agency removed CBD and few other cannabinoids from the controlled substances list. This is expected to have a positive impact on the companies that produce their products with less than 0.3 percent THC.


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