Cannabis Outlook 2019: Experts on What’s to Come

As investors rush to prepare for the upcoming year, the Investing News Network (INN) offers a few of 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 outside players from the pharmaceutical, alcohol or other beverage industries continues to capture the imagination of investors, serious challenges still lie ahead for the sector.

Ventures in the marijuana landscape have to deliver on more promises than ever, as Canadian companies combat shortages and prepare for the arrival of edibles, US companies are looking to separate brands and products from a flood of items in the states.

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With 2019 appearing to be a year when investors start demanding results from cannabis picks in Canada, the US play will continue to gain momentum from key policy drivers.

As the US cannabis market begins to clear up, investors could be motivated to pay more attention below the border.

Read on to learn what companies in the cannabis space are looking forward to in 2019, or click here to see our 2018 cannabis trends overview before diving in.

Cannabis Outlook 2019: More deals on the way

After a relentless pace for mergers and acquisitions (M&A) in the marijuana space during 2018, predictions indicate things won’t slow down in 2019.

Dena Jalbert, founder and CEO of Align Business Advisory Services, a firm aiding in the process of M&A, told INN she sees deals in which intellectual property is at hand to begin appearing more and more.

Deals for intellectual property (IP), which saw one of its biggest cases take place when Canopy Growth (NYSE:CGC,TSX:WEED) acquired the IP of Colorado-based cannabis research firm ebbu, are going to appeal companies in 2019 since, according to Jalbert, there is only “so much land and states and geography” to go around.

Jalbert is referring to the idea that at one point the valuable assets will be 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 an interest 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 to inject revenues and energy into older businesses.

“I think that consolidation is what we’re going to see I think especially in the United States, as regulation continues to lighten and those businesses become more risk tolerant,” Jalbert said.

The advisor also explained she sees 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 case,” said Jalbert. “We’re seeing a lot in the beauty industry.”

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Cannabis Outlook 2019: Will the real US market stand up?

The US represents 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 a marketplace for medical or even recreational use.

Due to the restrictions, public companies are forced to seek capital from Canadian investors in through the Canadian Securities Exchange (CSE).

Neal Gilmer, research analyst with Haywood Securities, wrote a note indicating a projection of a US cannabis market worth between US$ 15.9 billion and US$ 21.7 billion by 2022.

The analyst highlighted the most direct approach investors have looking for exposure in this market: multi-state operators.

These companies own and operate assets in legal states, but due to the fractured market based on each state, these companies have to manage operations separately.

As such, a more general market of retail investors has yet to find entrance points into these companies.

Gilmer wrote 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 wrote.

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.

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During a panel at the MJBizCon in Las Vegas Kevin Murphy, CEO of multi-state operator Acreage Holdings (CSE:ACRG), said Canadians “are leading the capitals 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 the 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 it’s currently in.

A wrinkle of the STATES act, if approved, 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 at that stage now [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 U.S. wakes up and smells the cannabis,” Steve Hawkins, CEO Horizons ETFs, said.

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 in Las Vegas.

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Cannabis Outlook 2019: Concerns to watch out for

Cannabis investors have seen the roller coaster 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 for in the new year?

When asked what his 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 it takes 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 this stocks has led to valuations and share prices that he deems aren’t appropriate.

“I’m concerned that some investors that are holding these companies might get burned,” he said.

Cannabis Outlook 2019: Hemp and CBD

Gilmer said was a big believer of the overall CBD market gaining ground in 2019 at the Arcview Investor Forum.

The analyst explained a lot 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 of the products.

“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 on a 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 would lead to an industry worth US$ 20 billion by 2022.

Cannabis Outlook 2019: Investor takeaway

With another year ending in the growing path of the cannabis industry, 2019 appears poised to offer just enough volatility and change for the space.

The resources cannabis investors can have continue to expand but the due diligence and research will continue to be key for investors looking to avoid pitfalls in the industry.

The evolution of the cannabis industry to accommodate a more global landscape, new products such as beverages, and a focus on developing brands that resonate with consumers will continue into 2019.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

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. 

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