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Weekly Cannabis Stock News: Say Hello to Cannabis 2.0

By Eric Volkman - Oct 21, 2019 at 10:13AM

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The sale of derivative cannabis products is now legal in Canada, but...

Canada's so-called Cannabis 2.0 was the major news item in marijuana stocks last week. Coming one year after the legalization of recreational marijuana use in the big country, Cannabis 2.0 sanctions the sale of derivatives like cannabis-laced edibles and beverages. Although there is a catch or two with Cannabis 2.0, it's a momentous event in the unfolding history of legal weed.

Nothing matched it for potential impact on the cannabis industry during the week, although Aphria's (APHA) first-quarter results release caused some ripples in the market.

Gloved hand holding marijuana leaf in front of Canadian flag

Image source: Getty Images.

Eating into the profits?

At the risk of stating the painfully obvious, Cannabis 2.0 is opening new product categories to cannabis companies. Many people want the effects of cannabis, but don't want to endure the harsh smoke usually involved in torching it the traditional way. Edibles, drinks, vapes, and other derivatives form an elegant solution to that problem.

There's a solid customer base for this. According to an estimate from Deloitte, the total potential of this market in Canada could reach 2.7 billion Canadian dollars ($2.1 billion). With that kind of number in its eyes, the market bid up the prices of marijuana stocks involved in derivative segments last week. Canopy Growth (CGC -12.50%) grew by 6% over the five-day span, and HEXO (HEXO -7.49%) rose by over 8%.

Those two companies are leading candidates for success if these products take off. The reason is simple -- both have already secured attractive partnerships for cannabis comestibles.

In Canopy Growth's case, its major shareholder is beer and spirits giant Constellation Brands, with which it is to develop cannabis-infused drinks. HEXO, meanwhile, has formed a joint venture for the same with Molson Coors.

So we can expect an immediate consumer rush toward cannabis chocolates and funky drinks made by HEXO and Canopy Growth, yes?

Well, no. The big catch is that derivatives makers are required to effectively register with government regulator Health Canada 60 days in advance of selling such wares. That means the earliest they'll go on sale is mid-December, and the revenue won't find its way into quarterly results until next year at best.

Still, it's always encouraging for investors when a new market segment or several open up. No wonder they were relatively optimistic about marijuana stocks last week -- a rare occurrence over these past few trying months for the industry.

Aphria -- into the black again

Aphria (APHA) stock popped last Tuesday after its Q1 results were unveiled. And why shouldn't it have? The company was profitable for the second quarter in a row, booking a bottom-line surplus of CA$16.4 million ($12.5 million), or CA$0.07 ($0.05) per share. This was a nice surprise, considering that analysts who track the stock were collectively looking for a CA$0.02 ($0.02) per-share loss.

As has been typical with Canadian marijuana companies, net revenue in the wake of recreational weed legalization ballooned -- in Aprhia's case it increased more than tenfold over the year-ago figure to hit just over CA$126 million ($96 million), which alas didn't meet the CA$131 million ($100 million) anticipated by prognosticators. 

Regardless, investors like the fact that the company again managed to land in the black, even though there's a caveat or two with the latest net profit number. This is an investor pool that's hungry for profitability, which is hard to come by given the aggressive expansion efforts of most big cannabis companies, not to mention other factors such as supply issues and, let's be honest, subpar management.

It's great that Aphria now has two quarters of net profit behind it. The company's certainly worthy of consideration for investors, but there is one issue hanging over it that I'd be leery of.

This is Aleafia Health's termination earlier this month of a supply deal in which Aphria was engaged to provide up to 175,000 kilos of product over the span of five years. Aleafia said that Aphria didn't live up to its end of the deal, citing its "failure to meet its supply obligations." If accurate, this is troubling, as distribution is an important aspect of Aphria's business, and a basic service it needs to get right.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands and HEXO. The Motley Fool has a disclosure policy.

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