For more than a year, cannabis stocks have been a monumental disappointment. Though the industry still offers incredible long-term growth potential, all next-big-thing investments face growing pains, and the pot industry is currently working its way through that phase as we speak.
It's been especially troublesome for marijuana stocks north of the border. Canada became the first industrialized country in the modern era to give recreational cannabis a green light in October 2018. This should have put Canada on track to be a global marijuana leader. But it blew its opportunity, no thanks to Health Canada and provincial regulators.
But there may be a bit of a bright side in the upcoming earnings season for Canadian pot stocks. With Wall Street's expectations for the industry depressed, most, if not all, Canadian licensed producers (LPs) should handily surpass sales and "profit" expectations. I say "profit" in quotation marks because all Canadian marijuana stocks are expected to lose money on an operating basis in the calendar second quarter.
Below are three reasons Canadian marijuana stocks can surprise in Q2.
More dispensaries have opened across the country
The first substantive catalyst for Canadian pot stocks is that we've seen a surge in the numbers of dispensaries opening for business is key markets. As reported by BNN Bloomberg late last week, Canada, as a whole, has surpassed 1,000 open retail locations, albeit more than 500 are located in Alberta.
The inability of provincial regulators to quickly and efficiently assign dispensary licenses meant far too few retail locations have opened in more densely populated provinces, like Ontario and British Columbia. In many instances, this led has led to rising inventory levels for LPs and supply chain bottlenecks.
However, the second quarter saw Ontario surpass its 100th open retail store. For context, just two dozen dispensaries were open on the one-year anniversary of adult-use weed begin legalized (Oct. 17, 2019). This long-awaited uptick is tied to Ontario retiring its lottery system for assigning retail store licenses on Dec. 31, 2019, and the implementation of a more traditional application and vetting process.
Since Aurora Cannabis (ACB 8.70%) has consistently been outproducing its peers, in terms of kilograms, this significant increase in licensed dispensaries in Ontario likely benefits it most. Both Aurora and Canopy Growth (CGC 4.76%) have relatively high levels of inventory, and these new retail locations may provide an avenue to avoid writedowns.
A COVID-19 lockdown demand spike
Secondly, the coronavirus disease 2019 (COVID-19) pandemic could prove to be more a benefit than a detriment to the Canadian marijuana industry.
Months ago, as lockdowns were becoming a reality across much of the developed world, I'd opined that the cannabis industry would be hurt in a number of ways. This included a decline in tourism-fueled sales, supply chain disruptions (e.g., most vape pens are manufactured in China), and the likelihood that consumers would rein in spending given economic uncertainty and the inability to touch, feel, and smell in-store product.
However, this prognostication may be all wet. You see, cannabis store sales, as reported by Statistics Canada, surged close to 20% in both March and April from where they were in February. This would suggest that consumers stocked up on cannabis products prior to and during Canadian lockdown due to COVID-19.
What remains to be seen is if this uptick in sales was sustained throughout the entirety of the second quarter. Having more open dispensaries should certainly have helped. But given that Statistics Canada's data lags by more than 2.5 months when reported, we'll probably know this answer when pot stocks begin unveiling their operating results in the next couple of weeks. Nonetheless, Canadian weed stocks had at least a one-month head start in higher sales figures during Q2.
Aggressive cost-cutting by LPs
Third and finally, aggressive cost-reduction efforts put in place by LPs should give Canadian pot stocks a chance to leapfrog Wall Street's per-share loss estimates.
Aurora Cannabis recently announced that its selling, general and administrative costs should come in between $40 million Canadian and CA$45 million on a quarterly basis, down from close to CA$100 million just two quarters ago. Aurora has halted construction on two of its largest projects, and it sold its 1-million-square-foot Exeter facility during the second quarter.
Likewise, Canopy Growth's new CEO David Klein has been tightening his company's belt. Canopy has closed two British Columbia-based greenhouses totaling 3 million square feet of licensed production space and declined to open the company's Niagara on the Lake facility. Further, Canopy Growth has trimmed its staff on multiple occasions and significantly reduced its share-based compensation.
Even HEXO (HEXO 1.79%) has gotten in on the cost-cutting act. HEXO announced the permanent closure of the Niagara facility, acquired during the 2019 Newstrike Brands buyout, then recently sold the Niagara grow farm for CA$10.25 million. Similar to Aurora, Canopy Growth, and virtually all Canadian LPs, HEXO has trimmed its workforce to bring expenditures more in line with near-term sales expectations.
To be clear, I'm talking about a "less bad" scenario in Q2 for Canadian pot stocks, which isn't to be confused with the group having a "good" quarter. Nevertheless, it should be a step in the right direction.