Weedly Report - January 20th, 2018

BHT is an independent research boutique that analyzes the private and public legal cannabis and medicinal marijuana industries and markets.   BHT also identifies meaningful trends and important supply and demand levels in the publicly traded Legal Cannabis and Medicinal Marijuana equity markets.   

The following are important factors to consider:

  1. Kush Bottles, Inc. - KUSHB showing what I believe are long term Bullish dynamics. 
  2. Cronos Group Inc. -  MJN could be building a base around the $10 level.  When securities are trading at levels that they have never been at before, it takes time for clearly defined areas of supply and demand to form.  Markets have ‘memories’, but these markets are very young.  That being said, typically nice round levels like $10 are important psychologically because many investors like to place their orders at them. 
  3. Future Farm Technologies Inc. - FFRMF is showing a similar dynamic here as a base seems to be building around the $1 level.  Again, this is most likely due to the psychological important of the level.
  4. Medicine Man Technologies Inc. - MDCL has run into resistance around the $3 level.  This level was resistance in December of 2016 and January of 2017 as well. 
  5. There are important issues and factors to consider when investing and trading in these securities. 
  6. The Canadian / US Dollar exchange rate has fallen from around 1.36 last April to about 1.25 now. 
  7. There were two very important and bullish news items to consider regarding the banking industry.  

 

 

Kush Bottles Inc. - KUSHB is showing some long term Bullish dynamics.  First, the average daily volume has increased dramatically over the past three months.  Second, well known institutional brokers have been trading the stock.  Virtu Financial advertised 80% of the traded volume in January, while Cantor Fitzgerald advertised 10%.  Third, Cowen, a well-respected sell side research firm covers it.   They have a $9.50 price target on it, and predict that it will begin to start earning a profit this year.  This is important because some institutional investors by mandate can't invest in equities that don't have sell-side coverage.  I think these three factors are indicative that large institutions are starting to acquire positions.

If it continues to sell off, there may be support around the $4.50 level because there was resistance there in October and November of 2016.

 

Cronos Group – MJN could be building a base around the $10 level.  When securities are trading at levels that they have never been at before, it takes time for clearly defined areas of supply and demand to form.  Markets have ‘memories’, but these markets are very young.  That being said, typically nice round levels like $10 are important psychologically because many investors like to place their orders at them.

 

Future Farm Technologies – FFRMF is showing a similar dynamic here as a base seems to be building around the $1 level.  Again, this is most likely due to the psychological important of the level.

 

Medicine Man Technologies – MDCL has run into resistance around the $3 level.  This level was resistance in December of 2016 and January of 2017 as well.

 

 

If you are investing/trading in these companies, the following are important issues to consider-

 

Is there sufficient liquidity and volume for an institutional investor to acquire a meaningful position?  Are there other institutional investors?

Investment funds that are investing in these securities will need to hire experienced micro and small cap traders (like yours truly) who have expertise with modern trading methodologies in addition to have numerous traditional relationships.  Outsourcing and junior traders will not be effective.  Trading algorithms and the trade outsourcing business model won’t work with these illiquid securities and the funds will run into liquidity issues around $200-300 mil AUM.  These managers should look at a trader as a profit center as opposed to a cost.  An experienced trader who has extensive relationships and knows how the markets work will allow a manager to manage more AUM.

The Canadian / US Dollar exchange rate needs to be considered, especially if you are going to hold them for the long-term.  Obviously, fluctuations in the currencies will affect returns. Many of these equities are Canadian Companies trading on Canadian Exchanges.  The strength of the Canadian dollar is strongly influenced by the price of commodities, and the CRB Index is up +20% since July.    

What is more advantageous to trade?  The ADR or on the primary Exchange in Canada?  Liquidity needs to be considered.  The decision is also influenced by exchange rate calculations and forecasts, and also by investment mandates.  For example, an investment fund may only be able to invest domestically, therefore the only option would be the ADR.

Important support and resistance levels have not been developed yet, because the trading history isn't long enough.  It takes time and volume to make a particular price level relevant or important, and most of these companies haven't been trading at these levels for enough time for these dynamics to have developed.  However, there will probably more support and demand at round levels like $10 or $20 due to their psychological importance.

Are there reputable brokers involved in the trading of these equities?  If so, that's most likely indicative that institutional buyers are investing in these companies and that is probably a Bullish Indicator.

 

 

The Canadian / US Dollar exchange rate needs to be considered, especially if you are going to hold them for the long-term.  This is the price of one USD in CAD.  Obviously, fluctuations in the currencies will affect returns. Many of these equities are Canadian Companies trading on Canadian Exchanges.  The strength of the Canadian dollar is strongly influenced by the price of commodities, and the CRB Index is up +20% since July. 

 

 

In my opinion there following two news stories are very important because the future of banking in these industries has been the subject of great debate.  Many institutional investors have avoided them due to fears that the companies would not be able to engage in traditional banking relationships.  When (not if) that changes, it will be very Bullish.

 

 Published January 16, 2018 | By Bart Schaneman, mjbizdaily

A letter to 10 major Congressional leaders from 19 attorneys general asks Congress to push through legislation that would allow states with medical or recreational marijuana laws to bank as other business do.

The group suggests that Congress give special attention to measures such as the Secure and Fair Enforcement Banking Act (SAFE). Congressman Ed Perlmutter, D-Colorado, introduced the SAFE legislation (S. 1152 and H.R. 2215) last April.

The letter comes only 12 days after U.S. Attorney General Jeff Sessions revoked the Cole Memo, a key marijuana industry safeguard.

Here’s what you need to know:

The attorneys general who signed the letter serve Alaska, California, Colorado, Connecticut, Illinois, Iowa, Hawaii, Maine, Maryland, Massachusetts, New Mexico, New York, North Dakota, Oregon, Pennsylvania, Vermont, Washington state, the District of Columbia and U.S. territory Guam.

The AGs wrote: “Because the federal government classifies marijuana as an illegal substance, banks providing services to state-licensed cannabis businesses could find themselves subject to criminal and civil liability under the Controlled Substances Act and certain federal banking statutes. This risk has significantly inhibited the willingness of financial institutions to provide services to these businesses.”

Such legislation “would bring billions of dollars into the banking sector, and give law enforcement the ability to monitor these transactions.”

The AGs characterize the lack of banking services for the regulated market as a public safety threat because cash-heavy businesses are often targets for criminal activity.

The group argues that bank tracking would make tax compliance easier and, thus, result in higher tax revenue.

 

Canopy enlists first major bank to lead CA$175M marijuana equity financing. 

By Matt Lamers, mjbizdaily.com

Canopy Growth became the first marijuana company in Canada to enlist a major Canadian bank to lead an equity-based funding, signaling a greater willingness by big financial institutions to provide financing to the nation’s cannabis businesses.  Bank of Montreal subsidiary, BMO Capital Markets, and GMP Capital are co-leading the stock-purchase deal that will allow Canopy to raise 175 million Canadian dollars ($120 million).  Ontario-based Canopy is Canada’s largest licensed medical marijuana producer.

Under the bought-deal transaction, a syndicate of underwriters has agreed to purchase 5.06 million Canopy shares at a price of CA$34.60 per share.  The underwriters have the option to buy an additional 759,000 shares for another CA$2.6 million.

“This is a huge deal,” said Chris Damas, editor of the Barrie, Ontario-based BCMI Cannabis Report.

“A Canadian bank co-underwriting a cannabis deal portends more bank involvement in stock issues and deals, a wider investor audience for cannabis stock issues and even bank-employed analyst coverage.”

Capital is pouring into the Canadian marijuana sector faster than ever, as companies bankroll capacity to meet demand ahead of the anticipated legalization of adult-use marijuana this summer.

Through the first 10 days of 2018, marijuana companies closed on a variety of funding deals or announced financing plans worth almost CA$1 billion.

Canada’s biggest banks had been steering clear of the marijuana industry to avoid jeopardizing their operations in the United States, where cannabis remains illegal at the federal level. Canopy has said it has no plans to enter the U.S. market because it would be a violation of Toronto Stock Exchange listing standards.

Until this week, financings had been exclusively led by investment banks such as Canaccord Genuity and Eight Capital in the absence of Canada’s biggest banks. Credit unions have led the way in offering banking services.

Khurram Malik – a partner with Jacob Capital Management, a Toronto-based financial advisory firm – expects things to change. “It should incentivize other bank-owned dealers to move in during 2018 in a variety of ways.,” he said. “The bigger deal will be if the commercial banking arms of these institutions take it on properly.”  Canopy is based in Smiths Falls, Ontario, and its shares are traded on the Toronto Stock Exchange as WEED.