Cannabis sector trades lower as investors disregard Senate vote to legalize commercial hemp

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December 12, 2018 2:24pm NYSE:MJ

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From Ciara Linnane: Cannabis stocks were mostly lower on Wednesday, as the news that the Senate has approved a new U.S. Farm Bill that legalizes commercial hemp failed to ignite a rally.

Hemp is a type of cannabis plant that does not contain the psychoactive ingredient that produces the “high” associated with the substance, but does contain CBD, or cannabidiol, an ingredient that is widely held to have health benefits. The bill is expected to head to the House for a vote by next week and would remove hemp from the classification that has made it illegal at the federal level. Hemp can also be used in construction and plastics. THC, the psychoactive ingredient in cannabis, will not be affected by the new bill and it will continue to be classified as a Schedule I drug, along with heroin and cocaine.

The news sent shares of New Age Beverages Corp. NBEV, +11.40% up 14%, making the stock a standout in the otherwise declining sector. The company has said it plans to launch CBD-infused products. But shares of rivals were lower, while drinks giants Coca-Cola Co. KO, -0.17%  and PepsiCo Inc. PEP, -0.17%  also floundered, even though they too have expressed interest in CBD-infused drinks.

Canopy Growth Corp. fell 0.1% despite a bullish note from Wells Fargo. Analyst Bonnie Herzog came away from an analyst lunch with management CGC, -1.79%WEED, -1.47%  upbeat on the company and its partnership with Corona beer maker Constellation Brands Inc. STZ, -0.39% which has invested $4 billion in the company with plans to launch their own line of CBD-infused beverages.

The key takeaways from the lunch were that recent supply issues in Canada were due to government bottlenecks–provinces did not have the right infrastructure to take orders at the start of Canadian legalization of weed for adult recreational use in October, said Herzog. That shortfall contributed to Canopy Growth Corp.’s weak fiscal second-quarter revenue, she said.

Things are expected to pick up by the fourth quarter, according to Canopy’s CEO Bruce Linton, who said the relationship with Constellation Brands is strong as both companies share an entrepreneurial culture. Linton said Altria’s decision last week to invest $1.8 billion in rival Cronos Corp. CRON, -3.59%  was a good one, as “Cronos operates in a trustworthy basis and has the right DNA.”

Canopy is planning to launch its first trial of a CBD sleep aid in January, and expects the CBD-drinks line to launch in the fourth quarter. The company is aiming to develop a scalable, calorie-free and transparent beverage with a quick onset and long shelf life. The company has filed more than 140 intellectual property patents relating to cannabis and expects to be ready with more products in the second half of 2019.

“CGC has sufficient production assets in Canada (4.3M sq ft licensed production facilities with another 1.7M pending) and is “approaching” the end of its planned investments in Canada,” Herzoq wrote in a note. “And going forward, CGC to increasingly focus on developing its presence in international markets such as Germany, Italy, Colombia, Australia & Denmark.”

The cannabis market is expected generate more than $10 billion in sales in North America this year, a number expected to grow to about $23 billion by 2021. The North America illicit market, meanwhile, is expected to growth to more than $50 billion, “which presents a key opportunity should cannabis ever become legal at the federal level in the U.S.,” said Herzog.

The U.S. cannabis market is estimated to be about 10 times bigger than the Canadian market, which is enjoying first-mover advantage since fully legalizing the substance in October.

Aurora Cannabis Inc. ACB, +4.20% ACB, +3.78%  was up 3.4%, MedMen Enterprises Inc. MMNFF, -0.27% was up 1.4% and Hexo Corp. HEXO, -2.07%  was down 1.3%.

Cronos Group Inc. stock was down 2.8% and Tilray Inc. TLRY, -4.71%  was down 4%. Aphria Inc. APHA, -2.77% APHA, -2.93%  was down 1.8%, even after announcing a new supply agreement in Paraguay.

The Horizons Marijuana Life Sciences ETF HMMJ, -1.23%  was flat, while the ETFMG Alternative Harvest ETF MJ, -0.87%  was up 0.8%. The S&P 500SPX, +1.26%  was up 1.3% and the Dow Jones Industrial Average DJIA, +1.34% was up 1.3%.

The ETFMG Alternative Harvest ETF (MJ) was trading at $28.96 per share on Wednesday afternoon, down $0.12 (-0.41%). Year-to-date, MJ has declined -10.96%, versus a 0.83% rise in the benchmark S&P 500 index during the same period.

MJ currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #59 of 75 ETFs in the Global Equities ETFs category.

This article is brought to you courtesy of MarketWatch.

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