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In this week's episode of Dolfin Discussions Geoff Wan, Fixed Income Analyst at Dolfin, is joined by Richard Briggs, Investment Manager, Emerging Market Debt at GAM Investments and Bennett Lim,...

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Dolfin’s response to Covid-19

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Alternatives: Cannabis

Investment outlooks / Q2 2020

The highs and lows of investing in marijuana

Following a complicated year, cannabis stocks have also been hit by the Covid-19 pandemic with the North American Marijuana index falling -32.1 per cent in Q1 2020. As we wrote last quarter, 2020 was going to be a year that would separate the losers from the winners, and we have started to see some companies filing for bankruptcy protection or creditor protection, while others have shown record quarterly sales. As it is still early to tell the overall impact of the virus, we have seen similar trends to “vanilla” sectors with both cost and workforce reductions being made across the board[1]. Nevertheless, the outbreak has shown some interesting and arguably predictable trends. Ultimately, we have reasons to think that the outbreak is positive for the industry and will accelerate the on-going switch from illegal to the legal in the long run.

In Canada, cannabis stores recorded their highest monthly performance with sales totalling CAD $154.2 million in January 2020, up from CAD $54.9 million in January 2019[2]. As government data has a three-month lag, to assess the impact of the “stay home” measures, we have looked at trading statements from individual companies.

“With quarantines in place in both in Canada and the US, we have seen e-commerce sales ballooning.”

As an example, Canadian producer Aphria reported an increase of 200 per cent in e-commerce sales in their last quarterly report. US peers reported an increase of three to four times in online sales in March alone[3]. Many consumers have struggled to purchase cannabis via their usual black-market methods and as a result, resorted to purchasing legally online. New Frontier Data conducted a survey in 2017 and found that relaxation, relieving stress and anxiety were some of the main reasons for people consuming cannabis. As such, we were not surprised when their latest survey showed that 29% of respondents had increased consumption[4] with many new entrants desiring to relieve boredom.

In the US, the total addressable market continues to increase with the state of Illinois legalising adult-use cannabis. Furthermore, all 29 jurisdictions with an operating legal cannabis market and quarantine measures have deemed cannabis businesses as essential health care and public health operations implying no shutdowns. While these trends are exciting, as this shows us that a complete ban on cannabis products seems less and less realistic, assumptions have to be tamed.

“Similarly to what we have seen happen in supermarkets, it is not improbable that recreational consumers have stocked up on cannabis in the same way others have hoarded beer, wine and toilet paper.”

Furthermore, higher margin products such as vapes have seen supply-chain disruptions as numerous components are manufactured in China. The next quarters will show if consumers rush back to the black markets following a return to normality, or if the comfort of ordering from home remains.

While Covid-19 accelerated sales and forced consumers to go legal, the industry will probably suffer similarly to the overall economy. Medical cannabis accounts for 20 to 25 per cent of total sales in the US hence remains a consumer discretionary product. So far, cannabis spending isn’t looking like it is discretionary, the risk of mass unemployment remains and looms like the sword of Damocles as consumers may have to deploy their reduced disposable income to staples only. Finally, despite their clear disadvantage with exclusion from national banking and capital markets, punitive tax treatments and inability for institutional investments; an increasing number of companies trading below their book value have become profitable, with growing revenue and expanding margins.


[2] Data provided by Statistics Canada, as at April 2020.



Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.

If not otherwise indicated, all graphs are sourced from Dolfin research, April 2020.

For more information please read our disclaimer.


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