By Ciara Linnane, MarketWatch
Cannabis stocks were mostly lower Tuesday, as investors took a breather after Monday’s gains to lock in profits and await the next developments in the sector.
Analysts are expecting to see more merger and acquisition activity in the sector, after a sharp spike in the volume of deals in the past three years. M&A activity came to $13.8 billion in 2018, up sharply from $3.5 billion in 2017, according to Korey Bauer, portfolio manager of the Cannabis Growth /zigman2/quotes/208282024/realtime CANNX -2.81% mutual fund recently launched by Foothill Capital Management.
“We believe M&A activity will remain elevated throughout 2019 as the first quarter was particularly active,” Bauer wrote in commentary published Tuesday.
Companies have been focused on growing market share and securing distribution opportunities to better compete with the three bigger names in the sector, Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC -3.55% /zigman2/quotes/202205609/delayed CA:WEED +0.73% Aurora Cannabis Inc. /zigman2/quotes/210559470/composite ACB +0.67% /zigman2/quotes/203734337/delayed CA:ACB -0.52% and Tilray Inc. /zigman2/quotes/209129655/composite TLRY +6.14% , he wrote.
Merrill Lynch analyst Chris Carey is also expecting consolidation, although for him, the trend will be driven by Canadian oversupply of cannabis over time, which will drive price deflation, pushing companies into deals.
“Companies with competitive moats in Canada (regulatory, product) or with global strategies become more attractive, here; we see valuation more constricted for others,” the analyst wrote in a note last week.
Carey said U.S. full legalization is possible and would be a game changer, but even without it, he expects Canadian players to accelerate U.S. strategies to ensure they have a foothold in the bigger market before a lifting of the federal ban.
Carey estimates the size of the global total addressable market (TAM) for cannabis at $166 billion, with the U.S. accounting for 34% of that total, compared with 3% for Canada. Regulation is important because it’s the key to growing that market and drawing consumers away from the illegal market.
“We estimate consumer categories generating $2.6 trillion a year in revenue could be disrupted by cannabis, from health and wellness to alcohol,” he wrote.
Meanwhile, a survey of attitudes to cannabis found Americans are more comfortable with the substance than their northern neighbors, even though Canada fully legalized weed for adult recreational use last October.
The poll conducted by PSB Research and Burson Cohn & Wolf, and reported by 420 Intel.com., found Americans are more comfortable attending a social event where cannabis is being consumed at a 52% rate versus 50% for Canadians, are more chill about dating a cannabis consumer, 53% to 50%, and even sharing a living space with a cannabis user, by 49% to 45%.
In company news, Jefferies reiterated its conviction buy rating on CannTrust Holdings Inc. and its C$15 ($11) price target, which is more than 50% above its current trading level, after the company announced plans to issue another $200 million in stock and offered preliminary guidance for the first quarter. Investors likely homed in on the sales number that is almost unchanged compared with the fourth quarter, analyst Owen Bennett wrote in a note to clients.
In case you missed it: Canopy Growth leads cannabis stocks higher after GMP upgrades to buy