Here’s What Legalization Means for Cannabis Earnings This Quarter

The game for Canadian cannabis producers will change forever this morning when, somewhere in some eastern Canadian province like Newfoundland or Prince Edward Island, someone purchases the first federally legal, adult-use cannabis product in any G7 economy.

That sale of maybe a single gram of cannabis this morning will change the world over time. But it will alter the course of Canadian business instantly. At that moment, the Canadian market size grows by up to ten times.

The cannabis market restarts today – all the potential, all the gains – it’s all squarely ahead of us right now.

That’s ultimately going to reflect across “Big Weed’s” bottom lines, and as one who stresses the importance of financials, I couldn’t be happier.

Just look at what’s happened already, in the run-up to legalization. Aurora Cannabis Co. (OTC: ABCFF) recently reported its results for the quarter ending June 30; most other companies did so in August. Just about all of them showed increasing revenue, fatter gross margins, higher patient counts, and a focus on higher value-added products.

That’s impressive growth, and like I said, today… we restart the clock on all of it.

So let me show you what we can expect from the first “post-legalization” stream of Canadian cannabis earnings reports.

After all, that’s where we can find some great, actionable “buy” signals.

Big and Small Players Alike Look Well-Positioned Today

For potential investors in Canadian cannabis companies, the most important short-term question to consider through 2019’s first earnings reports is: Will there be inventory in stores and/or ready to ship to online customers on the big day?

Unfortunately, the answer to that question doesn’t readily appear in the financial results of any of the reporting companies. Sure, there were some hints in rising inventories, particularly rising inventories of live plants – as opposed to finished product.

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But hints aren’t enough.

So I listened in on earnings conference calls…

I read the transcripts of the others…

I’ve called a few companies directly…

I’ve been in constant communication with my Canadian industry contacts asking exactly this question.

And I’m happy to report that the news is quite good for all producers.

The inventory levels for today, Oct. 17, 2018, look to be “just right.” That is, there will be plenty of product in the stores – no cannabis shortage, as there was in Nevada. When that state went legal for recreational use last summer, the wave of demand left officials worried that there would be no supply left for those with medical marijuana needs, and the governor declared a state of emergency during the first month of full adult sales.

Just as important, there will be no supply glut, so prices will not come under immediate pressure the way they were (and still are) in Oregon.

The situation will look more like that in Colorado and Washington, with a good balance between supply and demand for the foreseeable future.

But not every producer will be boosting its revenue with big sales right away…

The Biggest Early Winners Will Have Product in Stores, Ready to Ship

The supply dynamic is good news, if expected, for the large incumbent producers like Aurora Cannabis and Canopy Growth Corp. (NYSE: CGC). They’ll be able to meet demand and make strong profits on the products they have in the stores.

Companies like Aurora and Canopy actually ensured they would be prepared for this historic day with finished, salable product. Canopy, for example, is expected to supply an estimated 33 to 40% of the total Canadian market through provincial agreements and e-commerce in the beginning days of legalization.

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Companies like this will be able to boost revenue, in some cases sharply, from day one – an ideal situation in this emerging marketplace.

But the supply-demand situation also highly positive for smaller producers and those that won’t be shipping products until later in the year or next year – and the secret nobody talks about is that is a good portion of the publicly traded growers at the moment.

That’s because the stores will not be so stuffed with product from the “first movers” that they will be unable or unwilling to accept new vendors. And in these first several months, customers will be willing to try new brands as they become available.

The gradual growth brought on by the inventory situation means that these smaller companies will still have a chance to establish their brands before the big producers become so ubiquitous that a new entrant doesn’t even get a chance to shine.

And in the long run, branding will be everything in the cannabis industry.

So, it looks good across the board, but right now the big fish – companies like Aurora and Canopy – are in the best position to turn in standout earnings results in the first legalization-era quarterly reporting.

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