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February 15th, 2019

Cannabis Earnings

By PRATTE

 

The trade war was still at the centre of the action this week as talks between China and the United States were announced. The quarterly earnings season is still on and continues to influence US and Canadian markets. J.P. Morgan announced Thursday the creation of its own cryptocurrency. Here is what happened in the markets this week.

Market Brief

US markets opened higher on Monday as talks between China and the United States progressed, as the truce between the two countries ends in three weeks. Tesla gained 3% at the open while Netflix advanced 0.55%. This trend continued Tuesday as the three major US indexes opened up following the announcement of a tentative agreement on financing border security. The Dow advanced 200 points, led by Goldman Sachs and JP Morgan Chase, the S&P 500 climbed 0.7%, supported by the energy and finance sectors while the Nasdaq advanced 0.7%.

US markets opened and closed higher on Wednesday. “There is a lot of excitement on the subject of trade negotiations and the shutdown,” said Peter Cardillo of Spartan Capital. Markets were affected Thursday by the largest monthly drop in retail sales in the United States in ten years, a decline of 1.2% from November. Despite good earnings, Coco-Cola shares retreated 7.27%, as analysts were disappointed after the company announced it would be more cautious in 2019.

Stocks were up at the open on Friday; the Dow jumped 250 points as J.P. Morgan Chase and Caterpillar outperformed while the S&P 500 gained 0.76 percent, led by financials and tech. The Nasdaq Composite advanced 0.4 percent.

The Toronto index finished lower on Monday, driven lower by weak performances in the industrials and materials sectors, as well as SNC-Lavalin’s problems and the decline in gold price. Tuesday, the TSX opened up 0.26% helped by the good performance of the energy sector. Shares of Shopify lost more than 5% at the open after disappointing earnings. The Canadian index fell back late Wednesday, pulled down by technology and materials sectors, despite several gains in the health and energy sector. Cannabis growers’ shares boosted the health sector in Canada, Canopy Growth gained 4.8% and Green Organic Dutchman Holdings Ltd closed up 7.55%. The TSX opened up Friday as energy stocks climbed on the back of higher oil prices.

SNC Lavallin

The company, already in hot water concerning political controversies in Canada and around the world, has announced it will once again lower its earnings forecast for 2018. A downward revision of more than 40% due to many issues related to a mining project in Chile that would lose more than 350 million in the fourth quarter. “(The new downgrade) will continue to weigh on the credibility of management, in our opinion,” commented RBC Capital Markets analyst Derek Spronck.

SNC says that the Mining and Metallurgy Division’s operating loss will be greater than expected, as the company will not be able to reach an agreement with its customer in time to account for revenue in its 2018 results. The stock was down 5.8% Monday after the announcement, trading at $34.75 its lowest level since April 2009. On January 28, at its first downward revision, its stock was down by 27%. SNC Lavallin will release its quarterly results on February 22.

Aurora

The Canadian cannabis company reported quarterly results this week that met the expectations of analysts. Aurora generated revenues of $54.2 million in the second quarter, up 363% over the same period last year. A critical quarter for society as cannabis became legal in Canada during this period. Aurora sold $21.6 million worth of legal recreational cannabis, or about 20% of all consumer sales in the country.

The company is present in 21 countries and expects its global medical cannabis business to “accelerate significantly over the next few quarters and years.” “If I lose sleep over anything, I lose sleep over our ability to supply the global cannabis market,” said Terry Booth, Aurora’s chief executive officer, in an earnings call with analysts late Monday. “I see this worldwide expansion in the cannabis space to be close to being fed properly but it’s going to be five years until we have an oversupply problem for companies that can export under [European Union regulatory] compliant facilities. Since legalization, the stock has lost more than 35% of its value while at the close on Monday, the stock was down 5%.

J.P. Morgan

The famous American bank announced Thursday the creation of its own virtual currency. The “JPM Coin” will be the first cryptocurrency created by a bank, thus preparing for a future where “blockchain” technology will become a major player in banking transactions. Still, this technology was originally put in place to challenge the current financial system. That a big bank launches its own currency may seem unexpected.

Unlike bitcoin, only J.P. Morgan’s large institutional clients that have been subject to regulatory controls, such as corporations, banks and brokers, will be able to use tokens. Thus, each of the JPM coins is exchangeable for a single US dollar, so its value should not fluctuate. The coins will be returned to customers after they have deposited dollars in the bank. When the chips have been used for a payment or security purchase on the blockchain, the bank will proceed to the destruction of the coins while giving the customer the corresponding number of dollars. The stock lost 0.95% at the opening Thursday a few hours after the unveiling of its currency.

Canopy Growth

The company’s quarterly results were highly anticipated by investors, allowing them to properly measure the impact of marijuana legalization in Canada in the last quarter. The company reported revenues of $97.7 million, almost four times more than the same quarter a year ago. Canopy Growth announced gross sales of recreational products of $71.6 million and $18.6 million marijuana for medical purposes. The Ontario company, one of the largest cannabis companies in Canada, recorded an operating loss for the quarter, a loss of $157.2 million, compared to a loss of $26 million a year earlier.

The company, like many other Canadian cannabis companies, has reported huge marketing spending on legalization, but that spending will be down in the upcoming quarters. The stock of the company has almost doubled in one year and was up 2.70% at the open on Friday.

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
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