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Target This Stock as the Cannabis Shortage Turns to Glut

When Canada legalized recreational cannabis in October 2018, many industry experts expected that supply would be an early issue. This forecast turned out to be correct in the first months of legalization, as demand far outpaced what retailers were able to deliver. The rollout was complicated by varying regulations across the provinces. Ontario, the most populous province in Canada, only recently started allowing legal cannabis retail through brick-and-mortar locations.

Cannabis stocks have encountered volatility in the spring. Sales surprisingly dipped from December 2018 to January 2019, and several of the top producers have reported disappointing earnings. However, the supply shortage is expected to turn in the second half of 2019. In May, the province of Alberta lifted a six-month moratorium on adding new cannabis shops due to the improving supply situation.

Nick Pateras, the vice president for strategy at Lift & Co., recently predicted that we will see “dramatic oversupply in two to three years.”

Alcanna (TSX:CLIQ) is an Edmonton-based private sector retailer of alcoholic beverages in Canada and the United States. It recently partnered with Aurora Cannabis and made a push into the cannabis sector. Shares of Alcanna have climbed 38.4% in 2019 as of close on June 4. However, the stock was still down over 35% from the prior year.

Alcanna released its first-quarter 2019 results on May 9. Sales rose to $149 million compared to $129 million in the prior year. The company reported same-store sales growth of 6.2% in Canada and 6.3% in Alaska. In late May, Alcanna announced an agreement to acquire 28 liquor stores operating under the “Solo Liquor” brand. The acquisition is expected to close later this month.

The big story in the first quarter was Alcanna’s Nova Cannabis division. Sales per store were strong coming out of the gate, and this continued in Q1 2019. However, the company said that its performance was hindered by the cannabis supply shortage. It also mentioned the moratorium on new licences in Alberta. Fortunately for the company, this latter issue has been resolved. At the end of the first quarter, Nova Cannabis received three new licences.

Alcanna has successfully acquired a licence in Ontario and opened its first Nova Cannabis store in Toronto on 499 Queen St. West. A second Nova Cannabis location opened in late May in Sherwood Park. The push into Ontario is a great sign for Alcanna. There were concerns that its link to Aurora would hinder its progress, as Ontario has sought to limit the footprint of large producers in the cannabis retail sector.

The largest producers, including Aurora, are expected to dramatically increase production capacity by the end of 2019. Retailers will be able to look forward to supply no longer being an issue by the middle of 2020.

Alcanna has made promising strides in 2019, but the stock is still reeling from its sharp drop in late 2018. The company is forging ahead with acquisitions and its fledgling cannabis business. Going forward, it will be nice to see more investment in the latter.

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

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