Today’s Market Wrap Up and a Glimpse Into Wednesday

Stocks turned lower on Tuesday, putting an end to a five-day winning streak for the Dow Jones Industrial Average and S&P 500 indices. The Dow lost close to 300 points, or less than 1%. The S&P 500 and tech-leaden Nasdaq were similarly down fractionally.

Retail sales for the month of July fell 1.1% vs. June’s results, which is an indication that consumers are playing it cautious due to the spread of the delta variant. Shares of Home Depot weighed on the Dow on the heels of weaker than expected same-store sales.

In addition, the heightened geopolitical unrest as civilians and allies attempt to escape Kabul has added to the uncertain environment.

Stock index futures extended their declines on Tuesday evening in after-hours trading. The Dow, S&P and Nasdaq futures were all down modestly.

Stocks to Watch

  • AMC Entertainment gained 4% on the day. Retail investors are watching as the stock inches closer to the USD 40 level once again, which it last touched on in late July.
  • Shares of Tencent Music Entertainment Group, which is the streaming business of China-based tech company Tencent, plummeted 12% on Tuesday. The company reported better-than-expected profits but failed to meet revenue estimates. China is in the midst of a regulatory crackdown on technology stocks.
  • Walmart’s stock was up fractionally on the day after the U.S. retailer’s Q2 results beat Wall Street estimates. The retailer has been selling more grocery items and is also seeing more consumers return for back-to-school shopping.
  • Popular video game platform Roblox saw its shares tumble, but the stock ended off of its worst levels of the session. Roblox’s Q2 bookings, which are an indication of sales, were not as strong as Wall Street analysts were looking for. Now that the lockdowns are over, kids are not spending as many hours playing video games as a year ago.
  • Shares of cannabis stock Tilray are rising in after-hours trading. The Canada-based company revealed it has struck a deal with U.S.-based MedMen to acquire a majority stake in the cannabis retailer’s senior secured convertible notes. Tilray stands to benefit more if marijuana is legalized by the U.S. government.

Look Ahead

The retail earnings parade will continue on Wednesday, with companies such as Lowe’s, Target and TJX on tap to report their quarterly results. If Home Depot’s performance was any indication, Lowe’s stock could be in for a bumpy ride.

Today’s Market Wrap Up and a Glimpse Into Thursday

Stocks finished the day mixed after the Fed revealed that the economy is on track for employment and inflation. The Dow Jones Industrial Average and S&P 500 were each down fractionally, while the tech-heavy Nasdaq added 100 points to end modestly higher.

As the economy continues on the path to recovery, the Fed tipped its hand, saying it would begin to pull back from its asset purchasing activity. The major indices still remain close to all-time high levels.

One winner in the Dow was Boeing, which surprised Wall Street by swinging to a profit for the first time almost in two years.

Stocks to Watch

The tech earnings parade rolled on, with Facebook taking the spotlight today. Mark Zuckerberg’s company sees 3.51 billion people flock to its platforms,  including Facebook, Instagram, Messenger and Whatsapp, each month, up 12% YoY.

Facebook’s Q2 revenue came in at USD 29.08 billion, continuing a trend that Google, Microsoft and Apple similarly experienced in the quarter. While Facebook’s Q2 results topped Wall Street’s estimates, revenue growth is not expected to be sustained at these levels, the company warned.

PayPal bucked the positive trend in corporate America after its Q2 results disappointed. Worse, the payments company isn’t expecting things to get much better for Q3. Investors punished the stock in extended hours, sending shares lower by about 6%.

Ford shares found a reason to rally thanks to a stronger than expected Q2 in which the company was profitable. The automaker lifted its Q3 forecast on the heels of robust demand for its Ford Bronco SUV.

Shares of cannabis company Tilray climbed more than 25% in the wake of a profitable fiscal Q4. Tilray CEO Irwin Simon sees a world in which marijuana will become legalized at the federal level in the U.S. in the next 18-24 months.

Look Ahead

On Thursday, an advance look at GDP comes out at 8:30 a.m. ET. Wells Fargo economists predict that the economy grew at an annualized pace of 9.1% in the quarter. The economy has come a long way since last year’s pandemic-fueled contraction, which lasted for two months. The economists forecast that consumer spending and business investments were strong in Q2, while supply chain constraints persisted.

Amazon’s earnings come out on Thursday. Bitcoin investors might be listening to the call to hear if the company addresses the recent crypto-related drama.

Aphria, Tilray Will Merge to Become World’s Biggest Cannabis Giant

One of the world’s largest cannabis companies, Aphria will merge its operations with its business rival Tilray Inc, creating the biggest giant in the fast-growing cannabis sector, according to Bloomberg news.

This deal will create a new company with an equity value of about C$4.8 billion ($3.8 billion), according to a statement and interviews with the Tilray and Aphria chief executive officers. The new company will trade under Tilray’s ticker on the Nasdaq, and Aphria shareholders will own 62% of Tilray’s stock under the terms of the transaction, reported by Bloomberg.

“We see a strong strategic rationale for the company, as the combined company (rumoured to keep the Tilray name with Aphria CEO Irwin Simon at the helm) would have nearly 20% share of the Canadian THC market and could rationalize production facilities. As such, although the estimated $100 million of cost synergies represents a relatively high 11% of combined costs and overhead expenses, we think it could be achievable. This is further bolstered by Tilray’s relatively bloated cost structure,” said Kristoffer Inton, director at Morningstar.

“Details are all based in news reports, so they warrant some caution that official terms could be different. The rumoured terms would have Aphria owning 60% of the combined company. Based on our fair value estimates, Aphria shareholders should control closer to 70%, signalling that Tilray shareholders are getting better economics. Even based on pre-rumour share prices, Aphria shareholders should control at least 65%,” Inton added.

Tilray’s shares surged over 20% to $9.65 in pre-market trading on Wednesday. However, the stock is down over 50% so far this year. Aphria soared over 7% to $8.73.

“I realized that Aphria needed to expand out of Canada, and merging with Tilray was a great answer because it’s a U.S.-domiciled business with great international assets,” said Aphria Chief Executive Officer Irwin Simon, who will be chairman and CEO of the combined group told Bloomberg.

Investment in Emerging Cannabis Industry

Cannabis is an emerging industry and is subject to regulatory headwinds. Although the industry is still emerging, legal cannabis has gone through multiple iterations. The business started as a flower-based market aimed at catering to the needs of stoners and thereafter, blossomed to a more retail-centric market that experimented with multiple edibles, beverages and concentrates.

Most recently, the cannabis industry has further widened its reach to target a broad base of the audience whose main aim is not to get intoxicated but rather to be cured of some form of the diseases.

While over half of the population is in favour of new the legalization, only a few states have thus far legalized cannabis for recreational use and the product remains illegal at the federal level.

CBD Prices Weighed Down by Rising Supply in 2020; Industry has Huge Growth Potential

According to Leafreport, over two-thirds of brands slashed their prices this year to some degree. The report also said CBD prices plunged 17% in 2020 from last year, except prices for pet edibles which surged 44%.

Moreover, the decline in prices for hemp biomass, falling production costs and firms’ aim to reach low-income household amid rising jobless rate due to the ongoing COVID-19 pandemic have also contributed to this year’s drop.

Indeed, owner of CBD company Kind Lab, Angela Arena in an interview with Leafreport, said that one of the most significant reasons for CBD’s steady price decline in 2020 is that more hemp suppliers have entered the market since the passage of the 2018 Farm Bill legalized hemp cultivation. With the increased access to hemp, more and more CBD brands were able to enter the market.

Kind Lab’s Arena further stated that “prices were so high because the supply was so low, but we’re starting to see that drop, especially as people get creative and find ways to produce lower-cost products and introduce those into the market, it’s going to become a lot more price competitive,” noted Leafreport.

According to Hemp Benchmarks, an overall price of hemp CBD biomass plunged about 80% from April last year to April 2020 – dropped to $8.1 per pound from $38.0 per pound.

There are other factors that influence the pricing decision of a CBD product – the underlying costs associated with certain certifications, quality testing with third-party and merchant fees that factor into the sale of the product at clinics and online.

“A good way to make sure a CBD product is worth the money is to check how it is advertised. It’s always worth checking if the label says USDA Organic certified and if the brand publishes their certificates of third-party analysis (COAs) on their website. Also, as Terwilliger notes, look for a little orange stamp that says U.S. Hemp Authority Certified. This third-party organization evaluates the transparency of a brand’s testing protocol, quality manual, marketing, and more,” Leafreport added.

Investment in Emerging Cannabis Industry

Cannabis is an emerging industry and is subject to regulatory headwinds. Although the industry is still emerging, legal cannabis has gone through multiple iterations. The business started as a flower-based market aimed at catering to the needs of stoners and thereafter, blossomed to a more retail-centric market that experimented with multiple edibles, beverages and concentrates.

Most recently, the cannabis industry has further widened its reach to target a broad base of the audience whose main aim is not to get intoxicated but rather to be cured of some form of the diseases.

While over half of the population is in favour of new the legalization, only a few states have thus far legalized cannabis for recreational use and the product remains illegal at the federal level.

Much work and changes are still required to occur for this industry to realize its full potential.

“If you are considering investing in a U.S. company that is connected to the cannabis industry, be aware that cannabis-related companies may be at risk of federal and/or state criminal prosecution. The Department of Treasury has issued guidance that The Controlled Substances Act (“CSA”) makes it illegal under U.S. federal law to manufacture, distribute, or dispense cannabis and cannabis-related products. Many states impose and enforce similar prohibitions. Notwithstanding the federal ban, however, many U.S. states and the District of Columbia have legalized certain cannabis-related activities,” said Eric Assaraf of Cowen and Company.

Based on Jefferies Virtual Cannabis Summit, which hosted over 200 investors on Oct 7-8, the first point of the panel discussion was the Cannabidiol market size in the United States. There was a range of different estimates but the panellists were largely consistent about their growth predictions for the industry post-COVID-19, expecting it to grow at CAGR of 20%-25% over the next five years on a conservative basis and 30%-40%, when speaking optimistically.

The panellists were also on the same page when discussing the end uses of Cannabidiol which are quite profuse and span across personal use goods, medical products and CPG products. The CBD penetration right now is only 15% of households and therefore there is a big untapped opportunity for the industry to capitalize on, Jefferies added.