After years of volatility in Canada’s cannabis market, a research analyst says the industry could now be moving toward consolidation.

Frederico Gomes, director of institutional research in life sciences at ATB Capital Markets, told BNN Bloomberg on Tuesday that Canada’s cannabis market has been difficult for companies to operate in, given the inflows of new capital since legalization in 2018.

“You saw a lot of capacity being built and we ended up with an oversupply of product, and obviously that led to margin compression and price compression,” Gomes said. “Right now, what I think we're seeing is competition stabilizing a market that may be close to consolidating.”

He predicted that cannabis will “become a more rational market over time” as that stabilization takes place.

Gomes spoke with BNN Bloomberg on the five-year anniversary of cannabis legalization in Canada. He estimated that the country’s cannabis market is now worth about $5 billion. 

Over the longer term, Gomes said he believes cannabis companies will operate similarly to firms in the consumer packaged goods industry, like tobacco and beer.

“I think that many industry participants were expecting that consolidation to happen faster,” he said. “That didn’t happen yet, but we see some signs of that happening with prices stabilizing.”

CANNABIS STOCK PICKS

Within the cannabis industry, Gomes highlighted two companies as potential investment opportunities: Organigram and Village Farms International. 

Gomes said Organigram is a low-cost producer with one of the “largest indoor facilities in Canada” and has been successful in maintaining market share. 

“They're among one of the top five LPs (licenced producers) in Canada, roving around that five to six per cent market share. We liked their balance sheet, they have no debt (and) a strong cash position. Balance sheets are very important in the sector,” he said. 

Gomes named Village Farms as another low-cost producer in Canada with a high-performing subsidiary in Pure Sunfarms. He said Pure Sunfarms has been performing well and has experienced a series of quarters with positive adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization. 

Gomes does not have any ownership of any of the stocks mentioned above.