Marijuana Investing – What Comes Next

Over the last year or so the hype train has picked up steam for marijuana investing. There’s been a few rapid climbs, followed by a few massive dives, and it centers almost entirely around Canadian companies. The buzz has been on par with cryptocurrencies: lots of hype without much substance. Even the biggest and best-funded of the new marijuana companies had very little revenue, (from the medical market), if they had revenue at all. To any logical, more traditional-minded investor, the whole thing seemed like vapor. But, unlike cryptocurrency, these companies are preparing for the launch of a potentially massive new industry. The new cannabis industry has real money at stake, with leagues of hungry consumers that are sick of buying their products from their creepy uncle or that one guy from down the street.

October 17
Nearly all the marijuana stocks that matter, and certainly all the large-scale commercial cultivators, are based in Canada. Canada has been medically-legal on a federal level for years. Many of these marijuana companies started operations in the medical market, but once there were whispers that complete legalization was a possibility, they started changing tactics. Money began pouring in, mostly to be spent on infrastructure for the impending recreational market. When he was elected, Canadian Prime Minister Justin Trudeau set fire to the rails in late 2015 when he announced that federal, recreational legalization was going to happen on his watch. The timeline shifted many times, but a bill finally found its way through the legislative process in June of 2018, with the full legalization date announced as October 17, 2018.

Why does all this matter?
A big shift is coming in the cannabis world, and that will warrant a change in your investing strategies. Now that the launch of the legal market is just around the corner, the hype of the cannabis companies must translate into actual business results. Up until now, you’d hear constant talk and press releases about how much “funded capacity” a cannabis company has. Well, now operational capacity will matter. We’ll know soon enough whether the current front runners (Canopy Growth NYSE: CGC and Aurora Cannabis TSX:ACB) will remain on top, or if other second-tier companies will be smarter investments. To continue their exchange dominance, they’ll now need to justify their multi-billion dollar valuations.

What’s around the corner?
1. Institutional Investors. Canopy Growth had a big milestone with their listing on the NYSE at the end of May. Aurora Cannabis is likely to follow, and Tilray has just announced they will have their IPO on Nasdaq. Institutional investors are now playing in the cannabis stocks. That’s a big change compared to only six months ago. Expect more NYSE and Nasdaq listings to come.

2. ETFs. There’s really only one cannabis ETF, an offering from Horizons, (Horizons Marijuana Life Sciences ETF, or HMMJ). It has a broad stroke of cannabis cultivators and ancillary companies. You can expect to see the launch of more cannabis industry ETFs, particularly some that focus on a specific industry niche, (for example, industry startups).

3. Mergers and acquisitions. Aphria bought Broken Coast and Nuuvera. Aurora has been on a spending spree for the past year, including purchases of both Cannimed and MedReleaf. Canopy just bought Hiku Brands, making the announcement by releasing an actual haiku from CEO Bruce Linton. The M&A train is going to keep rolling, no doubt about that. So a lot of those 2nd and 3rd tier stocks you were interested in- just keep in mind they might end up as an acquisition target for one of the bigger companies.

4. International expansion. The build-outs of million square foot greenhouses continue as the Canadian cannabis product pipeline gets bigger and bigger. Folks keep asking “how the hell can Canadians possibly smoke this much weed?” That’s just it- none of the big companies intend to keep their business in Canada. Canada is a sandbox, it’s the launching pad for much bigger, more lucrative international markets (Aurora owns German distributor Pedanios, for example). The big players will continue to make international acquisitions and partnerships to try and get footholds and first-mover advantage in emerging cannabis markets. So, stop worrying so much about Canada, that’s just the start.

It’s hard to predict where you’ll get the best value from your investment when you’re playing the pot stocks. However, it’s going to get easier now that Canadian legalization is just around the corner. Canopy and Aurora are the media darlings with the big bucks. But look for others in the wings that have strong branding, international expansion, established operational capacity AND funded capacity expansion plans. Cannabis companies won’t be able to justify their valuations on what they claim they’re going to do, they’ll actually have to prove that they can execute. There will still be hype, no doubt about that, but at least now there will be business performance involved too.

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