Marijuana will be legal across Canada later this year. Is this your chance to make big money?
Recreational use of marijuana will be legal across Canada later this year, and Ottawa and the provinces are gearing up to handle what is expected to become a multi-billion-dollar business.
But will it? And who will benefit after the various levels of government take their cut of the profits?
One reader wrote to ask to suggest the legalization of marijuana represents “the chance of a lifetime” for investors. Just as alcohol companies prospered after the end of prohibition, he sees cannabis producers as sitting on a potential gold mine.
To bolster his argument, he cites the pent-up demand for recreational marijuana and quotes Health Canada as saying there won’t be enough supply to meet the demand. “While company valuations are high, they are still a fraction of those of the tobacco industry,” he added.
It’s true that the industry has tremendous growth potential. But there are also some unresolved issues that investors must consider before committing their hard-earned cash.
One is the fragmented state of the industry. At this stage, it’s somewhat like the dotcom start-ups of the 1990s. Many companies want a piece of the action, but no one can predict with certainty which ones will survive and prosper and which will go belly-up.
We also need to consider the regulatory environment. The provinces are racing against the clock to formulate the rules, establish pricing, and set up the distribution systems for pot sales within their jurisdiction. Except for some broad outlines, we don’t know what form these will take or what impact they will have on the marijuana producers.
Then there is the U.S. to consider. Recreational cannabis is not legal in most U.S. states and the federal government has served notice it will start cracking down on illegal sales. The point man is Attorney-General Jeff Sessions, who according to The Washington Post is almost obsessed with eradicating weed. (He once said that he changed his views on the Ku Klux Klan when he found they smoked pot. Supposedly he was joking.) Sessions announced last month that he has rescinded an Obama-era directive not to prioritize the prosecution of dispensaries in states that have legalized the drug.
No one is sure how that directive will translate into action and the challenge to states’ rights it implies may mean it all ends up before the U.S. Supreme Court. But it creates a lot of uncertainty for Canadian producers who sell their product into the U.S. in violation of federal laws. There have even been warnings that those companies might be delisted from the Toronto Stock Exchange and some firms are in the process of divesting their U.S. ties.
Other producers have issued statements designed to reassure investors that they will fully comply with U.S. law. Canopy Growth (TSX: WEED), the largest marijuana producer in Canada, said in a Jan. 5 press release that it will only do business in jurisdictions where cannabis is legal federally and will comply with all laws.
Given all these question marks, I have been reluctant to recommend any marijuana stocks. But here is a run-down on three of the leading Canadian companies in this industry. Keep in mind that the financials are based only on medical products, which have been legal in Canada for years.
Canopy Growth. Canopy is based in the small Ontario town of Smith’s Falls. It has a market cap of about $4.8 billion. The stock took off like a rocket in the second half of last year, going from a 52-week low of $6.58 in June to a high of $44 earlier this month. But then reality set in and the shares have dropped about $16 from the high.
Canopy may have its roots in rural Ontario, but it operates in seven countries and has 665,000 square feet of production capacity. It offers a wide variety of products under various brand names in dried, oil, and capsule form. Its latest quarterly report showed a year-over-year revenue increase of over 100 per cent but a bottom line loss of $1.6 million (-$0.01 per share). The loss over the first six months of the 2018 fiscal year was $10.8 million (-$0.07 per share).
Aphria Inc. (TSX: APH). This company, based in Leamington, Ontario, has a market cap of $2.4 billion. It grows its marijuana in greenhouses in south-western Ontario, using the slogan “powered by sunlight” to distinguish itself from competitors.
The company is positioning itself to be a leader in both the medical and recreational side of the business. It recently signed a deal with Shopper’s Drug Mart to supply medical cannabis products, which will be sold on-line for now as regulations restrict pharmacies from in-store sales. On the recreational side it has committed $10 million to a company that will combine the products of TS BrandCo. Holdings Inc. (operating as “Tokyo Smoke”) and DOJA Cannabis Company Limited.