This image is no longer available


Mark Bunting, Publisher, Capital Ideas Research

The marijuana sector has the most growth potential of any in Canada. That’s according to analyst Jason Zandberg of PI Financial, who, along with colleague Devin Schilling, has co-authored reports on the burgeoning industry. (PI Financial is a Canadian investment dealer established in 1982 that has conducted investment banking business with a number of publicly-listed marijuana companies.)

Mr. Zandberg initiated coverage last July on a few marijuana companies with “speculative buy ratings” ratings. His timing proved to be prescient because since then marijuana stocks became hugely popular among investors sending some of the stocks to gains over more than 300 per cent.

The companies Mr. Zandberg favours are Canopy Growth Corp. which trades on the Toronto Stock Exchange under the ticker symbol (CGC-TSX), Aphria Inc. which trades on the Venture Exchange (APH-Venture), but is graduating soon to the TSX, and OrganiGram Holdings Inc. (OGI-V).

Strong growth to continue 

Capital Ideas Research spoke with Mr. Zandberg, who believes it’s not too late to capitalize on marijuana stocks because the sector is relatively small compared to what it could look like in two to three years. He thinks Canopy, Aphria, and OrganiGram have a “significant competitive advantage” as they were among the first companies to be granted licensed producers status by the federal government to grow and/or sell medical marijuana.

Mr. Zandberg estimates the three companies can roughly double their revenue every year through 2019.

Marijuana sector set for strong growth

Prime Minister Trudeau’s drug czar, Bill Blair, recently indicated the government was going to take its time developing production, distribution and safety regulations for the sector.

Mr. Zandberg says growth drivers for his favoured marijuana companies include:

  • An estimated 10-fold surge by 2024 in the number of patients in Canada prescribed medical marijuana
  • An expected federal government legalization of  marijuana for recreational use by mid-2018
  • The possibility of pharmacies eventually selling medical marijuana, likely in the form of cannabis oil

Near-term catalysts

Since the federal government, under former Prime Minister Stephen Harper, ushered in the program now called Access to Cannabis for Medical Purposes Regulations (ACMPR), the number of patients prescribed marijuana has grown to 129,876 as of December 31, 2016, according to Health Canada.

The figures represent a 1,544 per cent increase from the 7,900 patients registered in mid-2014. Health Canada expects the marijuana patient count to reach 400,000 by 2024 — a compound annual growth rate of more than 30 per cent.

Mr. Zandberg believes that figure could hit 650,000 based on patient counts in the U.S., where 24 states have legalized the production and distribution of medical marijuana and, in eight states such as Colorado, recreational marijuana.

PI Financial foresees the total marijuana market in Canada to be worth about $4.6 billion in the first year recreational use is permitted, eventually reaching $7.4 billion by 2024. By comparison, in 2013, Canadians spent $9.1 billion on beer and $21.4 billion overall on alcohol.

“To get triple digit growth on an organic basis is pretty unheard of,” Mr. Zandberg says.

The case for Canopy

Canopy Growth is the largest of the three marijuana companies Mr. Zandberg recommends with a market value of about $1.9 billion. in 2014, Canopy became the first licensed seller in Canada of medical marijuana. The company grew its revenue year-over-year in its latest quarter 180 per cent to just under $10 million. Canopy also turned a profit for the first time. The company has partnered with rapper and affable pothead Snoop Dogg, and with DNA Genetics, which regularly wins awards at the annual Cannabis Cup for its different strains of marijuana.

The greenhouse effect

Aphria is the lowest cost producer among Mr. Zandberg’s recommendations. The company grows its marijuana inside a greenhouse which “significantly reduces its power consumption.” Aphria grew its annual revenue by 157 per cent in its latest quarter and was the first medical marijuana producer to have positive EBITDA (earnings before interest, taxes, depreciation and amortization). Aphria recently raised nearly $58 million for its expansion plans.

The organic advantage

OrganiGram is the only organic producer among Mr. Zandberg’s marijuana picks. One of the advantages of growing organic pot is that the plants are smaller than non-organic plants because high potency fertilizers are not used. That means OrganiGram can squeeze more plants per square foot into its facilities.

The company also proves however that the marijuana sector is not without risk. OrganiGram has had its organic certification suspended by Health Canada after it recalled some medical marijuana after discovering some contaminants. The company says it has beefed up its testing and safety procedures.

To subscribe to Capital Ideas Research for just $9.99 a month, please click here. Your first month is free! or call our subscription manager at 1(800) 732-9822, ext 100.

If you have any further questions, please feel free to contact us directly: [email protected]

Follow Mark Bunting on Twitter: @MarkBunting_